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Transcript
Yusuf: Welcome to geopolitical horizon, the podcast from the geopolity.com.
The dollar dominates international trade, but have we ever wondered why that is the case? Geopolity have released part one of a two-part series of the geopolitics of the dollar. We have geo polity founder it at Adnan Khan to discuss this with us today.
How are you Adnan?
Adnan: I’m good Yusuf, I’m good, how are you?
Yusuf: Yeah, I’m good. Thank you. Now, the first question that comes to mind is why does all trade have to be conducted in the dollar? I mean, even if we’re buying something from China, the chances are that you’ll be making the payment with the dollar.
Adnan: Um, so it’s a good question to begin with actually.
Why, why does the world use the dollar and why is global trade financial markets international settlements all done in the dollar now it’s not due to any legal reasons. It’s not because legally you’re not allowed to use any other currency. Really, the dollars position today is due to the political settlement that took place after world war II, after world war two, America was the last man standing. The European continent was devastated. The British were devastated. The French were devastated. The Germans were devastated. The Russians were devastated. So the U S established a new world order. And it placed America at the center of that world order. And it made his own domestic currency, the base currency for everyone around the world. And at that time, nobody could really compete with America after world war II. So as a result from then, until today, the dollar is the reserve currency. It’s the currency global prices are priced in. Global commodities are priced in, uh, agricultural goods are priced in it’s the way we have uniform prices across the board in America’s domestic currency. So it’s not because of any legal requirement. Uh, China is free to take payment in any currency or wishes. It could even take payment in your currency, which, which it doesn’t. Um, so it’s, uh, America was the power after world war two. It was the last man standing and it imposed this due to the political advantages, it would give America.
Yusuf: So I get that. I get that point that you’re saying that it was the last man standing. It was the most dominant country in the world, but why would any other country really choose to actually take payments in the dollar? Why wouldn’t they actually try to push their own currency and try to give an advantage to their own currency.
Adnan: So, what really happened is up until world war two or even two, just before world war two, the world was on the gold standard and even America, when it lent money to the British, when it lent money to the European countries for the war, it took. It paid them in gold and the loans that gave him expected to be paid in gold.
So up until world war two and a little after gold was how things were measured. And gold really has been money through through. the whole of human history, people have confidence in it. It has value as a unit of account. It’s a store of value. So when world war two ended. America saw the threat from the rise of communism.
And it realized that unless America pushed and kickstarted the global economy, everybody would just turn communist and the Soviet union will take over the world. So what they did was they aligned the Western world or the capitalist world, with them by making their currency, the currency of choice. So, uh, what that meant was, is money was linked to them, uh, oil.
Uh, and gas and all these commodities that people trade in they were priced in dollars. So if we take the example of the UK, if oil and gas is priced in dollars, then it probably makes sense. You take payment for your exports in dollars, because you can use those dollars now to purchase oil and gas. If only trading of America required dollar, then you can use any currency you want.
But. The key things you need to survive, uh, energy, these sort of things. Um, it makes sense. You take payments in the dollar because the dollar is used well beyond the American borders. Now that’s only possible because America has global position. Takeaway America being a superpower, nobody will use their currency.
And that’s why you’ll see. Prior to America, after world war II, `the British pound was probably the global currency because it was the currency used in all the colonies around the world. So as Britain declined, the use of the British pound declined and as America declines, then the likely chance is people abandoned the dollar as well.
Yusuf: I guess this is where the term petro-dollar comes from. It’s something that I’ve grown up hearing about the petrodollar. What does it actually mean? And what’s in it for some of these Gulf countries that actually use the dollar for payment for their energy.
Adnan: so what America did after world war two is because it had most of the world’s gold in his Vaults what America did. It said $35 will get you an ounce of of gold. So they link their currency with gold first now because the dollar was being used. In payments, many country didn’t withdraw their gold from America’s Vaults. They just kept using the dollar. Then when America went into the Vietnam war and it dragged on for a decade or so, it became quite clear that the seems to be more and more dollars in the world than there is gold.
And that’s because successive us administrations were printing money to fund the war effort in Vietnam. then in 1976, Richard Nixon temporarily suspended, converting. gold into dollars and that became permanent in the end as well. So at that point, the American dollar cease to be backed by gold. So literally today it’s the same dollar we have.
It is literally just the authority and the writ of the state that imposes it as payment. There’s no gold behind it. There’s no nothing behind it. So America saw a bit of a problem is if they’re no longer converting gold into dollars, why would anybody want to hold it up? Why would anybody have the need to hold dollars?
So what America did is cut a deal with Saudi Arabia. It cut a deal with them where America will provide the monarchy with security. It will uphold the monarchy in return if they could buy and sell the oil in dollars only and the Saudi monarchy accepted this because they felt threatened by the developments going in the middle east.
Now, why is this important? It’s because Saudi Arabia was on the verge at that time of becoming the largest oil producer in the world. If the world’s largest oil producer is only taking dollars in payment, then that gives a reason for other countries to hold the dollar. But the likely chance is you’re going to be buying.
From Saudi Arabia. So that’s called the petrodollar, uh, you know, effected the petrol price came to be based on the dollar. So that gave the rest of the world another reason justification to continue buying the dollar. So when they export goods over getting dollars and those dollars would then use to purchase energy.
And that’s still the system we have today in the world.
So, obviously this has meant that America has a massive advantage over the rest of the world with this dollar being the main currency that everyone uses. And ultimately this would mean that the dollar now with it being international, it gives America big, massive advantage.
And you often hear the, the phrase that the dollar has been weaponized. Can you give some examples of this?
So yeah absolutely by America’s currency being used in payments and being new that a reserve currency. What that means is if America cuts your access to the dollar, you can’t really engage with international trade. If America gives you access to the dollar, you can engage in international trade and prosper.
So if you take the example of Cuba, if you look at Iran, if you look at North Korea, when America was sanctioned on them, what it does, it makes it illegal for anyone to use America’s currency to treat. America’s domestic currency is used beyond. In fact, most of the dollar is used outside America. America’s seems to be a domestic company long time ago because it’s America’s domestic currency. America can sacntion you and make it illegal for you to use in transactions at the moment, it’s illegal for anyone to use the dollar, to make payment to Iran. So China has a problem. China relies on middle east oil and China can’t use the dollar to make payments to Iran. So if he wants to buy oil from Iran, China either pays them in their own currency. or they pay them in Iran’s currency. Now China pay them in their own currency. There’s nothing much Iran can do with China’s currency because China’s currency is not the currency in Iran. It’s only the currency in China. So that wouldn’t really work for Iran. If, uh, China has to pay Iran in its currency, in the Iranian currency, China would have to go and buy it off the international market, sell its own currency and then pay them.
So the dollar is the only currency that has other uses. So if you received dollars, there’s definitely something else you can do when you can purchase other things. No other currency has that, uh, position. So as a result, if you are not in America’s good books, If America wants to sanction you, it will stop your access to the dollar.
And if you do use the dollar with a country under sanctions America can hurt you so, this is why China has a problem. This is why, um, uh, some of the European countries who were looking forward to investing in Iran, uh, they fell into problems. So this in many ways America’s true nuclear option is not is nuclear weapons.
It’s actually the dollar, because if you look at the state of Cuba, if you look at the state of, um, uh, Iran, It’s because America cuts them off at a moment’s notice from accessing the, uh, international economy and international trade. And that’s what it means to weaponize the dollar.
I can imagine a lot of countries not being too happy about this. Uh, have there been any countries in the past that I’ve tried to challenge the U S in this?
So actually they, they there’s been a number of countries. So the Soviet union tried to challenge, uh, the system. Uh, you had the communist or Eastern block where they were tied to Russia, but economically, and from a development perspective, the Soviet block never really was at the level of the Western block.
What America did was it created a global economy where America defends the oceans. And everybody can trade using America’s a currency. However, the last two or three decades, you have seen more of a move and a lot more talk about moving away from the dollar because America keeps, uh, weaponizing it. So there’s been a lot of talk by the Gulf countries of moving away from the dollar.
The loudest voices have probably been from China and Russia. So Russia has been under sanctions for a little while now due to its invasion of Crimea and Eastern Ukraine. So its been talking for a long time to move away from the dollar because America is weaponizing it and China as well now there’s a lot of talk from China.
China’s view is if they’re the second largest economy in the world, if they’re the largest global trader, why on earth is the dollar being used as its currency. But for the moment there’s been a lot of talk. There’s been a lot of opposition countries can see America’s weaponizing it, but there hasn’t actually been any concrete move to move away from the dollar
Yusuf: yeah, that’s a very interesting point that you make. Um, one question that I’ve got is how would any country actually physically challenged the dollar?
Adnan: Because if all energy is being sold in the dollar, how can any of the dollar, how can any other currency get there?
Um, so really, if you look at how the dollar became the world’s premier currency, it wasn’t necessarily because the economic fundamentals were the best in America. What really happened was you had an event world war 2
it was an event of global magnitude and America was able to position itself at the center, post the war. So what you find is, is it’s not, anyone’s going to outdo America because America has got all the advantages at the moment. You’re not going to be able to print as many of your own commentary at the dollar, you are not going to able to issue debt the way America does
really it’s a political issue to replace the dollar because by trying to replace the dollar, what you’re doing is challenging America’s global position. So really to replace the dollar, it actually means you need to replace America as a global superpower. And this is why, you know, this is not really an economic discussion. When we talk about the dollar as seen as a very economic discussion what’s America’s economic situation. If you feel, look at it, the dollar shouldn’t even be the reserve currency. If you look at the debt America’s got, how is it going to repay that debt? That’s why America keeps rolling over the day. Really it’s a political issue. And at the moment, what you find is that politically there may be challenges to America in the long run at the moment, there isn’t anyone to challenge America politically. And that’s why there’s no one really to replace, uh, the dollar aswell at the moment,
Yusuf: if we can take a couple of examples and see where these currencies are actually going, and maybe you can shed some light on it, so for example, the euro
Adnan: uh, that’s one, that’s got quite a lot of prominence, obviously across Europe. And the second one is you mentioned it before China and its its currency the Yuan
yeah. So the Euro was launched in in 1991, and there was a lot of talk its gonna replace the dollar, you know, Europes a big continent, Europe, has got financial markets.
However, it’s not really turned out like that. Really. The challenge is the Euro really is a local currency beyond Europe. The Euro is used in very few transitions. You know, across the world the dollar, the only currency used in a volume, the Euro is not used in large volume outside Europe. So what that means is the Euro remains a very local currency to its own own region.
And that’s really been the problem. So what’s happened is that Europeans have not been able to promote the Euro at a global currency. Only those who trade with Europe, who invest in Europe. They, uh, by the, Euro. And obviously if you print lots of euros and the Euro is the currency of the European continent, then the likely chance a lot of that money will come back to Europe and that’s going to lead to massive amounts of inflation.
The advantage America’s got because energy and commodities are priced in dollars. A lot of the dollars America prints, they end up being used outside America. They don’t come back to America. So that’s why America doesn’t go for massive bouts of inflation.
Really, I mean, the amount of currency American needs any amount of dollar in circulation it’s of that magnitude in hundreds, but because the whole world needs a dollar, but America is imposed.
It is able to get away with having massive bouts of inflation. So, you know, the Euro really has been what, 30 years now? It’s not remotely come close to replacing the dollar in terms of China’s currency. Um, China became the world’s top trader exporter in 2012 its the second largest economy now, but there’s a problem with China’s currency, despite all the talk of China challenging the dollar.
Firstly, the Chinese currency, the Yuan, it’s not actually used much beyond China. And the Chinese central bank, every Strix how many you want their own speculation. And the reason why they do this is in order to keep the price of the exports low. They manipulate the currency they restrict how much currency there is in circulation.
So if the China, if the Chinese want to make their comms to the global currency, they’re going to have to print loads more of that currency. And by printing lots more of that currency, your prices will go up and you will no longer be the cheapest exporter, uh, around the world. Uh, when they did open up there financial industry, the flight of money was so bad.
They shut. Uh, taking money abroad. So that’s why today it’s not easy that the Yuan is not freely available. You cannot just go anywhere and get the Chinese currency. Yeah. There’s restrictions on us. And until so that shows you the Chinese don’t view their currency as a global currency, they view their currency as an economic tool.
They use to drive the economy forward. They don’t look at the way America did that. We’ve got an opportunity here to dominate the world with our currency. They don’t view it like that. Or there are many people in the world do the Chinese don’t view it like that then.
themselves.
Yusuf: Now on the topic of China, this might be drifting away from the topic of the dollar, but it’s an interesting question. I had could the dollar, the state of the world today. Could that be used in a way, which would be, uh, which would harm America?
So the specific example that I’ve got in my head is when a couple of years ago, China, because there had so many dollars. They bought a lot of government bonds from the U S and then they were wanting to sell those government bonds in order to harm us. Is that a realistic thing?
Adnan: Yeah. So if China dumped the. If it, um, uh, sold all its, uh, dollars, then it would lead to the collapse of the dollar. The problem China has got with that is China can really only do that once it’s taken itself if its dependence on America’s . market.
And once it’s taken itself off, uh, once it’s sold all its position, it holds in dollars because if China relies on the America market and it relies on it, American government bonds.
If you were to dump the dollar, then the investments you’ve got and your export would become worse. So the only time China can do that when it’s actually no longer needed the dollar it’s transitioned, its economy is transferred from being dependent upon foreign exports to domestic consumption. So anybody who dumps the dollar, you know what that means, anybody who holds the dollar, the dollar would become worthless.
So the only time any country will do that is when they are now in a position. They don’t need to hold dollars anymore.
Yusuf: Okay. So
Adnan: But that will probably lead to war to be honest with you.
Yusuf: So maybe China’s biding it’s time for now.
Adnan: Well, that’s how things are perceived, but China has got a long way to go. I mean, still it’s an export driven economy. America is number one market, even during a trade wall. We’ve Donald Trump, China stool, you know, the American market. So this may market, most of its goods are imported from the countries in its region.
These are put made into final goods. And the majority, a lot of these goods, the biggest market is goods are. So until it can change that, which is going to take, I mean, it’s been 10 years already where they talked about this and they’ve not made much progress on it.
Yusuf: Okay. Now, um, one final question, uh, cryptocurrency has gone crazy the last few years is cryptocurrency a viable replacement for the for the dollar.
Adnan: So you’re right. Last few years, cryptocurrency, uh, led by Bitcoin became really, really popular. The only issue here with the evolution of cryptocurrency is a bit different to the discussion where having a replacing the dollar a crypto currency was really a development .
Outside of the monetary system. We have the Manchester and we have each of central banks. They print money. They’re the central authority. So they print money. They create, uh, bank accounts, mortgages, which is money that they control how much money there is in the economy. what cryptocurrency was is money, becomes an algorithm.
So it’s outside the control of central banks. So it’s a decentralized system where you use a ledger system. You use this technology where multiple computers are updated constantly. So everybody can see how much comments to the is where currency is being sold and all of this decentralized.
So it’s not in the hands of central banks. Now, if you want to replace the dollar, then it means everybody needs to have access to this currency, everyone in a country. But if everybody doesn’t have access to. Um, how is it going to work? And then nature of normal money today is you have a central authority it prints it.
You can get the money from the bank. People take it as payments and orphans organized. Centrally. Cryptocurrencies the opposite. It’s all organized decentrally and also we don’t even know all the people that are buying, selling currency as well. So there’s this limitation, but I think it’s important to understand that the evolution crypto currency is because the central banks dominates area, the, how do you challenge the rate of central bank?
So the emergence of cryptocurrency is more of a challenge to central bank authority rather than any particular currency. So El Salvador. Adopted Bitcoin as the official currency. And it’s been a really difficult journey for them in the last year. Uh, the technology has gone down regularly. People haven’t been able to get access to their accounts and the value of Bitcoin.
It does fluctuate very widely on the financial markets though. The last thing I want is I’ve got a current. It purchase X amount of things. And then tomorrow only puts half of those things. It doesn’t hold its value. So you’ve got these sort of challenges as well. What we are now seeing is a number of central banks and countries are adopting the underlying technology of cryptocurrency.
So a central bank could issue a crypto currency. Um, which would be an algorithm and a people buy and sell using the algorithm and it’s monitored and managed by the central banks. So that will just be, we’ve gone from digital money to an algorithm that’s money, uh, and where that’s useful, for example, in China, because people use an algorithm, everything can be be monitored.
And that’s why the Chinese have really done a lot of work with crypto currency because obviously they want to monitor everything someone’s doing. So you could call someone for money by killing off the algorithm. You could give someone money. People’s benefits can be used Pang, crypto currency. It gives a central authority a lot more control with normal money.
You don’t actually know. What everyone’s doing with it. If it’s in physical note, you don’t always being spent. And even when you do electronically, you don’t actually know the final customer when you’re using cryptocurrency, which is an algorithm you can monitor all transactions. So whoever the central authority is, they’re in a very powerful position. You know what people’s spending patterns are, who’s doing what, and you can cut people off as well. So in some way, the dollar And crypto constantly. They’re not necessarily going in the same direction, the gang in different directions. And as a result, cryptocurrency, isn’t a complete alternative to the normal currencies.
We have, there’s a little bit of overlap, but they’re not the same so due to that. I don’t think cryptocurrencies are going to replace a dollar at any time soon, although they are evolving and they could do, uh, in the medium to long-term.
Thanks for your time today at none. Um, part two of the series on geo politics of the dollar will be out this week. So keep your eyes out for that.
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