David Gracey

David Gracey

David Gracey | Head of Foreign Exchange and Fixed Income Trading

De Dollarization – not so fast Mr. Brics

  • Being as old as I am – some say I’m old enough to have been a waiter at the last supper – I have been able to witness many changes over the eons.
  • The first man on the moon, the fall of the Berlin wall, the end of apartheid, and importantly, the battle between VHS and Betamax  Video formats.
  • When video moved from reel and projectors to machines hooked up to TV’s, there were two different formats battling it out. Betamax was the better quality format, but VHS was cheaper option.
  •  Ultimately if your parents chose the losing format you were shut out as the industry moved to support the winning format, ultimately VHS …the cheaper option.
  • This meant you had to pay twice. Once for your system of choice, and the second time to change over to the industry supported mode, all whilst your Betamax copies of “Debbie does everything” gathered dust.
  • It became even more complicated with the advent of DVD’s in the 90’s – many a time your rental would not play in your machine because it was programmed in a different “Zone” to the machine hooked up to your TV.
  •  If I remember correctly there were 4 or 6 zones that one needed to be conscious of. If your machine played only  zone 2 DVD’s , but you had mistakenly bought or rented a zone 4 disk , you spent the evening playing Monopoly instead of watching your chosen movie. It wasn’t long before the greedy capitalist seized upon this opportunity to fleece more money from DVD consumers by selling multi zone machines at exorbitant prices.
  • In modern terms you can think of it like this – if you wanted to stream Netflix you would need one kind of laptop, but if you wanted to watch something on YouTube you would require a completely different computer.
  • All of which brings me neatly to the debate around de- dollarization.
  • You will recall in past postings how it was explained that the US Dollar became the main means of global trade … you can find it here on “Beyond the headlines” if you require a refresher. 
  • The fact that the US Dollar, like VHS, was the ultimate winner for global trade has given the USA enormous privilege, and has allowed them to weaponise the Dollar  against nations that break the Western rules of engagement.
  • More recently there has been a tremendous amount written about the potential demise of the USD as global reserve currency and the implications for geo-politics.
  • And no doubt there will be much discussion at this year’s annual BRICS summit about a replacement system.
  • Change is never easy and change is never obvious. Change also never turns out as everyone expected….and even though its seems as if a new system is warranted, the difficulty is trying to predict what that new system will look like.
  • Practically it will be very difficult to replace the USD hegemony. Let me try to explain in fairly simplistic terms.
  • Imagine that you are an importer of Kangaroos sitting in India … you travel to Wangalula in Australia and find a source for cheap Kangaroos. You negotiate a contact whereby you can pay for your Marsupial imports in Indian rupees. You buy 200 well behaved Kangas and settle your bill in Rupees. All well and good so far.
  • Now look at it from the Australians point of view ….he no longer has any Kangaroos to feed, and has a few Indian Rupees sitting in an account somewhere.
  • Let’s for arguments sake say that he wants to diversify his business and realizes that Elephants are far easier to farm than pesky Kangas.
  • Given the fact that there are zero Elephants available in Australia he has to turn to  International markets.
  • Now he can, if he decides, source some Indian Elephants from India, and return the Rupees to an Indian seller. However African Elephants are bigger and prettier than their Indian counterparts and so he looks to Hennie Van Aswegen in South Africa for his supply of beautiful African Elephants.
  • He buys a few and offers Hennie Indian Rupees as settlement.
  • Hennie has no need for Rupees as he buys his feed supply from Kenya, and Kenya only accepts payment for that feed in Shillings or US dollars. Therefore in order to pay for his Elephants Mr. Australian has to buy Kenyan shillings with his Rupees. He however discovers that there is no real market in Indian Rupee/ Kenyan Shilling market in Sydney, and therefore sells his Rupees for the other currency Henie is willing to accept….back to USD.
  • Global trade, like Video machines, is complicated and the means of exchange is critical to its ongoing success.
  • Yes the US is too powerful and yes the Yankees have abused their privilege, however, Finding a new system will not be easy.
  • Factor in interest rate differentials and cost of carry , ease of transacting, global fungibility etc. and you see why its rather complicated.
  • Perhaps our BRICS summit attendees can come up with another system. But I wouldn’t expect a new means of global trade in the very near future.