In all his writings five centuries ago, the famed astrologer Nostradamus, who prophesied the cataclysmic events for centuries to come, failed to take account of the essential role currency plays in the rise and fall of kingdoms and empires. Modern economics has taught us to be very mindful of the way money works, not just in transactions but in the depth of our psyches. It not only colors our understanding of the world, but to a large extent it paints our picture of that world.

A rivalry appears to have emerged between three general ways of prophesying the future of international payments. They all have to do with the status of the dollar. YouTuber Lena Petrova, whose reporting about non-dollar transactions between China and the United Arab Emirates initially sparked this dialogue, believes that dedollarization is a powerful tsunami still far out at sea that is gaining momentum and coursing towards the shore.

Petrova is not alone. At the same time, our team member Alex Gloy and many others, who see the movement taking place and even accelerating, are keenly aware of the obstacles to its achievement of the ultimate goal of dethroning the dollar. Yes, the greenback’s status will evolve, but will it really be pushed off its throne?

Then there are those who, like Brent Johnson, the CEO of Santiago Capital, argue “that the US dollar will not only remain the world’s reserve currency but will also spike in a ‘violent’ global debt crisis.” Johnson’s debate with renowned economist Louis-Vincent Gave is well worth watching. Both give their contrasting interpretation of a complex geopolitical landscape. Both develop their Nostradamus vision of where this is likely to take us.

Picking up the conversation in February

Before trying to catch up with all the latest developments, let’s return to the conversation that began in February. Alex offered some further comments to his post on February 4. He first cites the fact “that FedNow is not a CBDC” and linked to the Fed’s FAQ.

Alex then offered this quick reminder on how bank wire transfers work.

If Alice sends Bob $100, and both have an account with the same bank, the bank will do internal “netting” and simply change their account balances.

If Alice is banking with Citibank, and Bob with Bank of America, the money does not get sent from Citi to BoA! Citi (and BoA) have accounts with the Federal Reserve. Citi will instruct the Fed to move $100 from its account balance over to BoA (and then the two banks are reflecting those changes in the accounts of Alice and Bob).

This is important to understand our banking system. Even as most of the money created exists within the private sector, it is the central bank that runs the “ledger” (in crypto speak)! When we send payments to each other, we are basically moving around bank liabilities.

The settlement system behind this system is quite old and slow, and you had to wait for up to a week until a check settled. “Encouraged” by competition from private payment providers, FedNow can now settle funds in (almost) real time.

You can also see the “danger” of stablecoins like Tether: When Alice sends some USDT to Bob, no central bank is involved. The “ledger” is being run by a bunch of questionable dudes on a Caribbean island! There is no recourse in case of erroneous transactions, and no institution that could bail out Tether if it turned out their reserves only existed in their imagination or were loaned out to related entities with mediocre credit.

War shows that geopolitics matters

This is when Fair Observer’s friend Edward Quince (not his real name) stepped in to develop the geopolitical side of the equation.

Hi All, 

The Eurodollar that Alex mentioned is one thing — consider it as a cushion that may soften the blow. However, of utmost importance to the US dollar’s position is the Petrodollar, and it’s not faring well at all. In his email, Alex precisely grasped the foundation of the greenback’s strength: energy trade. He also clearly outlined the main means of protecting the US monopoly on trade – unrestricted and ubiquitous military and economic aggression worldwide.

This abuse of power and lethal force is precisely why an increasing number of major players in the world today are actively diversifying away from dollar-denominated trade. Compared to the past 100 years, this growth has been astronomical in just the past two years. The American dollar and the US-centric financial system were convenient and safe for everyone and everywhere until they became problematic for anyone. In the past, players who questioned the US Dollar monopoly in international trade were marginal and simply murdered to the cheer and laughter of those in the Situation Room. The new defectors are large, sophisticated, and nuclear-armed.

I am not delving into the intricacies of financial transactions and the convenience of the status quo for traders and financial managers. I agree with Alex that the inertia and the sheer volume of US dollars and USD-denominated contracts protect the position of the US dollar in the short-to-medium term. For many countries, finding a substitute currency with the capacity to store as much value is simply difficult. The ultimate argument here is that many stand to lose if the dollar does not continue; therefore, it will persist as is. However, the opposing argument has also been made loud and clear: many stand to lose a lot if the dollar continues, and hence, it will not continue as is.

The US made several catastrophic mistakes in the run-up to the inflection point, which can be traced precisely to an event that occurred on December 9, 2022.

The key failures first manifested during the subprime economic crisis when the default course of action in Washington and Brussels became printing their way out of any problem or through any war. The abuse of the printing press is evident when examining the USD monetary base graph.

In parallel, the American financial system and Western banks and infrastructure have been increasingly used as a stick against the West’s perceived strategic rivals. The system was no longer impartial to anyone (as it should have been) but instead was shaped into a key weapon against other sovereign states — most prominently and almost exclusively against key oil and gas producers: Venezuela, Saudi Arabia, Libya, Iran, Iraq, Russia, as well as against one of the most important energy consumers outside the US — China.

Perhaps, there were two catalyst events. First, the freezing and confiscation of the sovereign assets of the Russian Central Bank and the Social Welfare Fund. Second, the seizing of Russian private investors’ assets in February 2022. Not unprecedented in form, but unprecedented in size — nevertheless, this was the last straw.

This was followed by Russia’s equally drastic and revolutionary retaliatory measure to require oil and gas trade with Russia to be settled exclusively in rubles on March 23, 2022. It was an unprecedented and brilliantly executed experiment, showing that the strategy to decouple from the dollar in key trades is not only theoretically correct but also practically implementable even for large complex economies like Russia.

Other countries take note of Russian success

Key economic powers, many of whom suddenly found themselves on the list of American archenemies or rivals, took notice of Russia’s success. Most of them have been actively following Russia’s roadmap to financial sovereignty since.

The roadmap is essentially a simple two-step approach: first un-dollar, then de-dollar.

What we are observing now is the un-dollarization stage, where the main goals for the numerous players are the same: a) to reduce the risks associated with exposure to the dollar; b) to strengthen their own currencies by increasing demand for them, accomplished by introducing them into international trade; c) to create or join alternative payment and settlement systems to shield their major companies from acts of economic aggression, notably unilateral sanctions.

The most noticeable symptoms of un-dollaring include accelerating divestitures of US treasury holdings, growing utilization of local currency swaps in cross-border settlements, emergence of alternative payments and clearing systems, explosive growth in the independent non-Western insurance sector. In this regard, the use of digital currencies – both central and decentralized – to transact cross-border should be seen as another alternative payment and clearing system that bypasses the dollar, SWIFT and American banks.

Some other signals that are easy to pick up are the emergence of serious initiatives to create NEW global and regional currencies and financial systems to shield regional economies from the lack of accountability and abuse in Washington. Today, nobody would be surprised if Latin America united in the use of the Sol just like the EU once created the Euro.

What happened on December 9, 2022? President Xi Jinping’s state visit to Saudi Arabia, where he essentially announced the end of the petrodollar monopoly.

The speed of change has been unprecedented. Three key facts illustrate that the cornerstones of the USD-denominated monopoly in finance are gone:

— No longer the only means to pay — two years ago, there was only one currency in which energy trade was cleared —  the American dollar. Today, there are at least four more: Petro Ruble, Petro Real, Petro Yuan, Petro Rupee.

— No longer the only payment system — in 2022, there was a single payment system, i.e. SWIFT — to settle international payments. Today there are many.

— No longer the only military force — America is no longer the only military force in the world capable of effective projection of power worldwide: the combined forces and military potential of Russia,China and Iran, two of which are nuclear-armed — are vastly superior to any force that existed before. 

To bring it home for you, just imagine that your business had no competition for half a century, and suddenly in just a span of eight quarters, it has to compete against several new very strong entrants. This would have been a major challenge and an uphill battle for any CEO. Simply put, this new development is a disaster.

It’s no wonder that what followed was a series of wars targeting key energy trade routes, infrastructure, energy producers, and buyers willing to do oil trade bypassing the USD and Western financial systems altogether. In the first month of 2024, with proxy wars with Russia ongoing in the background and the hottest arenas being the Black Sea, Ukraine, Armenia, and Gaza, the US and the UK have already bombed Yemen, Iraq, Syria and Somalia.

We will see wider and deeper rivers of blood in the next several years: at the very minimum, I expect a major-scale military attack and an attempt to occupy Venezuela in the nearest future, probably in 2025 — it seems to be the first thing the new American president would have to do. The previous attempt at a coup-d’etat there failed thanks to Russia’s and China’s direct military intervention. This time around, we can expect a full-scale invasion of Caracas probably under the pretense of defending Guiana or perhaps to establish a truly democratic power. 

India is also very likely to be hit with at least economic sanctions and trade restrictions. In addition, a major hot war is likely to flare up in Africa as it is naive to expect that the West would not continue flexing its muscles to control resources there. All the key contenders’ military forces are already present in Africa physically: the US/NATO, China and Russia. Following Moscow’s blueprint, China will continue diversifying away from the US Dollar, while divesting its vast holdings of US treasuries in preparation for war. Taiwan’s fate — and dollar monopoly’s one — will be sealed the minute Beijing has sold its last billion worth of US treasuries.

Our friend Edward penned these prophetic musings in February. Just a few days ago,nearly four months later, we noted this headline: “China Sells $48,900,000,000 in US Treasuries in One Quarter, Analyst Says ‘Clear Intention’ To Dump US Dollar Holdings on Display.” 

Can Edward claim the title of our new Nostradamus?

Tune in next week for more.

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