Ukraine Conflict - Fracturing of the World Order
Sabyasachi Das, FIA, FIAI
Corporate Actuary and Head of Risk | Life & Health Re-insurance | South Asia
Since the end of world war II, the world order has been dominated by the USA. It was somewhat challenged for a few decades by the Soviets during the cold war but since the fall of the Berlin wall in 1990 the king has no real competition. During this period the USA has established its hegemony over the global financial and military order, but on the flipside, in doing so, has run up huge debts and a hollowed out of its industrial and production capacities.
This situation falls neatly into Ray Dalio’s framework of the “Changing World Order”. Ray Dalio, the founder of Bridgewater Associates, the world’s largest hedge fund,?has shown empirically that every empire, going back to the Dutch in the 1700s, has declined in broadly the same pattern;
Dalio believes that this rising challenger, right now, is China.
This view of a challenge to the USA led world order has been doing the rounds for some time now. During the recent trade wars with China, it gained some spotlight but now with the Ukraine conflict and the ensuing response from the G7, it has gained enormous traction. In response to Russia’s ‘unjust’ invasion, amongst other sanctions, the Biden administration seized Russian reserves in US treasuries (UST). This had been done earlier with reserves of the Afghanistan Central Bank, but the current adversary is way more powerful, both economically and militarily. Many believe that this is a watershed moment in global politics and could be a trigger for the change in the existing world order. While seizing Afghan or Russian reserves may feel righteous and just, it may undermine the credibility of the UST as an international savings asset. Luke Gromen, CEO of FFTT LLC, an independent research firm, has asserted in various discussions that the Fed and the European Central Bank (ECB) have "completely discredited sovereign debt as an FX reserve".?
Zoltan Pozsar, revered investment strategist at Credit Suisse, elaborated exactly this view in his note titled 'Bretton Woods III'. Zoltan sees the beginnings of a commodities based currency as a result of the “rising allure of outside money over inside money”. He says that the Bretton Woods II, which at core is based on the ‘inside money’, had its foundation shaken when the G7 seized Russia’s FX reserves. Bretton Woods II refers to the current petrodollar system and the dominance of the USA in the global order which brought with it trust in the US dollar (USD) as a world reserve currency and the US Treasuries (UST) as the go-to savings asset for the world, friends and foes alike. The USD and UST is what Zoltan refers to as the ‘inside money’. Zoltan sees the rise of an ‘outside money’, backed by commodities and gold, in the east. And he sees China playing a crucial role in this direction.
China, given its recent prominence in the global economy, has been least bothered about the G7’s ire in response to its policies. China has been aggressively?growing its sphere of influence though its belt and road initiative, its predatory lending practices and its military expansions. China openly aspires to regain its former glory as the world’s number one superpower. It may take this opportunity to secure its access to critical commodities to further its ambitions. Also, China would be worried about its own FX reserves, now that the G7 have weaponised foreign reserves and seized Russia’s. It is also no secret that both Russia and China have been de-dollarising over the past decade and have been continuously adding to their gold reserves. Luke Gromen, has estimated that global central banks over the past decade have bought 3 times as much gold as they have treasuries. To this alliance, if we add in other energy rich nations like Iran and Venezuela, who have been marginalised by the US in the past, we may end up with a powerful, nuclear armed, energy rich block. And this block could set up its own financial mechanism, through repricing oil in a common currency, say Renminbi, or gold or even a gold backed sovereign digital currency, thereby challenging the current petrodollar system.
In my opinion, this may also lead to the rise of a third, neutral, non-aligned block of nations which would deal with both the western US led and the eastern China led blocks. Perhaps this would be led by India, which is a large economy dealing with both the blocks and which has historically been non-aligned even during the cold war, albeit with slightly left leanings. This neutral block may itself become a major player in the global order.?
Coming back to Zoltan’s note, in a cryptic ending he says “Bitcoin (if it still exists then) will probably benefit from all this”. Given that Zoltan has never been a bitcoin ally, his message on bitcoin does come as a surprise. Perhaps he is looking at bitcoin’s neutrality as a virtue in a fractured world and, despite all its flaws, he is applying the ‘cleanest dirty shirt’ principle on it. Perhaps he views it as a hedge against not only currency devaluation but also against the risk of confiscation. Also given bitcoin’s inbuilt payment rails, perhaps if it survives, it will be the only asset capable of being used for global transactions, that does not depend on operatives controlled by either side.
All this is of course in the realms of pure speculation right now and not everyone agrees that king USA, USD and UST would be displaced anytime soon, but there is a fairly broad consensus that the rubicon has now been crossed, signalling the beginning of the end of the current world order. How that exactly plays out, right now, is anyone’s guess.
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Disclaimer?
Nothing that I have written in this piece can or should be considered as financial advice. Also this piece has been written by me in my personal capacity and does not represent the opinion or views of my employer.
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