Don't worry about de-dollarization
It's not going to happen. Though to be honest, a little would be a good thing.
A number of financial pundits are publicly worrying that the sanctions on Russia will lead to a post-dollar world. The basic idea here is that with Russia essentially cut off from financial transactions with the West, it will either turn toward deeper financial integration with China or toward the use of trans-national commodity currencies like gold and Bitcoin. And if that movement leads other countries to follow, then either the yuan, gold, or Bitcoin might become the global currency, and the U.S. might eventually find itself financially isolated instead of Russia. For example, over at the Financial Times, Rana Foroohar writes:
Russia’s invasion of Ukraine [will result in] a quickening of the shift to a bipolar global financial system — one based on the dollar, the other on the renminbi…[T]his supports China’s long-term goal of building a post-dollarised world, in which Russia would be one of many vassal states settling all transactions in renminbi…[T]he Chinese hope to use trade and the petropolitics of the moment to increase the renminbi’s share of global foreign exchange…Beijing is slowly diversifying its foreign exchange reserves, as well as buying up a lot of gold. This can be seen as a kind of hedge on a post-dollar word [sic].
Bitcoin boosters, meanwhile, naturally think the new global currency will be BTC.
To be blunt, this is unlikely to happen. Neither the Chinese RMB, gold, or Bitcoin is prepared to play anything like the role that the dollar currently plays in the global financial system. I’m not being contrarian by saying that, either — most of the top economists surveyed by Chicago Booth’s IGM Forum don’t think a shift away from the dollar is likely.
And markets seem to be even less concerned. The U.S. dollar’s value relative to the currencies of its trading partners actually rose after the sanctions, suggesting that confidence in the dollar is unshaken:
But although I may not be taking a bold contrarian stance here, it’s still worth it to explain why de-dollarization is highly unlikely to happen as a result of these sanctions (and why it’s also not as terrifying a prospect as people think).
Before I explain that, by the way, I should say that I do have some qualms about the way sanctions have been employed in this conflict. I think that wholesale destruction of a country’s economy is not generally an effective way of pressuring a repressive or aggressive regime to change its behavior, as Iran, North Korea, Cuba, and many other cases have clearly shown. I think sanctions should be focused on weakening a country’s military machine, not on impoverishing its populace — otherwise, by enraging the people against an external enemy, sanctions risk entrenching the very regimes they seek to weaken. I also do worry that there could be a slippery slope, in which ultra-harsh sanctions of the kind being used against Russia eventually get deployed in conflicts where the morality is not nearly so cut-and-dry.
So there are risks to these sanctions, I think. But de-dollarization is not one of them — at least, not in the current conflict. The first reason this is true is that the kind of financial shift people are worrying about would have to mean not just abandonment of the dollar, but also abandonment of the second most important international currency — the euro — at the same time.
De-dollarization would really mean de-dollar-and-euro-ization
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