The Dominance of the US Dollar

The US dollar is central to global trade and finance. Many countries hold dollar reserves, and much trade is invoiced in dollars, even when the US is not involved.

What is Dollarization?

• Dollarization occurs when more international trade is conducted in US dollars, even when the United States is not directly involved in the transactions. 
• Example of Dollarization: If India and Japan agree to trade in US dollars, it is considered dollarization, even though the United States is not a party to the trade.

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What is De-dollarization?

• De-dollarization is the process of reducing the use of the US dollar in international trade and finance, and increasing the use of other currencies or commodities instead.

Reasons for De-dollarization

• Dependency on US Dollar: Countries may pursue de- dollarization to reduce their dependency on the US dollar and the economic influence of the United States.
• Example of De- dollarization: If India and Russia decide to trade in Indian rupees and Russian rubles instead of US dollars, it would be considered de-dollarization.

Consequences of Dollarization in International Trade

• Increased Demand for Dollars: Dollarization increases the demand for US dollars, leading to an increase in its value relative to other currencies.
• Need for Dollar Reserves: Countries need to hold significant dollar reserves + facilitate international transactions conducted in dollars.

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Consequences of De-dollarization in International Trade

• Reduced Demand for Dollars: De-dollarization reduces the demand for US dollars, potentially putting downward pressure on its value relative to other currencies.
• Diversification of Reserves: Countries may hold other currencies or commodities, such as gold, in their reserves instead of US dollars.

Benefits of Dollar Dominance for the United States

• Lower Borrowing Costs: The high demand for US dollars allows the United States to borrow at lower interest rates, reducing the cost of financing its debt.
• Seigniorage: The United States profits from printing dollars, as the cost of producing them is lower than their face value, a benefit known as seigniorage.
• Financial Leverage: The dominance of the dollar gives the United States financial leverage, as it can pressure other countries by restricting dollar transactions.
• Trade Advantage: American companies benefit from international trade conducted in dollars, as they do not incur currency exchange costs.

The US Elections and De-dollarization

• Impact on Other Countries: The upcoming US elections in November are already impacting other countries, including India, which is part of the BRICS group of nations.
• Trump’s Stance on De-dollarization: Donald Trump, a potential presidential candidate, has announced plans to take action against countries that pursue de-dollarization policies.
• BRICS Push for De-dollarization: The biggest threat of de-dollarization is from the BRICS countries.

History of Dollar Dominance

• Paper Currency in China: Paper currency invented in 7th century CE Tang Dynasty.
• Spread to Europe: Concept spread via Marco Polo in 13th century.
• Rise of British Pound: Pound Sterling dominant in 17-18th centuries.
• Pound Sterling Dominance: Default currency for global trade in the 9th century.
• US Superpower: After WWI, the US emerged as a new economic and military superpower.
• Gold Reserves: The US gained substantial gold reserves by supplying allied nations in both world wars
• Bretton Woods: In 1944, 44 countries pegged their currencies to the US dollar, backed by gold.
• Petrodollar: In 1945, the US made a deal with Saudi Arabia to sell oil only in US dollars.

End of Gold Standard & Petrodollar

• Nixon Shock: In 1971, Nixon ended the dollar’s gold link, terminating the gold standard.
• Petrodollar System: In 1973, the US made a deal with Saudi Arabia to sell oil only in dollars, creating the petrodollar.
• Increased Dollar Demand: The petrodollar system increased global demand for US dollars to purchase oil.
• Financing US Deficit: Saudi Arabia invests excess dollars in US Treasuries. 

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Dollar Dominance Today

• Central Bank Reserves: Over 60% of central bank reserves worldwide are held in US dollars.
• Global Circulation: $2 trillion in US dollars circulates in the global market, with more than half used outside the United States.
• International Trade: Over 80% of world trade is completed in US dollars.
• US Superpower Status: The United States has become a superpower due to the weaponization of the US dollar.

Consequences of Dollar Weaponization

• Military Interventions: The United States has intervened in the Middle East to protect dollar supremacy (e.g., Iraq, Libya).
• Economic Sanctions: Countries like Iran and North Korea are isolated due to US sanctions that prevent companies from dealing with them.
• Realization of Dollar Monopoly Risks: When the US sanctioned Russia and removed it from the SWIFT payment system, other countries realized the risks of Dollar’s monopoly.

The Push for De-dollarization

• Concerns about Dollar Credibility: Countries are moving towards de-dollarization due to concerns about the credibility of the US dollar and the sustainability of the US economy
• Unsustainable US Debt: The US debt has reached $31 trillion, and the budget deficit is over 16%, which is considered unsustainable by many experts.
• Risk of Global Collapse: If the US economy collapses, it could lead to global economic collapse due to the dollar’s dominance in international trade and finance.

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De-dollarization Efforts by China and Russia

• Bilateral Trade Outside the Dollar: Over 90% of trade between China and Russia is now conducted outside the US dollar.
• Russia’s Ruble Mandate: Russia has imposed the use of rubles for selling oil and gas to Europe, reducing the demand for dollars.
• China’s Belt and Road Initiative: China is converting $385 billion of debt into yuan through its Belt and Road Initiative (BRI) project, promoting the use of the currency.
• Saudi Arabia’s Yuan Oil Sales: Saudi Arabia’s decision to sell oil to China in yuan is a significant blow to the petrodollar system. 

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