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By: Frank Knopers
The war in Ukraine has unleashed an economic war that could have far-reaching consequences for the global economy and the international monetary system. According to Credit Suisse credit analyst Zoltan Pozsar, this could even trigger a New monetary system. A system in which the US dollar will play a less important role and raw materials will become more important. According to him, this will be accompanied by a Economic Depression and loss of prosperity in the 'rich' West in particular. But is Credit Suisse's credit analyst right?
Bloomberg Organized recently a debate between Zoltan Pozsar and his teacher Perry Mehrling, professor at Boston University. In 2013, the two collaborated on a scholarly publication on the shadow banking system and the workings of the financial system, but now they disagree on the future of the dollar system. It results in an interesting and instructive conversation, in which different insights about the financial system come together. For example, Mehrling does not expect the logistical and geopolitical problems to fundamentally change the future of the dollar system.
Pozsar's view is that a decades-long trend of globalization has turned into de-globalization this year. This has major consequences for the Western world in particular, because they have benefited the most from cheap goods from China and cheap energy from Russia. Due to a hostile attitude of the West, Russia and China are increasingly seeking rapprochement with each other, causing the center of gravity of economic power to the east Shifts. Together, these two countries have a lot of production capacity and energy resources.
In this context, Pozsar foresees that the dollar will depreciate against commodities. He expects that countries will hold more reserves of strategic raw materials and assign more value to them than to their dollar reserves. In addition, more countries will start trading in currencies other than dollars, making the holding of dollar reserves less obvious. Other currencies such as the ruble and the yuan will play a bigger role.
According to Pozsar, central banks are currently unable to bring the current inflation under control, because high energy prices are mainly political in nature. With interest rate hikes, central banks try to remain credible, because they have the mandate to pursue price stability. But central banks can't print oil or grain to support the economy.
Professor Mehrling endorses a number of these trends, but does not yet see them as a major threat to the international dollar system. According to him, the high inflation we are currently facing says much more about disruptions in logistics chains than about confidence in the dollar. He expects that these disruptions, caused by the corona pandemic and the war in Ukraine, will eventually diminish and that inflation will also decrease. He is therefore reluctant to extend the current trend of ever-higher prices in his analysis.
A new book by Mehrling will be published in October, entitled Money and Empire, in which he stresses that a contradiction has arisen between the political reality of nation-states and the financial reality of a global financial system. By the latter, he is referring to the global anchoring of the dollar in the financial system and that this is the currency in which banks trade internationally and in which most debts are listed. The Federal Reserve plays an important role in this system, as only this central bank can provide liquidity in emergencies. For example, by opening up the balance sheet via swap lines or via a repo counter.
Mehrling also has a different view on the decoupling of gold and the dollar in 1971. This event is seen by many as a bankruptcy of the dollar system, but according to him, this was more of a growing pain in the evolution from an onshore to an offshore dollar system after the collapse of the Bretton Woods system. Of course, the United States had an interest in this, because it gave room for the deficits to increase further.
