Bitcoin & Geopolitics - Week 17

The dollar took a hit in 2022. Its share in international reserves fell ten times faster than in previous years. Bitcoin is chomping at the bit.

Black year for the dollar

According to Eurizon SLJ Asset Management, the dollar’s share of central bank foreign exchange reserves fell sharply in 2022.

In a note published on Monday, strategists Joana Freire and Stephen Jen calculated that the greenback represented around 2/3 of total world reserves in 2003, then 55% in 2021, and 47% at the end of last year. The IMF, for its part, puts forward a figure of 58%.

“If we take into account fluctuations in exchange rates, the dollar has seen its market share fall by 11% since 2016 and double since 2008. It has also fallen by 8% in 2022 alone, which is exceptional. This is ten times the average annual rate of erosion observed in previous years”say the authors.

Evolution of the share of currencies in global foreign exchange reserves
Evolution of the share of currencies in global foreign exchange reserves since 2003

At the same time, the share of the euro as a reserve currency increased by 5%, according to Eurizon. The single currency returns to the same level as in 2003, erasing two decades of losses. Yet the ECB also froze 150 billion euros belonging to Russia…

The decline of the dollar as a reserve currency has accelerated since the start of the war in Ukraine in particular. Of the “exceptional actions”namely the sanctions imposed by the United States and its allies against Moscow, have prompted many countries to review their strategy.

That said, its use for international trade payment remains unchallenged. It is involved in 85% of Forex conversions and represents 45% of SWIFT transactions. The euro represents 33%.

The end of dollar hegemony

The role of the dollar as an international currency “will not be called into question anytime soon because of the size, liquidity and proper functioning of its financial markets”warn however the two strategists of Eurizon SLJ Asset Management.

Nevertheless, “Investors must understand that if the countries of the South cannot completely do without the dollar, a large part of them no longer want it”…

The world is moving forward. The BRICS clearly want to internationalize their currencies. As well as the 19 countries that have officially requested to join the club.

“19 countries have applied to join the BRICS bloc before the next BRICS summit.
Currently, the BRICS contribute more to global economic growth than the G7. Countries such as Saudi Arabia, United Arab Emirates and Iran have shown interest in joining BRICS. »

The Middle Kingdom built the equivalent of the SWIFT network. CIPS oil transactions totaling nearly 500 billion yuan every day. Brazil and China recently announced that they are using it for their bilateral trade.

We are on the cusp of a radical change in the international monetary system. According to the Financial Times, the biggest buyers of gold in 2022 were China and Middle Eastern oil producers. That is, countries with large trade surpluses no longer wanting to be paid in monkey money.

This bulimia of gold is to be compared with the recent historic visit of Chinese President Xi to Saudi Arabia and other states of the Gulf Cooperation Council (GCC). The GCC includes Saudi Arabia, Kuwait, Qatar, Bahrain, Oman and the United Arab Emirates.

These countries represent more than 25% of world oil exports (17% for Saudi Arabia). In addition, more than 25% of China’s oil imports come from Saudi Arabia. China is simply the GCC’s largest trading partner.

Petroyuan?

During his visit, Xi made the following crucial remarks:

“China will continue to import large quantities of crude oil from GCC countries, increase imports of liquefied natural gas, strengthen cooperation with engineering services, storage, transportation and refining, and make full use of the from shanghai [pour régler en yuans les échanges de pétrole et de gaz]. »

Message received from the Saudi government, which announced a few weeks later its intention to sell oil in yuan.

“Saudi Arabia is open to discussions on trade in currencies other than the US dollar”according to the kingdom’s finance minister, reports Bloomberg.

Saudi Arabia, which had insisted for 50 years on being paid in American dollars, suddenly accepts the yuan (and the euro). We are witnessing the twilight of the petrodollar, which allowed the United States to post a chronic trade deficit without the value of its currency collapsing.

The Saudis probably feel that the United States is no longer fulfilling its end of the bargain. In particular because of the Fed, whose balance sheet reached 32% of GDP (58% for the ECB, and 127% for the Bank of Japan).

Conversely, the Central Bank of China is the only major central bank in the world to have shamelessly refrained from printing. Excluding foreign assets, its balance sheet represents only 16% of GDP.

This headlong rush of debt results in double-digit inflation in the United States, while it is virtually non-existent in China.

So it makes sense to start swapping dollars for yuan.

Yes, but…

THE yuan cannot be a reserve currency if China does not liberalize its markets. What’s the point of having yuan if you can’t invest it?

Hence the possibility for oil-exporting countries to convert their yuan into gold through Shanghai and Hong Kong.

It makes sense for gold to serve again as a reserve currency instead of debt if the interest rates served are lower than inflation. What is the point of investing in a treasury bond yielding 2% when inflation is 10%?

Especially when you know that inflation will get worse as energy becomes scarcer. In particular oil, whose peak we may have already passed in 2019.

It will be impossible to repay the debt with declining energy production. China will be no exception. This will inevitably lead to inflation.

[À ce propos, ne manquez pas notre article : D’où vient l’inflation]

But is gold really the ideal currency of the 21st century? More since the advent of the Internet and Bitcoin.

Four advantages that bitcoin has over Barbarian Relic:

  • Gold needs to be protected and transported, which is expensive and risky. Bitcoin travels at the speed of light almost for free.
  • It is always possible to extract more gold if its price increases. Bitcoin is limited to 21 million units.
  • The purity of gold is very expensive to verify. You have to melt the metal.
  • The yellow metal is difficult to split. Will it ever be necessary to send envelopes containing gold dust. A bitcoin is divisible into 100,000,000 satoshis.

Sooner or later multinationals and nations will trade in bitcoin.

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