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Attempt to Pre-empt the post-dollar world

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There are many reasons that the US is pushing on China in the South China Sea. Many articles have been published in recent weeks exploring “why?” None mention an important economic reason that has, at least in part, motivated the US to go to war and is very much at stake in the growing dispute with China: the value of the dollar.

The dominance of the dollar in world trade is critical to its value and to the US economy. Once the US abandoned the gold standard, it signed firm agreements with Saudi Arabia and all of Middle East OPEC nations that bound them to sell oil in dollars. Because of this agreement the dollar is often referred to as the “petrodollar.” The value of the dollar/petrodollar rests on its being the currency of international trade, not only for oil, but for weapons and food and everything else.

Two Dollar Wars

As I discussed in a 2013 Counterpunch article, one reason Bush II invaded Iraq was because Iraq threatened the US by selling oil in Euros. If Sadam Hussein had been allowed to continue, this would have been a major challenge to the dominance of the dollar as the world’s reserve currency. Petroeuros could begin replacing petrodollars.   This would have weakened the value of the dollar and undermined the US economy. That is an underpublicized reason for the elimination of Saddam Hussein. The value of the dollar was at stake as well as the health of our economy. The second Iraq war eliminated this threat and Iraqi oil was again sold in dollars.

Ron Paul made public this rationale but it has been given scant attention. “Saddam Hussein demanded Euros for his oil. His arrogance was a threat to the dollar; his lack of any military might was never a threat…There was no public talk of removing Saddam Hussein because of his attack on the integrity of the dollar as a reserve currency by selling oil in Euros. Many believe this was the real reason for our obsession with Iraq. I doubt it was the only reason, but it may well have played a significant role in our motivation to wage war.”

Ron Paul also made public the rationale for the surprising US-led removal of Gadhafi and the destruction of his government in Libya. Again, protecting the dollar was the main reason: Gadhafi was planning on selling oil in dinars, an all-gold African currency. According to Ron Paul, the US has targeted any country that threatens the dollar by using a non-dollar currency to conduct international business.

Loss of Confidence in the Dollar

The dollar has been the dominant currency of international trade since Nixon stopped dollars being exchanged for gold. Despite the challenges from Iraq and Libya, this arrangement continued a decade into the twenty-first century.

Two things happened during and after the 2008 crash to weaken confidence in the dollar. The first is not fully appreciated even by many financially astute Americans: the damage the USA did to developing nations when the USA suffered the crash. Short on funds at home, US financial loans were no longer providing developing nations the money they needed to continue with their projects. These countries haven’t forgotten the sudden and crippling loss of funds. The ever-present possibility that this can and will happen again has become an omnipresent nagging worry. These nations realize that relying on the dollar is relying on an external condition over which they have absolutely no control but which can, did, and may again have a devastating effect on their economies. The second was Bernanke’s qualitative easing that diluted the dollar into a mere shadow of its former self (which was already a diminished dollar from the 1971 gold-based dollar). Here are the Reserve Balances with Federal Reserve banks. On September 17, 2008, the Fed banks had $47 billion. On May 27, 2015, the amount was $2,510.791 billion “Bernanke dollars,” which is but a homeopathic dilution of the pre-Bernanke dollar.

Foreign countries noticed. The most vocal were Russia and China. In 2010, China Daily reported that “China and Russia… [intend] to renounce the US dollar and resort to using their own currencies for bilateral trade.” China and Russia, with three other nations, formed BRICS (Brazil, Russia, India, China, and South Africa). Reuters reported last July that BRICS was forming a “$100 billion development bank and a currency reserve pool in their first concrete step toward reshaping the Western-dominated international financial system.”

The Plan for the BRICS Bank

Amy Goodman and Juan Gonzalez interviewed Nobel prize winning American economist Joseph Stiglitz about the planned BRICS bank. Stiglitz said BRICS was very important:

First, the need globally for more investment-in the developing countries, especially-is in the order of magnitude of trillions, couple trillion dollars a year. And the existing institutions just don’t have enough resources….[the new bank] is adding to the flow of money that will go to finance infrastructure, adaptation to climate change-all the needs that are so evident in the poorest countries.”

“Secondly, it reflects a fundamental change in global economic and political power, that one of the ideas behind this is that the BRICS countries today are richer than the advanced countries were when the World Bank and the IMF were founded. We’re in a different world…. The old institutions have not kept up.”

One big complaint was that people from other countries expected, in the 21st century, that people in the top positions of the IMF would “be chosen on the basis of merit, not just because you’re an American. And yet, the U.S. effectively reneged on that agreement.”

Gonzalez asked Stiglitz how China, which obviously has huge monetary reserves, and Brazil, which had its own development bank for several years, would work together as key players in this new BRICS bank.

China has reserves in excess of $3 trillion,” answered Stiglitz. “One of the things is that it needs to use those reserves better than just putting them into U.S. Treasury bills. You know, my colleagues in China say that’s like putting meat in a refrigerator and then pulling out the plug, because the real value of the money put in U.S. Treasury bills is declining. So they say, ‘We need better uses for those funds,’ certainly better uses than using those funds to build, say, shoddy homes in the middle of the Nevada desert. You know, there are real social needs, and those funds haven’t been used for those purposes.”

Stiglitz then talked about Brazil. “Brazil has BNDES… a huge development bank, bigger than the World Bank. People don’t realize this, but Brazil has actually shown how a single country can create a very effective development bank. So, there’s a learning going on. And this notion of how you create an effective development bank, that actually promotes real development … is going to be an important part of the contribution that Brazil is going to make.”

China and Russia Trade without Using the Dollar

In October, 2014, in an exclusive interview with CNBC, Russia’s Prime Minister Dmitry Medvedev said that the world must move away from its dependence on the U.S. dollar, arguing that the global economy would benefit from a more diversified currency system. “We have nothing against the dollar, but we believe that today’s currency system should be more balanced,” he said, calling for a greater number of major reserve currencies. In particular he said that the euro, the yuan, the pound and the dollar would be a good initial grouping. He mentioned BRICS as a group which was implementing this change. “A much more just financial system” was possible, he said.

Medvedev highlighted that when countries “really depend” on the dollar, they are beholden to the fortunes of the US. “The U.S. economy is now improving but we have no proof that it will not go down again, and then everyone will suffer,” he said. “We believe that we should move away from such dependency [on any one currency] in the world’s financial system.”

Medvedev pointed out that incorporating other currencies has allowed Russia to trade with China directly. “This is a good demonstration that if somebody leaves their place, another person occupies their place[italics mine],” he added. October’s agreements follow a high-profile gas supply deal with Gazprom, worth $400 billion, to supply China with gas over 30 years.

The 2014 China-led Asian Infrastructure Investment Development Bank

In addition to being a founding member of BRICS, the Chinese were forming a development back, the Asian Infrastructure Investment Development Bank (AIID). The US controlled the World Bank and theAsian Development Bank. Both of these institutions would face substantial competition if the Chinese development bank went forward. Combined with the BRICS bank, the new development bank would offer an international alternative to the dollar for trade.

According to the New York Times, “the United States, perhaps the most vocal of … critics… has not embraced the Chinese proposal. Instead, in quiet conversations with China’s potential partners, American officials have lobbied against the development bank with unexpected determination and engaged in a vigorous campaign to persuade important allies to shun the project, according to senior United States officials and representatives of other governments involved [italics mine].” The New York Times also reported the irrelevance of US critical arguments: “Washington’s arguments run up against undisputed needs on the ground in Asia – needs that existing institutions have been unable to meet, some development experts said. The Asian Development Bank estimated in 2009 that the region would need as much as $8 trillion in investments in physical infrastructure by 2020 – an amount that exceeds what it or the World Bank can muster, experts at the two banks said.”

Recent Developments

In April of this year the deadline fell for nations to join China’s new Asian development bank. The Chinese were astonished at the last-minute applications by countries not considered especially friendly to Beijing. Among the surprises: Taiwan and 14 of the Group of 20. Japan is the only major Asian ally still standing with the Obama administration. Even Australia and South Korea had decided to join. In Europe, Britain was among the nations that joined, much to the irritation of the US.

Meanwhile, Putin announced the launch of the $100-billion BRICS New Development Bank. It will have another $100-billion as a currency reserve pool to shield the BRICS currencies from the world economy and market volatility. The launch is in July in Ufa, Russia. “We expect to reach agreement in Ufa on the launch of practical operations of the BRICS Bank and a pool of currency reserves,” Putin said. The bank will be a rival to the IMF and World Bank and will finance infrastructure projects in developing countries. It also will challenge the dollar as the currency of international trade.

A Plausible but Underemphasized Motive for Goading China

In his excellent CounterPunch article, Jack Smith wrote that the US goading of China “is happening for one main reason. The U.S. has arrogated world rule to itself, without authority, competition, or oversight, since the implosion of the Soviet Union nearly 25 years ago. There is nothing more important to America’s ruling elite. Every possible danger to Washington’s hegemony must be neutralized. And looming in East Asia is the cause of Washington’s worst anxieties — China.”

Smith is certainly correct as far as he goes. Hegemony has been an official US policy since the Soviet Union collapsed. But there is an aspect of this hegemony that Smith does not mention: protection of the dollar’s status as the dominant currency of world trade. China and Russia are creating alternatives that threaten the dollar’s status as the sole dominant international currency. By instituting trade alternatives to the dollar, they challenge the value of the dollar and so threaten the US economy.

First published in CounterPunch under the title: ‘ An Economic Reason for the US vs. China’

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Possible Impacts of the Russia-Ukraine War on Global Food Trade

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The large-scale war that erupted between Russia and Ukraine, the two major grain-producing countries, undoubtedly will impact the global food market. However, it would be insufficient to use simple quantitative analyses to assess its effect on the global grain trade. It is only through an all-rounded interpretation of the grain production cycle and the supply structure can we truly recognize the complexity of the problem.

Quantity-wise, Russia is currently the world’s largest exporter of wheat, accounting for about 16.9% of global exports in 2021. The combined annual wheat exports from Russia and Ukraine (about 60 million tons) are equivalent to 30% of the world’s total exports. Corn exports of the two countries (about 38 million tons) accounted for 20% of the total global exports. Ukraine, in particular, exported 23.1 million tons of corn, 16.6 million tons of wheat, and 4.2 million tons of barley in 2020/2021, making it the world’s second-largest grain exporter after the United States in total exports of all grains. In addition to barley, Russia and Ukraine provide one-third of the world’s grain exports. Such a huge volume is the reason the market is highly concerned about the security of the global food supply.

It should be noted that the key window times for wheat and corn exports from the Black Sea region are August to October and October to May of the following year. The majority of the grain produced in the previous year has already been sold by Russia and Ukraine. In the case of Ukraine, it has been stated that 7 million tons of wheat and 12 million tons of corn are still awaiting delivery. Ukraine’s foreign shipping has been halted, and traders are attempting to arrange for grain exports via train through the country’s western border, but transportation capacity is limited, implying that the short-term market supply gap caused by the Russia-Ukraine war could be in the range of 20 million tons.

If solely grain production, stock, and demand are evaluated at this scale, ignoring trade and geopolitical variables, the EU and India can compensate for wheat, while the U.S. and Argentina can compensate for corn. In the short-term future, there will be no big issues with food supplies. According to USDA estimates released in March, wheat stocks in the United States and India could reach as high as 17.63 million tons and 26.1 million tons, respectively, by the end of 2021/2022. Current global grain prices continue to rise and reach a record high, owing to market concerns over current inventories and future supplies, causing futures prices to overshoot to some extent.

However, in the medium and long-term production problems, such as transportation and sales problems, and other issues, as well as geopolitical factors such as the probable continuation of the Russia-Ukraine conflict, the global grain trade will experience a more significant impact as a result. This situation will cause severe disruption in the USD 120 billion global grain trade market.

In terms of the war’s impact on agricultural production, Ukraine suffered more directly. More than 90% of the crop grown in Ukraine is winter wheat. In this year’s grain production, winter wheat was in the field before the escalation of the situation in Ukraine and will be harvested around July this year. Ukraine will lose an estimated over 20% of its winter wheat production due to its harvesting inability, which is also the impact of the direct damage caused by the war. Judging from the previous information, the domestic fertilizer supply in Ukraine also faces some issues. Since the top-dressing period of Ukrainian winter wheat coincides with the conflict between Russia and Ukraine, the lack of fertilizer or even the inability to top-dress in time will reduce the yield per unit of winter wheat. Even if it is fully harvested, its total output could be 15% less than that of the previous year. Ukraine’s wheat production in 2021 was about 33 million tons, equivalent to more than 6 million tons of wheat supply if calculated at 20%. The impact of the war on spring planting is likely to be greater, which will severely impact Ukraine’s corn production in 2022. In 2021, Ukraine has replaced Brazil as the world’s third corn exporter, with an export volume of about 32 million tons, accounting for about 16% of the world’s total export volume and 80% of its own corn production. However, according to Ukrainian domestic estimates, the spring planting area completed in Ukraine for this year may even be as low as 50% of the usual year. Even if it is optimistically estimated that Ukraine can achieve 70% of the spring planting area this year, according to Ukraine’s corn production of about 42 million tons in 2021, it will lose more than 10 million tons of external supply.

The direct threat to Russia’s foreign food supply is the imposition of trade and financial sanctions by Europe and the United States, which make it difficult to deliver and pay for its export commodities. However, there is greater uncertainty when it comes to individual operations of this type. For example, Russia’s wheat exports surged by about 60% year on year in March, marking a significant rebound from the start of the Russia-Ukraine war. It should be noted that when faced with external sanctions, Russia tends to “weaponize” grain exports. For example, in addition to recently raising export tariffs, Russia has threatened to restrict grain exports to “unfriendly countries”. Such a constraint on initiative could have much more serious consequences.

From the demand side, Russia and Ukraine may experience a substantial reduction in their foreign grain exports in the future, which will impact the daily food supply in the world, especially in some countries. For example, wheat is the staple food of more than 35% of the world’s population, and it is hard to be replaced easily with another crop in the short term. Russia’s influence on the global grain market also mainly lies in wheat crops. In 2021, wheat exports will be 35 million tons, accounting for about 17% of global exports, second only to the EU. Russian wheat is mainly sold to the Middle East. The top five exporters are Turkey, Egypt, Azerbaijan, Nigeria, and Kazakhstan, accounting for 25%, 21%, 4%, 3%, and 3% of Russia’s total wheat exports in 2021, respectively. Meanwhile, Ukraine mainly sells its corn to China, Europe, and other countries or region. Its top five exporters in 2020 are China, the Netherlands, Egypt, Spain, and Turkey, accounting for 28%, 11%, 10%, 9%, and 5% of the total Ukrainian corn exports that year, respectively. In 2021, China imported 8.2345 million tons of corn from Ukraine, accounting for 29.0% of China’s total annual imports, making it the second-largest corn importer after the United States. If the grain exports of Russia and Ukraine are reduced or blocked, the above-mentioned relevant countries need to reposition the import direction.

The Russia-Ukraine war will change the total global food supply and the flow of its exports. Besides that, new trade flows come at a cost, whereby the logistics would be more expensive, takes longer transit time, or might affect the quality, which could further accelerate food prices. The war will not only affect the grain exports of the two countries, but also the uncertainties mentioned above have an impact on grain production, transaction, trade, and transportation to a greater extent. It remains unclear whether the tightening of the food market will boost food exports from other countries. As an institutional analysis pointed out, “high prices tend to lead to protectionism, not just an increase in exports”.

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China’s Current Macroeconomic Situation Calls for New Policy Support

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The latest data from China’s National Bureau of Statistics showed that its economy grew by 4.8% in the first quarter, basically maintaining stable economic growth and picking up from the fourth quarter of last year. However, amid the intensifying geopolitical conflicts in the world and the increasing pressure on domestic pandemic prevention and control, on the one hand, the consumption data show negative growth in total retail consumption in March, and on the other hand, the real estate market is still in a downward trend with a sharp contraction in sales. Under such circumstance, China’s domestic economic situation cannot be described as “optimistic”. The impacts of internal uncertainties such as COVID-19 prevention and control measures are gradually emerging; the external situation will also become more complicated in the future, and there may be a “double tightening” in international economic growth and currency. In this context, more policy tools are needed to stabilize the country’s domestic economic fundamentals.

For the current Chinese economy, a top finance official recently said that the triple pressure of macroeconomic operation still exists in the first quarter of this year, while the pandemic and economic growth have also emerged some new situations and changes that require attention. In addition, there are also clearly defined corresponding policies to coordinate with economic and social development under the pandemic, while promoting economic operation to maintain a reasonable range. At present, all measures are being carried out in accordance with the requirements of making advance efforts and taking targeted measures, and more policy combinations are being studied and prepared. Researchers at ANBOUND have mentioned that the current economy needs systematic policy support, which should be reflected in policy beyond the existing overall macro policy tone.

As far as monetary policy is concerned, the People’s Bank of China (PBoC) has taken measures to lower the reserve requirement ratio (RRR). However, the central bank also said that the current liquidity is already at a reasonably abundant level. On the one hand, the RRR cut will improve the capital structure and release long-term funds; on the other hand, it is to reduce the cost of capital for financial institutions. RRR cuts are not sufficient for systemic easing. Under the external situation of rising global inflation and monetary tightening by major central banks, the room for further expansion of aggregate policy is limited. In the future, monetary policy should pay more attention to structural policies and support SMEs and some emerging strategic industries through re-lending and other tools. At the same time, monetary policy tools will support the reform of the financial system and provide a stable monetary environment for systemic reform.

In terms of fiscal policy, on the basis of a deficit-to-GDP ratio of 2.8% this year, the current policy focus is on reducing taxes and fees and investing in special bonds to help ease the burden on the real economy, and ensuring economic and fiscal stability through investment-driven growth. However, judging from the current performance of central and local state-owned enterprises, state-owned enterprises still maintain a rapid momentum of development this year, and they still make a certain contribution to government finance. At the same time, the top finance official also mentioned the possibility of raising funds in the form of short-term treasury bills, if necessary, to help stabilize government finance. Therefore, the strength of fiscal policy is expected to be further increased in the future, and fiscal policy will also play the main role of the new policy tool.

Looking at the policy relaxation in the real estate market since the beginning of this year, the current risk prevention policy needs to accelerate the market clearing of real estate enterprises, so as to remove the obstruction, reverse the downward trend of the real estate market the soonest possible, and help stabilize the overall economic demand. In terms of the financial sector, the non-performing assets of commercial banks and non-bank financial institutions related to real estate have been gradually exposed. With the gradual implementation of the Financial Stability Law and the establishment of the financial risk prevention framework, accelerating the merger and reorganization of the real estate market and unloading the burden of the market should be the focus of future risk prevention policies, which is also conducive to the realization of a “soft landing” of the macroeconomy.

To achieve stable economic growth, China needs not only monetary and fiscal coordination, but also more reform tools to smooth the market cycle. This is reflected not only in the field of commodity circulation, but also in the further reform of capital markets and the development of various regional markets. In the central government’s proposal to build a “unified market”, these contents have been laid out, and will be implemented with various relevant policies in the future. Therefore, institutional reform and construction will be the focus of releasing market space and enhancing endogenous growth. Finance officials expect financial institutions to provide more financial services to key logistics, warehousing, and e-commerce enterprises, and support these enterprises to better leverage the driving effect and clustering effect for smooth logistics and supply chains. This will require not only further reform of the financial system, but also new incremental capital to meet the needs of the new economy. An indispensable component of this would be market opening-up and policy relaxation to guide financial resources toward related fields.

Based on the expectation and judgment of the changes in the Chinese economic situation, systematic easing is still needed to support the economy and avoid the stall of economic growth. As things stand, this need has become increasingly urgent. To keep the economy running in a reasonable range, the country not only needs to continue to promote structural reforms and make cross-cyclical adjustments, both aggregate and structural policies also need to strengthen their counter-cyclical adjustments, promote demand in emerging and conventional sectors, resolve the prominent contradiction, and achieve a new balance of supply and demand in a higher level.

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Putting systems thinking at the heart of a global green and just transition

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In 1972, the seminal report to The Club of Rome – The Limits to Growth – was the first study to explore the possible impacts of the growing ecological footprint of population growth, human activities and its physical impacts on our finite planet from a systems perspective. The authors warned that if growth trends in population, industrialisation, resource use and pollution continued unabated, we would reach, and then overshoot, the carrying capacity of the Earth at some point during the first decades of the 21st century.

50 years on, we are experiencing the real impact of the encroachment of humanity on these limits through COVID-19, climate change and conflict. The pandemic and now the Russian invasion of the Ukraine have both demonstrated the high degree of interdependence between people around the world and the fragility of our current value chains and geo-political relationships. In the words of the International Committee of the Red Cross: ‘No one is safe until everyone is safe’.  

What we need is systemic policies that address the complexity of our world and joined-up systems to support the ambition for a global green and just future that guarantees greater resilience to future shocks and stresses. The current global system is far from being green, just or resilient. We must aim for not only net-zero carbon emissions, but also zero biodiversity loss, zero inequality, and zero poverty and design systems that truly place a value on people, planet and prosperity together.

The International System Change Compass strives to do just that. Taking the European Green Deal (EGD) framework as point of departure, the report sets how the European transition may positively contribute to a global transition. The ‘Compass’ serves as a stress-testing tool for policymakers working on topics related to the EGD agenda by outlining what global green and equitable pathways may look along 10 principles and 8 economic ecosystems. While decarbonisation and dematerialisation help support the green transition, reshaping international relations and governance is fundamental in building long-term resilience and ensuring a transition that is socially just as well as green. Success of the green and just transition in Europe depends on how the EU includes the rest of the world in this economic shift, ensuring that the circle of care alongside environmental and social indicators are applied when addressing external relations and trade. Reversely, EU diplomacy can play an important role in reshaping international governance systems through radical collaboration and leadership instead of reinforcing historical power imbalances and exclusion.

Yet, existing policy frameworks do not go far enough in addressing these interconnections and implementation at international and EU-levels is halting in the face of urgent crises requiring short-term emergency responses. For example, post-2020 climate actions designed to help meet the Paris Agreement goals focus on reducing emissions and rarely tackle systemic resource efficiency solutions. Likewise, the focus of Europe’s “green” recovery spending has been on climate, not factoring in nature or biodiversity spending needs. Conversations around the energy transition continue to be driven by traditional security concerns rather than building resilience across interconnected systems, including the food-water-energy nexus. We know, as the IPCC report outlines: “vulnerability of ecosystems and people to climate change differs substantially among and within regions, driven by patterns of intersecting socio-economic development, unsustainable ocean and land use, inequity, marginalization, historical and ongoing patterns of inequity such as colonialism, and governance.” Yet, existing governance frameworks for the global green and socially just transition perpetuate historical, dominant modes of collaboration and partnership, which do not redress historical dependencies and underlying assumptions of. 

This needs to change, urgently. The Planetary emergency will linger if we only treat the acute signs of distress – climate change, COVID, conflict – without also addressing the underlying cause – systems failure. It is time to put systems thinking at the heart of international climate governance and diplomacy. The International System Change Compass makes the case for how Europe’s green and just transition could benefit the EU and the global community at large, from improved health and wellbeing to intact ecosystems and resilient relationships.

Ultimately, if we are to value our future, we need to value resilience in societies and nature and understand the perversities in our existing economic, financial and political systems. This means getting the balance right between saving lives and livelihoods, ensuring economic prosperity and living within our planetary boundaries. The war in Ukraine, the lingering effects of COVID, spiking inflation and increased pressure on political liberties are clear signs that Europe needs to alter its course quickly and implement holistic systems thinking at the core of its policy designs. The European Green Deal provides Europe with a starting point – now policymakers need to apply systems thinking to make sure policy solutions are both green and just and their implementation does not have adverse effects on other policy domains or the larger global transition. The International Systems Compass allows us to ask the right questions, unpack key tensions and put in place the core principles necessary to radically transform our economies. If we want to steer this ship in the right direction, it is an all hands-on-deck systemic approach that is needed with bold political leadership at the helm.

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