Macro Post #2 – May 17th, 2023
Over a year into the Russian invasion of Ukraine, the only clear outcomes are the geopolitical tremors agitating the international order. The steady rise of China, an intractable Russia, and warmer feelings by periphery nations towards a less dominant America are at the forefront of the Western world’s anxieties. The unipolar Pax Americana that defined the second half of the 20th Century may have had a multitude of detractors since its onset, but few seriously considered an end to American preeminence on the world stage until recently.
While the Western fears of a changing global order are not unfounded, they likely overestimate both the likelihood and velocity of a genuine American decline. The United States entrenched its influence the world over throughout the 20th Century, a century in which many of the great empires were reduced to shells of their former selves in successive World Wars. Going uncontested in virtually any pillar of cultural ascendency from entertainment exports to technological advancements, American institutions have been a force of gravity for international relations and trade. Perhaps few examples better exemplify the dominance exuded in the “American Century” than global ubiquity of its currency in international trade and finance.
Source: Federal Reserve
Of those envisaging an end to America’s dominance on the world stage, many foresee the US dollar’s inevitable loss of reserve currency status. Over 50 years removed from the gold standard and after many profligate Congressional budgets, the US dollar has of course lost much of its purchasing power over time.
Source: Visual Capitalist
This process of currency devaluation may have slowed with the technological breakthroughs of the late 20th Century coupled with globalized supply chains making goods cheaper, but central bank policies, the Covid induced supply shock, and the potential for a shake up in trade relations has already reduced what a dollar can purchase in a short period of time.
Source: Federal Reserve
Source: IMF
Despite this trajectory, the imminent collapse of the dollar is unlikely, especially when held in comparison to other currencies. The world’s reliance on it for trade insulates it from a near term collapse. Since all advanced countries use fiat currencies that they can print with ease, the dollar’s value has little chance of cratering relative to other currencies. A true end to the dollar’s reserve status could only happen with a more drastic geopolitical realignment, one that would be measured in decades, not years. In the near-term, the risk in the dollar comes from how many goods and services it can buy today compared to tomorrow. But the deterioration of supply chains and free trade are very serious possibilities in the intermediate to longer-term.
Source: ShipMap
The cost and flow of commodities and how these fluctuate in the coming years may tell which way the winds blow in international relations with greater accuracy than speeches by diplomats and trade ministers. While the post-Cold War order called for free relations that transacted in US dollars with goods traveling on trade routes patrolled by the US Navy, this world order is being rejected by some. For the first time in a long time, this rejection isn’t coming from an authoritarian leader of a relatively powerless country or a fanatical religious terrorist, but by large nations with large militaries that produce large amounts of resources for the global economy. How widespread and how forthright these rejections become will define global politics for the foreseeable future.
Source: Visual Capitalist