Not Every Robin = Spring and Not Every Story About Moving Away from the Dollar Is Well Founded

Yours truly hates to have to be the voice of sobriety. Yes, it was really really outrageous that the US (and the EU and UK) stole all those assets from Russia and Russian companies and has no intention of giving them back. Yes, a whole bunch of countries sat up and took notice and are working on ways to be less exposed to dollar and Euro financial institutions and payment systems. One way to do that is avoid those currencies unless you really can’t escape dealing in them.

We got a lot of people very unhappy with us in 2015 during the Greek bailout negotiations when we explained, repeatedly and long form, why Greece could not escape from the tender ministrations of the Troika by leaving the Eurozone and issuing its own currency. Aside from the fact that most of Greece’s debt was subject to UK law and therefore could not be redenominated in local currency, the big spanner in the works was the huge time required: over a year to design, print, and distribute a new physical currency (that includes changing ATM hardware; the new notes can’t be the same form factor as other currencies), and years to get the new coding done, not just in Greece but in foreign banks and processing networks that will trade with Greece.

In other words, this “move away from the dollar” project has a ton of moving parts. Right now, key countries are starting to do large bi-lateral transactions involving non-dollar currencies. That’s a start but a long way from a new system. Remember it took two world wars and a Great Depression for the dollar to dethrone sterling, and that was merely replacing one dominant trade currency with another, and not potentially devising a new system that does not depend on the control and backing of a single central bank.

Observers are so keen to see progress that stories that have no bearing on the displacement of King Dollar are nevertheless presented as meaningful. For instance, consider this story from Thai Examiner, Thailand teams up with other Southeast Asian nations to create a new cross-border QR code payment system:

On Monday at the G20 Summit in Bali, Indonesia, Thailand’s central bank joined with those of Indonesia, Malaysia, the Philippines and Singapore in a memorandum of understanding to facilitate cross-border electronic payments between the 5 countries without converting to the US dollar using a quick response QR code system.

In Thailand’s internal commercial payments sphere, the movement away from the use of business cheques has already begun with a 16% reduction seen in 2021 and a corresponding transfer value decrease of 12%.

The Bank of Thailand estimates that an accelerated pace in the takeup of digital payments will increase overall economic activity.

It is targeting 800 transactions per person per year by the end of 2024.

Payments system expert Clive had to rouse himself to say that the dollar should never have been part of these transactions, hence eliminating them was not meaningful from a “role of the dollar” perspective:

These “everyone is moving away from the US$“ stories are becoming a little tedious in their repetitive misunderstandings of the subject.

Cross-border payments only involve the dollar if one side (or both sides) of the transaction are denominated in dollars. In my TBTF, we settle £ to €, ¥ or other major currencies such as the Swiss franc etc. without any round-tripping in US$s. I can’t think why banks in Southeast Asia would be bringing dollars into the equation. They’ll simply maintain correspondent accounts in the various national currencies they handle.

It sounds like, for some transactions, some recipients prefer dollars (maybe because they price in dollars or perhaps with volatile currencies if their input costs are dollar-driven, they’d prefer to avoid currency risks and denominating in dollars is a cheap hedge against them). Well, if one party is selling and wants paying in dollars (and/or the counterparty is buying in dollars) then, duh, you’re using dollars.

Trying to wean commercial settlement off dollars is laudable, but you have to fix the issue which leads B2B transactions being denominated in dollars in the first place. A new payment system brings nothing to that particular question.

As for setting up a new payment system, that’s easy. Software vendors are falling over themselves to sell you a “payment system in a box” solution. I could run one from my garage, if I felt so inclined.

Implementing the software isn’t the difficult part. The difficult part is, who puts up the capital? All payments systems need to be capitalised to a degree. If there’s no currency risk, the float can be very (very) thin because you only have to contend with technical issues affecting payments — although once you scale up, even teeny tiny reserve requirements get to be fairly meaty monetary amounts because of the volume and cumulative value of transactions gets big. But bring in currency risks and someone has to put up real money.

So what is the cost of your capital and who covers this? And what are your operating costs (manufacturing and distribution of physical tokens, ongoing system maintenance, process design, legal bills, regulatory filings and compliance)? These drive your fee structure and buy/sell spreads. As it takes a while to get economies of scale, who covers the startup costs and subsidies needed while you acquire customers? How do you integrate with existing payments systems? Many are walled gardens and are under no obligation to let you play there. If you go it alone with a ring-fenced merchant or end user infrastructure, how do you persuade users to run two systems side by side?

And how are disputes arbitrated? In what jurisdiction? If you’re potentially engaging in a transaction worth the equivalent of hundreds of millions of dollars, you can’t afford to run any possibility of legal uncertainty around the payment settlement. EU, US and U.K. domiciled payment systems fall under courts which are, for the most part, unbiased and fair. No commercial concern wants to end up having a payment dispute governed by legal systems which are subject to and, alas, all-too-often succumb to, political influence.

There’s lots more, which is probably why coverage of this subject gets treated in such silly ways, but that’s the gist of it.

Again, your humble blogger is not disputing that there is a lot of thought and effort being put into reducing dollar dependence, but it’s a far bigger and more complex task than most imagine.

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  1. Peter DeBoer

    Thank you Yves, for this breath of fresh air. Deserving as its fate is I am glad I’ll not be around when the wheels come off the empire.

  2. YuShan

    I always feel that the importance that is attached to the US$ being the reserve currency is overstated. Only about 1/4 of US government debt is owned by foreigners and they are not expanding their holdings. So it isn’t the foreigners who keep the ship afloat. It will be Americans who have to finance the deficits and future unfunded liabilities. It’s all a confidence game.

    1. LY

      US federal government is not a household.

      Similarly, commercial settlements are not like a tourist changing money, or a consumer buying from Alibaba.

      1. AngloMan

        LY… It seems that no-one is referencing US Federal payment obligations. The whole purpose is to remove any part of relegation to US Dollar standards and settlements. For good reason. Yves makes a very informative introduction to the deterrents inherent is viable side currency settlements. I still believe it is inevitable for world trade due to the weaponization of currency and SWIFT sanctions by the US. It is self -defeating BRICS and SCO, CIS will settle on a basket of currencies and commodities which will be much more equitable than a single contrived Dollar….

    2. jsn

      There is no issue of funding future liabilities as the Fed / Treasury can at a key stroke make the money whenever the need arises.

      Currently they just do that to bail out bankers and pay for wars, they could just as well do it for public goods as for these public bads, but that’s the nature of our current politics.

      The fact of reserve currency status requires as a prerequisite availability of the currency in depths adequate to the quantity of trade being financed with it. This provision, where it is provided, requires the provider to export jobs and import goods to ensure an adequate reservoir of the currency remains abroad. No country that cares about domestic welfare will do this. Thus, for the last 200 years various empires have provided this service to finance and commerce at the expense of their dependent populations, at home now, in the colonies before.

  3. Regis II

    If I’m not mistaken, I believe one of the tasks for any new system which aims to displace the dollar is the token which will be used for final settlement of claims.

    Currently, if a country (e.g. Argentina) runs up a large trade deficit relative to another country (e.g. Germany), and needs to settle that deficit using some currency (token), the dollar is available for that purpose and, if necessary, there is the possibility of an IMF loan (with draconian conditions, of course) as the source of the dollars. And there is also Special Drawing Rights issued by the IMF which appear to me to sit on top of all of the other currencies/tokens as a means of settlement.

    If Russia, China, India, Brazil, etc wish to depart from the current system, wouldn’t they need a similar mechanism, including perhaps some newly created international organization with the power to issue a token similar to Special Drawing Rights?

    1. podcastkid

      Great comments above. I can almost understand JSN’s (and working on understanding it won’t be wasted time I gather).

      They take my mind beyond the multipolar/bipolar issue. That said (by somewhat of an economic simpleton), by my lights Steven Grumbine was also great on Political Misfits yesterday (talking about gambling ads clawing back the few breaks college kids have gotten). Where the big lumps of dough
      have to remain is interesting (by what law?). I feel there is means-to-better-explain-things hovering. All I can sense about it now [pretty inchoate] is two illustrations. One is ye olde American Economy Poster (flow chart) by Stephen J. Rose (American-Economy-Poster-Fact-Book). I know many experts have arguments against such flow charts; sorry, but I like the thickness and thinness of the lines meaning something.

      And the other is something I’ve never seen…sort of a “scales” illustration. If money represents resources, the perhaps develop a thing that’s an aggregate “dollar” in terms of what fraction it is of the cost, say, of a scrubbing contract for an average size coal fired power plant (IOW a unit of the value of the resources dedicated to such). Then you measure with those dollars the excess profits that the FIRE sector rakes in, or maybe with just plain profit they make?

      And how could we arrive at a “steady state,” at an economy that develops qualitatively, not quantitatively? At one point, Daly spelled out a “top 10” list of policies to move us forward in that direction. High on that list: a call to limit the range of inequality by setting both a minimum and a maximum income.

  4. Stephen

    Thanks. A helpful antidote against the hype.

    Clearly huge friction against de-dollarisation on the infrastructure side and many continuing underlying drivers that cause people to want to hold dollars versus other currencies. It’s all relative, I guess. What are the easily available better options to holding and using dollars?

    Not going to change overnight.

  5. spud

    russia is kinda showing us the way. of course they are big with lots of stuff others want. but argentina is big enough, if you want argentina grain, beef, oil etc. pay in our currency. if the oligarchs and PMC class want foreign goodies, as lincoln said they are rich enough to pay a tariff.

    make that tariff payment be in dollars. the oligarchs and PMC class will howl in rage, and to bad, there system is causing the extinction of man and the destruction of the planet.

    those dollars harvested will go a long ways into staying as free as possible, plus encouraging local production.

    smaller countries need to form blocks, and be as self sufficient in food as possible, let alone other things as well.

    pull out of the W.T.O. and other rube goldberg free trade schemes has some russians suggest.

    yes it will be a long painful haul that many might not make it out of slavery and starvation, but the alternative is to end up cold, starving, and in slavery.

  6. Jack

    Col Douglas MacGregor recently was asked about this in an interview by Mike Krupa; This particular commentary starts at minute 37 almost at the end of the interview. The complete interview is worth watching but it has to do mainly with Ukraine and Poland.

  7. Sunny

    The only way for the dollar to lose its status would be for the US army to be defeated in a all out war. Anything else not accounting in their analysis for this is an exercise in futility.

    1. larrymotuz

      Nope. Just one vote to not pay the loans on bills previously authorized by Congress will do that trick in spades.

  8. juno mas


    EU, US and U.K. domiciled payment systems fall under courts which are, for the most part, unbiased and fair. No commercial concern wants to end up having a payment dispute governed by legal systems which are subject to and, alas, all-too-often succumb to, political influence.

    Well, those three entities are part of the problem (West), correct? It is the entities outside the West that don’t see payment disputes being handled by a legal system that is fair. Political influence just stole $7B from Afghanistan and over $300B from Russia. And if China thinks it can repatriate $1T in Treasuries anytime soon, good luck! Won’t talk about BoE stealing Venezuela gold.

    It may take time but it is inevitable.

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