US Stock Mkt Falls When USD De-Dollarization Starts?
I first came across the above article back in Feb 2022 last year.
At that point in time, it was an interesting “what-if” read.
Cue to beginning of May 2023, looks like there is progress made afterall.
I supposed there is a lot to be said about US Dollar dominance since the rise of the #1 nation in the world years ago.
However, in this Age of infinite possibility aided by Information Technology (IT) and now Artificial Intelligence (AI) what seemed impossible in the past might just be possible in this 21st century afterall.
Will it happen overnight. Of course not!
Dawn Of A New Co-Currency?
The emergence of a common BRICS payment system (BRICS Pay) and a BRICS digital currency could have significant implications for the role of the US dollar as the dominant currency in global trade and commerce.
Some “glass half full” analysts believed that BRICS Pay could facilitate cross-border payments among BRICS countries and reduce their dependence on the US dollar and the SWIFT system.
I think no reminder is required on how “with the flick of a switch” Russia was immediately locked out of the international payment system (SWIFT) when it decided to wage a war against Ukraine.
This is the 2nd wake up call of how reliance on a single global currency (US Dollar) spells trouble for the rest of the world.
The first wake up call, of course dated back to the 2007–2008 Global Financial Crisis. The crisis originated in the US had raised the following “2Rs”concern:
Reliability of US leadership
Rationality of preserving the dollar’s hegemonic position in the global financial system.
A BRICS digital currency could also enhance financial inclusion and innovation within the bloc and challenge the hegemony of the US dollar in the digital realm.
Success of BRICS Pay and a BRICS digital currency is not guaranteed.
There will be many challenges & uncertainties involved in creating and implementing such initiatives:
How would BRICS Pay and a BRICS digital currency be governed & regulated?
How would they interact with existing national payment systems and currencies?
How would they ensure (a) interoperability, (b) security, and (c) trust among users?
How would they cope with (1) geopolitical tensions and (2) divergent interests among BRICS countries?
Impact of BRICS on US Dollars and US Market
For the impact to be had, these are the challenges perhaps:
Size & Growth of BRICS trade and investment.
Degree of internationalization of (a) BRICS currencies, (b) attractiveness of BRICS financial markets and institutions, and (c) response of other countries and regions to BRICS initiatives.
The “Old World” US dollar still have many sources of strength and resilience that are not easily eroded by alternative payment systems or currencies:
Its status as a global reserve currency.
Its deep and liquid financial markets.
Its network effects and inertia
Is legal and institutional framework, and
Its political and military power.
In the immediate term, even if BRICS Pay and a BRICS digital currency is rolled out, its impact & threat to the US dollar or the US economy is virtually non-existent.
However, in the longer term, they could contribute to a gradual erosion of the US dollar's dominance and influence in global finance, especially if they are accompanied by other de-dollarization efforts by BRICS countries and even non-BRICS countries.
This is the 3rd article that set me thinking again about the viability of the US dollar continual dominance in the longer term.
Although this initiaitive within ASEAN is only “good for” ASEAN countries (in principal) for now; there is no telling that the framework on which the current foundation is built will not and could not be extended to non-ASEAN countries in the future.
Especially if the ASEAN Bloc could evolve and become a “successful” and “unique” bloc to call our own; without someone breathing over our necks, dictating and calling the shots on our behalf.
Will The Time Come?
Hypothetically, let’s assume both BRICS and ASEAN are able to implement their respective system with fair percentage of success, it will become the day of reckoning for US.
Negative Impact On US Economy At The Horizon?:
Higher borrowing costs, especially if its still selling Treasury bonds, expecting other countries to buy them.
Reduced seigniorage revenues,
Lower policy autonomy, and
Increased vulnerability to external shocks.
Effect On US Stock Market?
Lower demand for US assets, especially in sectors that are exposed to international competition or regulation, such as fintech and banking.
Again, all these if it happens will be in the future. Fast - 5 to 8 years from now (with limited success initially). Slower - 10 to 15 years from now.
I am unsure how things will playout for BRICS - too many giants in that mix.
For ASEAN, it could all come together (fully integrated) in 8 years max. Pilot (with a few countries) perhaps in 3-5 years time optimistically speaking.
Can you imagine ?
A future where the playing field is “levelled”. Are you hopeful ?
Do you think this day will come ?
Do you think the US will do all that it could to thwart the goals of the 2 Blocs?
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