The Breakdown - Everyone Is Talking About De-Dollarization, Is There Anything To It?

Episode Date: April 11, 2023

On today’s episode of “The Breakdown,” NLW looks at shifting geopolitical alignments, honing in on French President Macron’s recent visit to China, China’s war games in the South China Sea and the growing de-dollarization narrative.  Enjoying this content?   SUBSCRIBE to the Podcast Apple:  https://podcasts.apple.com/podcast/id1438693620?at=1000lSDb Spotify: https://open.spotify.com/show/538vuul1PuorUDwgkC8JWF?si=ddSvD-HST2e_E7wgxcjtfQ Google: https://podcasts.google.com/feed/aHR0cHM6Ly9ubHdjcnlwdG8ubGlic3luLmNvbS9yc3M=   Join the discussion: https://discord.gg/VrKRrfKCz8   Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW - “The Breakdown” is written, produced and narrated by Nathaniel Whittemore aka NLW, with editing by Michele Musso and research by Scott Hill. Jared Schwartz is our executive producer and our theme music is “Countdown” by Neon Beach. Music behind our sponsor today is “Foothill Blvd” by Sam Barsh.  Join the discussion at discord.gg/VrKRrfKCz8.  

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Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is produced and distributed by CoinDess. What's going on, guys? It is Monday, April 10th. And today we are discussing the latest in geopolitics and how much there really is behind all of these discussions. of D-Dolarization. Before we get into that, a quick note, there are two ways to listen to the breakdown. You can hear us on the Coin Desk Podcast Network feed, which comes out every afternoon and features other great Coin Desk shows, or you can listen on the breakdown-only feed, which

comes out a few hours later in the evening. Wherever you listen, if you are enjoying the breakdown, please leave a rating or a review. It makes a huge difference for new people discovering the show. All right, friends, happy Monday. Hope you had a great Easter weekend. Hey, listen, I have a big announcement tomorrow, so keep your ears out for that. But for today, Today, this week is beginning pretty quiet on the crypto front. The FtX bankruptcy estate released a report with not a ton of new info or things that we didn't know, just more lurid details. No, I would say all in all, people's heads are definitely on the bigger issues swirling around. Take, for example, a post that went quite viral over the weekend from Adam Driver on Twitter,

whose profile reads, not the Adam Driver from Star Wars. The thread kicks off the Empire is imploding and goes through more than 30 recent stories all relating to the supposed collapse or at least radically shifting landscape of the American-led global order. A few of Adams' examples. Number three, Saudi openly divorces USA and ties nuptials with Iran and China. Number four, de-dollarization trade agreements signed. Number five, Taiwan straight controlled by China. Number 17, China domestic chip manufacturing advancing rapidly. Number 18, American banking system on brink of collapse. Number 20, mass protesting in Franks. McCron struggling to keep control. 25, SWIFT system alternative developed by Russia slash Iran increasingly being adopted.

26, an unusual increase in train derailments, factory explosions, chemical spills, and contamination events across the U.S. Number 30, demand for Zimbabwe's gold coin skyrocketing following calls by African leaders to stop using the U.S.D as a primary currency. Now, I don't totally agree with all of the characterizations of events in the thread, but that's sort of secondary to the broader point, which is that the collection of these things under this framework of the empire's imploding clearly has resonance. So we're going to use that as a jumping off point today for a bit of a geopolitics primer and catch-up.

And let's start on the themes of trade, China, and changing alignment. Last week, French President Emmanuel Macron and EU Commission President Ursula von der Leyen visited Beijing to meet with Chinese President Xi Jinping. Two European leaders had somewhat diverging interest during their visit. von der Leyen represented the concerns of the European Union, articulating that continued friendly relations with China were contingent on Beijing refusing to provide material support to Russia. In a speech last week ahead of the visit, she said that China's interactions with Russia, quote, will be a determining factor in EU-China relations. Vunderlion stressed the goal of, quote,

derisking trade with China. A somewhat softer touch than the American rhetoric of a decoupling, but still strong enough to convey her concern for protecting European interests, primarily related to the lurking issue of, quote, unfair practices in trade, which undermine European competitiveness. Now, Macron's visit stood in stark contrast. The French president was treated to lavish banquets and a traditional tea ceremony alongside Xi, spending around six hours with the Chinese leader. The optics then, of course, showed a Europe divided in their stance towards Beijing. John DeLure, a China expert at Yonsei University in Seoul, said the visit reflected, quote, two ends of the European spectrum in terms of how to message towards China. He went on.

Xi's strategy is, McCrone is coming with his hands outstretched, so they're embracing him. Von der Leyen is articulating the harder European position, and they're trying to put her out at the margins. Noah Barkin, an analyst at Rhodium group, said that Macron had missed an opportunity to present a united front to Beijing. Quote, Macron seems to have thought that by bringing von der Leyen along, he was sending a message of EU unity, even if the two of them were sending different messages when they were in Beijing. It looks like Macron misplayed his hand. Now, this actually gets to one of the more interesting recent trends in geopolitics, which has been individual member states negotiating on their own terms, seemingly unrestrained from prior allegiances.

This is, of course, the emergence of a new multipolar world order happening in front of our eyes. And in this context, it appears the individual European member states might have their own agendas. Miko Hoitari, director of the Mercator Institute for China Studies in Berlin, said that he was anticipating that Beijing would exploit these differences in strategy. Quote, both Berlin and Paris and other capitals will still need to be convinced of the derisking approach outlined by von der Leyen and its implications. Again, from John DeLurie of Yon-Sai University, the French have their own economic interests in their China relationship and have not bought into the decoupling theory.

and in the case that China does play a role down the road, it'll be good to have a relationship to leverage there. Now, in an interview on his plane back to Paris after the three-day visit to China, Macron had some pretty provocative statements for Politico. The French president trotted out his view of the world that Europe should aim for, quote, strategic autonomy and become the third superpower presumably led by France. He said that the quote-unquote great risk Europe faces is that it, quote, gets caught up in crises that are not ours, which prevents it from building strategic autonomy. Beijing has reportedly been echoing this sentiment in relation to other European leaders. McCron said, the paradox would be that, overcome with panic, we believe we are just America's

followers. The question Europeans need to answer, is it in our interest to accelerate a crisis on Taiwan? No. The worst thing would be to think that we Europeans must become followers on this topic and take our cue from the U.S. agenda and a Chinese overreaction. Now, EU Commission President von der Leyen's stance on Taiwan was clear. She said the threat of use of force to change the status quo is unacceptable. Macron, in contrast, presents some additional flexibility. Europeans cannot resolve the crisis in Ukraine, he said. How can we credibly say on Taiwan, watch out, if you do something wrong, we will be there. If you really want to increase tensions, that's the way to do it. Yanmi Shai, a geopolitics analyst at Gavakal Dragonomics said, Europe is more willing to accept a

world in which China becomes a regional hegemon. Some of its leaders even believe such a world order may be more advantageous to Europe. Macron's most shocking statements, however, at least for the global political set, were around the need to push away from the U.S. dominated in a bid for autonomy. He said that Europe should reduce its dependence on the, quote, extra-territoriality of the U.S. dollar, adding that, quote, if the tensions between the two superpowers heat up, we won't have the time nor the resources to finance our strategic autonomy, and we will become vassals. There is a growing sentiment in Europe that the weaponization of the dollar has gone a step too far, forcing European companies to give up business with

third-party nations or face secondary sanctions. Essentially, there is a growing fracture between nations that are continuing to do business with China and Russia in an unrestricted manner, and those in the West that pay lip service to obeying directions from Washington on the subject of sanctions. One really fascinating thing. There's an editorial note at the end of the political article suggesting that they went against their editorial policy to allow the president's office to edit quotes. That footnote said that Macron spoke, quote, even more frankly, about Taiwan and Europe's strategic autonomy in quotes that were cut. At this point, it would be useful to ask how seriously we should take anything Macron says. While he projected grand ambitions

on the global stage, this posture could simply be a distraction from domestic troubles. The French president was re-elected last April on a slim margin, but did not manage to secure a parliamentary majority. This has led to issues with pushing forward a legislative agenda. In January, a proposal was put forward to reform the French pension system, raising the retirement age from 62 to 64. Unable to pass the legislation, Macron invoked special powers to force it through. The French people have basically been consistently protesting ever since then. In a similar fashion to the Yellow Jacket movement of 2018, this month's long protest has grown to cover more general critiques of French government from a populace that feels increasingly unrepresented by the nation's elite. Cessaly Aldi,

a professor of French and Italian at Sanford University, said, protests are more about a feeling that representative democracy has been emptied out by Macron and the administration of all its substance. The pension reform was the spark that lit a bigger fire that has been kind of dormant before. McCrone ran and won the 2022 election as the moderate neoliberal candidate, opposing a firebrand right-wing populist. Seen largely as a compromised candidate, McCrone has become increasingly representative of the problem of an out-of-touch ruling class in France that fails to improve the lives of ordinary citizens. Now, of course, the point of this in bringing up domestic French politics is to say that Macron barely speaks for the French people, let alone the European continent. Much of

his actions in China feel to some like the last gasp of a struggling politician, rather than the strong position it's being pushed as in some media outlets. News and Markets commentator Priapos Iq writes, McCrone literally had to go to China to find members of the general public that would smile and wave at him. So then the interesting question becomes, why, given McCrone's compromise position, is this being reported in such stark terms? To answer that, I think we have to look even broader. There is a lot of this emergent narrative of de-dollarization and the end of U.S. power. In that configuration, China is the rising emergent power, and Europe is nominally a question mark, although maybe less than they'd like to be. For example, political scientists and president

of the Eurasia group Ian Bremmer tweeted, President Macron, Europe should become a third superpower without tech companies, a reserve currency or an army, but otherwise could totally happen. So anyways, while Macron's nominally European rhetoric is fairly vacuous, that doesn't mean that there aren't real geopolitical events transpiring underneath it. Following the departure of European dignitaries, China escalated military exercises in the Taiwan Strait. For the third day of exercises, the Chinese People's Liberation Army utilized live fire drills in a simulated sealing off of Taiwan. The drill, which utilized more than 11 ships in 70 warplanes, included launching jets towards the island. On Monday, the Chinese military confirmed that fighter jets loaded with live

ammunition had, quote, carried out multiple waves of simulated strikes on important targets. This exercise was viewed as a show of strength after the Taiwanese president had met with Republican leader and Speaker of the House, Kevin McCarthy, as well as a bipartisan group of lawmakers in Los Angeles last Tuesday. The U.S. Navy responded with a, quote, freedom of navigation exercise through the South China Sea on Monday, which it called normal operations. The Chinese PLA, meanwhile, said that the U.S. ship had, quote, illegally entered the disputed waters without Chinese approval and monitored the vessel. A spokesperson for the PLA said China has indisputable sovereignty over the islands in the South China Sea and the surrounding maritime area.

The Kobayisi letter noted how heightened recent geopolitical tensions have become. They write, over the last 24 hours. One, China encircles Taiwan with 71 fighter jets. Two, China carries out simulated precision strikes on Taiwan. Three, Taiwan goes on high alert. Four, 20 ships involved in a standoff between China and Taiwan. Five, China says drills around Taiwan to continue. We have had more geopolitical issues over the last two years than the previous 10 years.

geopolitical tensions are now our biggest risk. So China flexing is one real side of this discussion, but China Rising is not the only part of the narrative. De-dollarization has rocketed into the mainstream political discourse in the U.S. There are a few events that have catalyzed this discussion. In the last month, we've seen the first natural gas trade settled in Chinese yuan, a deal struck between Brazil and China to conduct trade settlements and investments in domestic currencies, as well as a meeting of Asian regional powers where Indonesia urged its peers to move away from the

dollar to limit the strength of sanctions. Now, of course, the Bitcoin and crypto folks are well-versed in this type of discussion. Former Coinbase CTO, Bologi Shrinivasa, explained in a tweet last week, the dollar isn't just a currency. It's a network and it's controlled by the Fed. That's why 10 Asian countries just met. They want digital sovereignty, so they are de-dollarizing, using local currencies for trade to increase economic independence. No, it's not surprising that Bologi and others like us are having this conversation. What's surprising is the extent to which it is penetrating domestic political spheres. Cable TV host Tucker Carlson has discussed the topic on multiple recent shows.

Carlson has tended to lay the blame for de-dollarization at the feet of the U.S. Treasury, criticizing the aggressive use of sanctions and seizure of reserve holdings as the reason the globe is turning away from the dollar. Carlson said, quote, smart foreigners started to dump the U.S. dollar. Why? Because the U.S. dollar was no longer a reliable store of value. Suddenly, it was a political weapon that could be wielded at will against anyone who held it. This is hardly the only example of this.

If you flip through cable news in America, especially conservative-leaning cable news, this has become a major theme. And given that, a thoughtful observer might ask, given all this de-dollarization talk hitting a fever pitch, is there actual evidence to suggest it is happening? In other words, evidence of an actual reduction in the use of the dollar. By the numbers, the dollar remains omnipresent and pretty much all important in global trade. Last April's figures from the Bank for International settlements, for example, showed that the dollar was one side of 88% of all foreign exchange trades. The Fed estimates that between 1999 and 2019, the dollar accounted for 96% of trade involving the America's region, 74% in Asia, and 79% in the rest of the world. Banks use the greenback for

around 60% of international deposits and loans. That said, one trend that is clear, something that folks like Luke Gromman point out frequently, is how much dollar exposure global central banks have to the USD. Those global central banks have trimmed their dollar exposure to 60%, which is a 25-year low. Some of this can be explained by Russia being cut out of the global system. as well as China taking strategic moves to pair back their dollar reserves, and at the same time, central bank's exposure to gold is at record highs. At the same time, there isn't yet consensus building around any sort of replacement. Part of the issue is debt. A huge portion of global debt is owed in dollars, so a period of dollar strength, as we've seen over recent years,

essentially acts as a drag on the ability to repay this debt. It also makes de-dollarization exceedingly difficult for most nations. It's one thing to do a few small trade transactions in local currency, but to entirely switch off the dollar standard would dry up the currency flows needed to service dollar-denominated debt. This is the point that Brent Johnson of Santiago capital has often made in his dollar milkshake theory. That is the world attempts to de-dollarize, dollar supply will dry up faster than debts can be paid down, squeezing the dollar higher. On top of the debt issue, there's also the consensus issue. Even if few nations really want to be trading in dollars, when they're asked what should replace the dollar, the only answer is their

own currency. If a critique of the dollar is generally that it can be printed by the U.S., that is also equally true of all other fiat currencies, which is of course why you're seeing central banks turn to gold, and of course, why Bitcoin has a never-ending new supply of people who get interested in it. It does feel a bit like part of what's happening right now with the de-dollarization discourse in the U.S. is that it's being churned up into the political culture war machine. Not that the issues being presented aren't legitimate and serious, as any Bitcoin or a crypto person will tell you, but that it has become another wedge by which to divide partisan politics. And yet there is still clearly something bigger than just American domestic

politics happening. There is very clearly a palpable sense that the age of U.S. dominance is coming to a close. Prior to last Friday's jobs report, trader Matt Zweefel captured the mood in a Twitter post. A single bad print and it's the end of U.S. hegemony is where we are at. Although the dollar's position in the world is called an exorbitantin privilege, some have pointed out the incredible costs that have been borne by the American people to pay for this privilege position. Macroanalyst Lin Alden discussed this point in a tweet a few weeks ago. Dollar hegemony, she writes, in its current form, is synonymous with anti-mercantilist policy. meaning it hollows out domestic industrial capacity in exchange for widening the external reach of the

political and military influence of the country. When people fret about the U.S. one day losing status as the sole global reserve currency, what precisely is it that they're afraid to lose? Our ability to sanction anyone? Our 754 and military bases? Our artificial import boosts, which comes at the cost of artificial export weakness, always ask, who specifically benefits or is harmed by a given framework. The U.S. is a broad thing, who specifically is the U.S. When asked if net net this was good or bad, Lynn responded that she views the dollar's global reserve status as, quote, neutral the bad for the median American and great for most of the upper quartile. Now, of course, it's more than just de-dollarization, that is at the heart of this new

weird period of anxiety in a sense of change. I actually don't think there's a great word for what the general vibe really is right now. In fact, I asked ChatGBT to imagine itself as a modern-day Daniel Webster, and please come up with a word that would be defined, the strange feeling that exists between anxiety and excitement that arises in moments of particularly momentous change. Chat Chbettie responded, I proposed the word exceedance to describe the strange feeling that exists between anxiety and excitement that arises in the moments of particularly momentous personal or global change. The word is a blend of excitement and anxiety and captures the essence of both emotions in a single term. So guys, we are living through a moment of exceedance and one that

I think will inevitably have big implications for the future. Hope you guys had a great weekend. Appreciate you hanging out as always. Like I said, stay tuned tomorrow for a big announcement. And until then, be safe and take care of each other. Peace.