By Kashyap Arora
Edited by Madhavi Roy, Senior Editor, The Indian Economist
There does seem to be a definite trend in the direction of ‘de-dollarization’, something which can be easily seen from the decline in the percentage of dollar denominated securities in the world’s reserves (i.e.,from90% to 60%). Further, some of the prominent economies leading this race towards de-dollarization include the economies of Russia and China, which recently have started engaging in regular, and sizable Ruble – Yuan swaps. The Russia – China US$400 billion energy deal is also an important move in the direction of decoupling hydrocarbon trading from the dollar, as it foresees payments in local currencies, rubles and Yuan.
The Governor of the Russian Central Bank has shown keenness in discussing with China and its ‘BRICS’ partners the establishment of a system of multilateral swaps that will allow to transfer resources to one or another country.China has also offered the European Union to deal with it directly through their respective central banks’ currency swaps, thereby avoiding the usage of the dollar, which up till has been used dominantly as a universal currency.
Adding to the above reasoning, five of the largest US banks alone have each more than USD 40 trillion in derivative exposure. If they decide to call in their debt (even in parts), it will definitelycreate a worldwide financial disorder with a resulting collapse of the western monetary system. The US economy also has an enormous debt (i.e., 105% of GDP – US$ 17 trillion) and unmet obligations of US$ 127 trillion, which is about 8 times its GDP. Adding to the fragility of the US economy is its banking system.Many ‘expert’ estimates also predict a stock market slump of up to 70% in the very foreseeable future.Further, penalties such as the ‘fine’ to the French BNP-Paribas for dealing with sanctioned Iran could have been avoided if the French bank did not have the obligation to transit – and hold accounts – in the US banking system.
Thus, the above-mentioned factors signal towards the beginning of a new monetary system, which in the future can issue its own currency or a basket of currency that could gradually replace the dollar as a reserve currency. Such a currency system, offering a healthy alternative to the dollar system, would be detached from the Wall Street – BIS clearing system and could also allow trading in countries’ own currencies with currency swap arrangements between respective central banks. In this regard, a solid alternative currency can also become an alternative reserve currency – a move for which countries such as China, Russia and India have been calling for years.