What are the implications of de-dollarization, BRICS, and central bank policies for the global economy? Let’s discuss
The current state of the global economy is a subject of much debate among experts, with many expressing concerns about the impact of recent geopolitical events on the world’s financial markets. There is plenty of evidence to suggest we are entering a multipolar world that is different from the era of globalization. With the rising BRICS (Brazil, Russia, India, China, and South Africa) nations gaining increasing support in their push for a different currency regime and a more regionalised economic system, it’s clear this is going to ripple through economies and markets with a myriad of effects.
Dollarization refers to the widespread use of the US dollar as a medium of exchange, store of value, and unit of account in a country or region outside the United States. It occurs when individuals, businesses, and governments in a particular country prefer to use US dollars over their own domestic currency for transactions.
In the context of the global economy, the US dollar is the most widely used currency for international transactions. It is the world’s reserve currency, which means that many central banks around the world hold US dollars as part of their foreign exchange reserves. In fact, over 50% of the world’s currency reserves are comprised of US dollars. This is because the US dollar is seen as a stable and reliable currency that is widely accepted for transactions.
However, the dominance of the US dollar in the global economy has also led to concerns about its potential impact on the financial system. For example, changes in US monetary policy, such as interest rate hikes, can have ripple effects on the global economy, leading to fluctuations in exchange rates, capital flows, and commodity prices.
Another component of Dollarization is the reality that a US-dollarized country is having inflation exported to their economy from the US. One of the things that can happen in a country that adopts the US dollar as its currency is that it can start to experience inflation that’s been imported from the US. This happens because the value of the local currency is tied to the US dollar, and as the US money supply grows, so does the amount of inflation that’s being exported to these dollarized countries.
Moreover, countries that are US-dollarized often find themselves in a tough spot, financially speaking. Because they’re limited in how much they can expand their own money supply, due to currency pegs, they often have to take on US-denominated debt. This, combined with the inflation that’s being exported from the US, makes it difficult for these countries to ever pay off their debt. Instead, they end up refinancing their debt repayments over and over again, which can have severe economic and social consequences for emerging markets.
In essence, dollarization is a double-edged sword. While it can bring stability and predictability to a country’s monetary system, it can also lead to inflation, debt, and economic hardship. Such is the case for many emerging markets, Like Ecuador, which has seen complete economic erosion gauged by macroeconomic indicators since the Dollarization of its monetary system.
De-dollarization and Global Inflation
The process of de-dollarization, which involves reducing the reliance on the U.S. dollar in international trade and financial transactions, can have various effects on inflation depending on the specific circumstances of each country.
One potential effect of de-dollarization is that it can lead to higher inflation in countries that are heavily dependent on imports denominated in U.S. dollars. If a country’s currency weakens against the dollar, the cost of imports rises, which can put upward pressure on prices. This effect can be particularly pronounced for countries that import a significant amount of food and energy, which are typically priced in U.S. dollars.
On the other hand, de-dollarization can also lead to lower inflation in countries that have a high level of dollar-denominated debt. If a country’s currency appreciates against the dollar, the burden of servicing dollar debt decreases, which can help to reduce inflationary pressures.
An analysis by the European Central Bank (ECB) found that de-dollarization in emerging market economies can lead to higher inflation in the short term, but can have a positive effect on inflation over the medium to long term. The study noted that the benefits of de-dollarization are likely to be greater in countries that have a well-developed financial sector and a stable macroeconomic environment. The final conclusion also noted fiscal discipline is not a social trait which prevails in a dollarized system, making it overall a system that does not promote good economic policies.
Since the inception of the US dollar as the global reserve currency, a process of dollarization at a global scale has been taking place. It’s clear now that the trend is away from this monetary system, but with over 50% of the world’s currency reserve being held in US dollars, it will require a tremendous amount of economic pain to move on from the Dollarized and Globalized world. Inflation will be a necessary and sobering reality for the world to accept that much of the expansion of money supply carried out in a Dollarized system, has not been matched by an equal expansion in goods, services and economic activities. Moreover, a true social existential crisis of monetary consciousness will be required for everyday people to accept a new monetary system that operates differently from the one they have always known – this all will take time.