EDITOR'S NOTE: For decades, the US dollar has maintained a hegemonic position over the global economy. Arguably, this hegemonic relationship has helped maintain stability in global trade, but it does come with a price. The current conflict in Eastern Europe is a testament to the dollar’s iron grip. Is it conceivable that the West’s latest round of sanctions on Russia might drive other nations to begin moving away from the dollar; hence, loosening its hegemonic grip on the global economy? That’s certainly one scenario that analysts, including the one below, are considering. Furthermore, what’s the likelihood that Russia, whose FX reserves have been virtually cut off, may begin trading oil for gold or bitcoin; enacting a Bretton Woods III, or a new gold standard? The effects of the current sanctions rest on the faith and functionality of US dollar strength. As Treasury Secretary Janet Yellen told reporters, “I don’t think the dollar has any serious competition, and is not likely to for a long time.” This may sound reassuring for the US, but it's a serious problem for many other nations who find this arrangement to be stifling. Something is about to come to a head. And should sentiment turn against the dollar, what are the chances we’ll be facing a new world financial order?
Credit Suisse’s Zoltan Pozsar wrote an interesting research note on how the Russia invasion of Ukraine and the G7’s response is causing a major upheaval of the global financial order.
Coindesk: The foundations of Bretton Woods II crumbled last week when the G7 seized Russia’s foreign exchange reserves, the investment bank said.
The Russian-Ukrainian war will create a new world financial order from which Bitcoin is set to benefit, according to Credit Suisse.
Zoltan Pozsar, global head of short-term interest rate strategy at the giant investment bank, wrote in a Monday report that Western sanctions on Russia are likely to cause a paradigm shift in the way the world organizes money and reserves, a “Bretton Woods III” kind of scenario.
“From the Bretton Woods era backed by gold bullion, to Bretton Woods II backed by inside money, to Bretton Woods III backed by outside money,” the strategist wrote.
Pozsar argues that the fall of Bretton Woods II ensued last week as G7 countries decided to seize Russia’s foreign exchange (FX) reserves, leading to a rise of outside money – reserves kept as commodities – over inside money – reserves kept as liabilities of global financial institutions.
“We are witnessing the birth of Bretton Woods III – a new world (monetary) order centered around commodity-based currencies in the East that will likely weaken the Eurodollar system and also contribute to inflationary forces in the West,” the report states.
Russia, a surplus agent in the financial system, can now no longer make use of the hefty FX reserves it accumulated through its commodity exports over the decades to defend its falling ruble or aid its local economy. Moreover, Russia’s ability to export its commodities has been severely hurt due to the “buyer’s strike” in the West.
“What we are seeing at the 50-year anniversary of the 1973 OPEC supply shock is something similar but substantially worse – the 2022 Russia supply shock, which isn’t driven by the supplier but the consumer,” the strategist wrote. “The aggressor in the geopolitical arena is being punished by sanctions, and sanctions-driven commodity price moves threaten financial stability in the West.”
Pozsar argues that while Western central banks cannot close spreads between Russian and non-Russian commodity prices as sanctions lead them in opposite directions, the People’s Bank of China can “as it banks for a sovereign who can dance to its own tune.”
“If you believe that the West can craft sanctions that maximize pain for Russia while minimizing financial stability risks and price stability risks in the West, you could also believe in unicorns,” Pozsar wrote.
As outside money keeps trumping inside money, this crisis will likely emerge and end differently than all others ever since Nixon broke off the gold standard in 1971 – which marked the end of the era of commodity-based money.
Meanwhile, US Treasury Secretary Janet Yellen said the U.S. dollar is in no danger of losing its status as the world’s dominant reserve currency as a result of sanctions imposed against Russia over its invasion of Ukraine.
“I don’t think the dollar has any serious competition, and is not likely to for a long time,” Yellen told reporters in response to questions following a speech in Denver on Friday.
Some commentators, including Credit Suisse Group AG interest-rate strategist Zoltan Pozsar, have warned sanctions that blocked Russia’s access to its foreign currency reserves could drive other countries away from the dollar.
Well, what Zoltan says may be true, but not so far. Bitcoin has been plunging since November 2021 as inflation keeps rising.
Source: Confounded Interest
Zoltan: “..and Bitcoin (if it still exists then) will probably benefit from all this.” The US Treasury yield curve is listing towards inversion, a signal of impending recession.
Source: Confounded Interest
Originally published on Confounded Interest.