Copyright CQG, Inc., 1980-2022. Unless every commodity producer backs BW3, there are alternatives and/or technological innovation to reduce commodity intensity. The Triffin Paradox is that global demand for a reserve currency forces the country that owns it to run trade deficits. In short, BW3 is not looking like a globalalternativeto USD just a cluster of Chinese hub-and-spokes offset/barter trades trying to avoid USD as middleman. And it was Britains naval supremacy that really mattered in WW2. Similarly,Chinas trade with theMiddle Eastsaw it import$146bn of mainly primary goods/resources, while exporting$116bn ofa broad range of goods(Figure 16). Zoltan Pozsar is a Managing Director and is the Global Head of Short-Term Interest Rate Strategy based in New York. Indeed, the proto-BW3 is attempting to keep the current global architecture while trying to cut some USD out of some trades, or to insert another currency where they were previously absent. However, it is not a new concept at all, but an old one mercantilism. a lack of VLCCs to move oil around (and other ships for other stuff) is the realworld equivalent of yearend GSIB constraints in the financial system. Any BW3 currency trying to push USD aside would have to be willing to run large trade deficits too. As part of their compensation, certain CoinDesk employees, including editorial employees, may receive exposure to DCG equity in the form of stock appreciation rights, which vest over a multi-year period. are now weaponised for Afghanistan, Russia, Belarus, and anyone who supports the invasion of Ukraine. In fact, most people have no idea about the role they themselves play within the system, so sanitised everything is on the other side. BBC: Is this demand absolutely rigid or is this just a negotiating position? The 2000s US-steered hyper-globalisation saw a boom in funding in the five-decade old. Ever since Zoltan Pozsar started echoing Zero Hedge circa 2010, and in note after feverishly-drafted note, the former NY Fed repo guru has been writing about a coming monetary revolution in which commodity-backed currencies such as the yuan become dominant and gradually displace the worlds reserve currency the US Dollar which slowly fades into irrelevancy in a world where commodities are the fulcrum asset and where paper wealth is increasingly meaningless, there have been three reactions: i) those who have no idea what Zoltan is writing about (that would be about 98%), ii) those who agree wholeheartedly and believe that the USD should be dethroned as a reserve currency yesterday, and iii) those who are just a little bit displeased with all the attention the strategist (who has correctly called every major crisis and turning point in markets in the past decade) is getting and are starting to lash out at his stream of consciousness. (ii) States instead need control of key commodities and supply chains, including maritime logistics, with military might required to secure them. We even linked this all toFX structuresback in 2015. (i) High inflation and supply-chain logjams mean Western central banks and economies can no longer rely on quantitative easing (QE) as a policy crutch: you cannot print commodities. Here we see a genuine argument for more CNY trade compared to the total bilateral trade being done. One could say he is purposefully politicising the money system so as to reassert political control and his own ideological perspectives on the international community. Try to talk about trends in global GDP without using USD as the common denominator. And yes, all arbs are theoretically profitable to close. For obvious geopolitical reasons, Russia is rapidly embracing CNY but major Chinese firms from SOEs to Huawei are still wary of US and EU sanctions so far. And it is also true that any bottlenecks could be life threatening to the stability of the system. Earlier this week, Credit Suisse strategist Zoltan Pozsar published a research memo titled Bretton Woods III that argued the Wests Russia sanctions were an inflection point moment that would push the world economy into a new world monetary order. Definitely. A lot of the time this linguistic variance is down to how sector-specific heuristics have evolved. Which is why I would be expecting this sort of thing from Biden soon: If viewing on a mobile simply tap the QR code. It used to be as simple as our currency, your problem. Meanwhile, Europe appears intent on slowly decoupling from Russian energy completely. In summary,China accounted for 12% of global trade vs. just 2.6% of central bank reserves at end of 2021(Figure 11). Yamani: Well, a new type of relationship. 4: An independent middle class is the sine qua non of democracy, In the Blind Spot (Beirut blast, Syria, Marbella), ALTIF transcripts: Englands water companies are up Schitts creek again, In the Blind Spot (Syria, Coups, Euro collapse), Commodities are real resources (food, energy, metals), and resource inequality cannot be addressed by QE | Evocatively Ambiguous. Is he right, or is he just unhappy with how much attention Pozsar is getting? The West still has key resources, technology, allies, a strong military, and could even onshore production if needed: could BW3 commodity producers (and China as importer) replicate or sustain value chains without Western technology and Western end consumers? and Saudi Arabia is open to China paying for oil in renminbi. The more likely shift is just 1% of global trade. The primary targets for a major USD > CNY switch are in Asia ex. Your email address will not be published. We should also add Russia(Figure 19), where Chinese exported $53bn and imported $57bn, with Russia running a slight trade surplus. Two countries that both run trade surpluses with China, e.g., Brazil and Russia, could decide to use CNY to settle some bilateral trade. Yra Harris is a highly respected global macro analyst and trader for four decades---knowledgeable in Foreign Exchange, Global Bonds, Commodities and Equities. High US inflation hardly backs the USD. There is growing pushback against this within the US, but no idea of how to maintain USDs reserve status while doing so. Hong Kong is with North America, Europe, Oceania, or parts of Asia that for geopolitical reasons will not trade in CNY. Join the discussion at discord.gg/VrKRrfKCz8. Moreover, Chinas total public sector debt, including local governments, is already that of a European state, and the IMF says its augmented fiscal deficit was a staggering -16.5% of GDP in 2021. (Figure 21. These trends are accelerating a global shift to alternative FX, payment systems, and trading patterns. One can take out the Western producers: Australia, Canada, the EU, New Zealand, and the US. Theres a reason why the British East India Company became indistinguishable to a sovereign military force. Bretton Woods II served up a deflationary impulse (globalization, open trade, justintime supply chains, and only one supply chain [Foxconn], not many), and Bretton Woods III will serve up an inflationary impulse (deglobalization, autarky, justincase hoarding of commodities and duplication of supply chains, and more military spending to be able to protect whatever seaborne trade is left). document.getElementById( "ak_js_1" ).setAttribute( "value", ( new Date() ).getTime() ); Your email address will not be published. What central banks are to the protection of par promises, the military branch is to the protection of shipments: foreign cargo needs to sail on sea routes and through choke points like the Strait of Hormuz, and par in this context means being able to sail from here to there freely, safely, and without undue delays, Im really glad Zoltan brings this up because it is a much under appreciated point in high finance. Now its our commodity, your problem. So, the total shift in trade is not imports and exports ($728bn), but Asias* exports to China ($211bn) doubled, which is $422bn. On the government side, the current vogue is for more, not less state spending in the name of national security: and for more, not less social welfare to narrow income gaps. Piracy can perhaps never be entirely eradicated militarily, but it can certainly be reduced to a non-issue by military means. And again you only need to be a classicist to understand that piracy, the equivalent of wide-spread global insurgency, can never be settled militarily. This is not going to happen! In short, CNY will not be adopted by third parties either within BW3 or outside it. Indeed, Debt: The First 5,000 Years(Graeber, 2011) echoes Polanyi (1944) in arguing past historical periods of exogenous money, such as gold, saw more warcompared to endogenous, fiat/debt-based periods of expansion. Civility has compartmentalised everyones role in the great power game in such a way that nobody feels directly responsible for anything bad the system does. Using this methodological approach for each region/economy China trades with, we can summarise the total global CNY shift we expect to see(Figure 20). Read theNOTES FROM UNDERGROUNDarchives to get a taste of Yra's work. There are many key lessons we can draw from this period for BW3 proponents. If oil and gas are still priced in USD, this would be de facto barter or countertrade avoiding USD more than real trade in CNY. most of the time. Moreover, many of the electronics goods it imported from China are re-exported to Western markets, earning USD. The essential nature of commodities has been laid bare by the Ukraine War, but total global trade in them is still far smaller than other goods combined (Figure 7). How long until it can replace its foreign-built capital stock, foreign-designed cars, trucks, and planes, or high-tech goods? Geopolitically, the gold standard was zero-sum. Looking at Latin America(Figure 17), the region exported $149bn of commodities to China, and China sold it $151bn of goods of all kinds. Meanwhile when Hitler tried to blockade Britain: A feature of the German submarine warfare was the sinking of a large percentage of neutral ships. This is economic geography at work and against BW3. Yet is that backdrop negative for USD and positive for BW3? Indeed, we agree with a lot of its core arguments, depressing as they are. That lasted 26 years before collapsing due to the. Yet because CNY is still not going to be a true global alternative to USD for structural reasons, there are still rigid limits on how much bilateral China-BW3 trade we might actually see shift, as we shall now show. Pompey the Great only managed to solve the Roman Republics pirate problem by paying the pirates off, effectively establishing the OPEC concordia of its day. Past performance is not necessarily indicative of future results. BW3s prospects would be boosted if CNY was adopted by third parties globally:yet we have already explained why this is structurally very hard to achieve. The post-war Bretton Woods timeframe left excludes it, but one could look to the fragmentation of the global monetary order and trading system in the 1930s, for one key and worrying parallel:however, that saw the end of the gold standard, not a move towards one. (Which reminds me, I will have to tell the story one day about how shipping protection and indemnity insurance clubs came about, as its a fab story.). The music you heard today behind our sponsor is I Don't Know How To Explain It by Aaron Sprinkle. That backdrop will support USD: and that is true if that level of rates can be sustained, or if it cant, and the US (and world) economy falls into recession taking commodity prices with it. After Prime Minister Boris Johnson Resigns, Are the UKs Crypto Hub Dreams Dead? Indeed,China lacks an open capital account,which means CNY is not free-moving or freely traded. Russia is now invoicing its commodity exports to nonfriendly nations in ruble, not U.S. dollars or euros and Saudi Arabia is open to China paying for oil in renminbi. Global trade-flows mean even if more commodity producers were on board with BW3 it would count for little because BW3 does not replicate the structure of commodity producers, goods manufacturers,and final consumer marketswhich are mainly in the West. Opinions and market data are subject to change at any time. At what exchange rate? Finally, there was the deal struck between Nixon and Saudi in 1974, brokered by Kissinger, which would assure that the kingdom would sell the West its oil in dollar terms so that most of the wealth generated could be reinvested back in the Western system. See how the arming of merchant vessels has stopped the Somali pirate threat, and how the armed suppression of Nassau as a pirate base put an effective end to Caribbean piracy around 1720. How does one earn CNY? That is kind of the situation we are finding ourselves in now. We saw in Chapters II and III that the blockade was never water-tight and that it was unable to prevent Germany altogether from importing essential materials or from replenishing her foreign exchange reserve by maintaining a certain amount of exports. China doesn't want it; neither do exporters nor commodity producers. Fewer countries will want to hold such reserves if they can be frozen or appropriated, as happened with Russia and Afghanistan. What will influence the foundations of the new BWIII system, Zoltan argues, is the reality that we no longer live in a unipolar world dominated by American military supremacy or the soft power of its cultural exports. All of which was neatly incapsulated in this famous boardroom scene from the 1976 classic film Network (which also happens to deal nicely with the topic of press freedom): What Putin is seemingly trying to do in that context, is meddle with the primal forces of multistakeholder capitalism and depoliticised neutral money which he sees as ideological in its own right. Why Zoltan Pozsar's Bretton Woods 3 is SO WRONG [Eurodollar University, Ep. The famous Sunset Boulevard line from a fading movie star is, I Am Big. Rabobanks Michael Every, himself a geopolitical status quo skeptic yet clearly misaligned with Zoltan as to what happens next (and in reality a believer that the broken system we have now will be the broken system we have for a long, long time to come), is in group three, and following a handful of subtweet shots across the Zoltan bow (which have barely registered in the financial media, especially Bloomberg, which Every continuously mocks yet reads religiously) the Rabobank strategist has (bravely) penned the closest thing to a Pozsar rebuttal we have seen. The analogy is Sheikh Zaki Yamani, the Saudi Oil minister, threatening to destroy his own oil supplies if the West doesnt toe the line: Theres another excellent clip of Yamani in the Adam Curtis documentary Bitter Lake that I cant currently find, explaining the wider motivations. Central bank asset purchases, and so on. Yep this is a thing. China obviously wants to buy all its commodities in CNY. Even though the purchase of fifty American destroyers brought some relief, the situation gave cause nevertheless to grave concern. However, it is not new. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups. Yet countries running large trade surpluses dont allow others to earn that currency to pay in it! 217], Users who like Why Zoltan Pozsar's Bretton Woods 3 is SO WRONG [Eurodollar University, Ep. Adam B. Levine is our executive producer and our theme music is Countdown by Neon Beach. This is de facto bilateral barter, technically in INR, and leaves Russia with either the need to buy more than it needs from India, or to accumulate INR claims it cannot usefully transfer elsewhere. Your current browser isn't compatible with SoundCloud. (Figure 21.). ), still rest more with the US and its allies and their military, soft power, and financial power, than with a cluster of commodity-producing states (and one commodity importer). Notify me of follow-up comments by email. The opinions expressed here are solely those of the author and do not reflect the opinions of CQG, Inc. or its affiliates. This is particularly the case in terms of Eurodollars (offshore USD borrowing). Ifwe wereto see fewer USD circulating internationally via trade, servicing Eurodollar debt will just get harder and that will keep a structural bid behind USD. Over the last several years, most economic crises have been solvable by money. As such, total CNY trade might only be $240bn from a total of $728bn. Without the latter, the gold standard did not stop the many attempted revolutions of 1848 or 1870 in Europe: rather it encouraged them. The Breakdown is written, produced by and features Nathaniel Whittemore aka NLW, with editing by Rob Mitchell, research by Scott Hill and additional production support by Eleanor Pahl. Did OFAC coordinate with the FOMC and FSOC when crafting sanctions on Russia? Pompey propagandised the pirate settlement as a military achievement when really it was indeed a pay off. That is lower than the current holdings of CNY reserves: while some economies would add more, Western economies may hold less. What followed, of course, was the US-Saudi special relationship or concordia, and the begrudging acceptance of Saudi ideology and its way of doing things. How do CNY get into the global system within BW3? Pozsar notes: We are witnessing the birth of Bretton Woods III a new world (monetary) order centered around commodity-based currencies in the East that will likely weaken the Eurodollar system and also contribute to inflationary forces in the West., Pozsar discusses his vision for Bretton Woods III in the Bloomberg podcast found here: https://overcast.fm/+qdIDRbUrU. Yet past attempts at building BW3 frameworks created enormous problems! It used to be as simple as our currency, your problem. We could perhaps see the total of Asias commodity exports to China shift to CNY, so only $120bn. Do any potential BW3 currencies inspire broad global trust, or just in pockets? In short:https://0183c82a7344fe60d26fead0c8b73f9f.safeframe.googlesyndication.com/safeframe/1-0-38/html/container.html. document.getElementById("ak_js_1").setAttribute("value",(new Date()).getTime()), if viewing on a mobile simply tap the QR code, there is a base interest rate (EFFR and the OIS curve, and a basis between that base rate and other, harvesting commodity bases uses shipping balance sheet capacity (vessels), out of a sight deposit, you expect the same amount, When you sail foreign cargo from port A to port B, you expect to unload the, same amount of cargo that you onloaded. As such, BW3 will not work, and USD will retain its leading global role albeit perhaps with more sticks and fewer carrots. In terms of FX trading, the major shift is only worth $4.8bn per working day, a drop in the ocean for the $6.6trn global FX markets, and much of that would be offset trading, not selling USD for CNY. It can shut down the Suez canal until other nations wheat supplies are diverted to it an chaos-inducing experience we recently went through when the Ever Given got stuck in the canal. Not only did it work on a Royal commission in many areas (sharing proceeds of its activities with the head of state) but developed its own naval force to protect certain trade routes for precisely these reasons. 217], Users who reposted Why Zoltan Pozsar's Bretton Woods 3 is SO WRONG [Eurodollar University, Ep. Perspectives and ideologies, we should add, that those countries are prepared to self-sabotage, die and sacrifice for which may not be the case for the spoiled West. This episode is sponsored by Nexo.io, Arculus and FTX US. (iv) We will see a new commodity- and supply-chain based FX architecture replace the USD-centric system: Russia just called for BRICs countries to create exactly such a new FX system. All funds committed should be risk capital. (Though, one would hope it would be.). In terms of mineral exporters, there are a large number of floating countries, and the same general cluster in the pro-West and pro-BW3 camps. Banks can deliver par on deposits most of the time. This left a large trade surplus for China. Einzig explains that a considerable amount of the merchant fleets of conquered countries were placed at the disposal of British authorities, with the British government actively chartering as much tonnage as it could to counteract the effects of the sinkings. BW3 has one given: high inflation and commodity prices; central bank impotence; concerns over the imminent withdraw of US QE and fears over what having to restart it would imply; and talk of geopolitical and geoeconomic realignments and fracturing. That makes it much more like a 1973 OPEC-style moment than anything else. Its that the fundamental power structures involved have been muted in resonance due to how normalised this sort of activity has become in the mind set of those involved in the financing. (Figure 12 shows Chinas trade breakdown by region and separates Russia from the continent of Europe for obvious reasons.). Moreover, BW3 does not require the audience to suspend much disbelief. 
zoltan pozsar, bretton woods
