39 - The Network State Conference 2023 - Kathleen Tyson - Multicurrency Mercantilism

Summary

The speaker discusses the shift from U.S. dollar dominance to a multicurrency mercantilist system, as nations, particularly in Asia, move towards local currency trade. This transition is driven by concerns over economic security, especially following sanctions on Russia. The speaker highlights new financial models, including the use of gold for trade, which can stabilize inflation and promote global growth. While the shift may disrupt established systems, it offers the promise of more equitable wealth distribution and an acceleration of globalization, with China and other countries leading the charge towards a more decentralized, resilient financial world.

Takeaways

• 😀 The world is shifting away from the U.S. dollar, which accounted for 87% of global transactions in 2021, to local currencies for trade. Over 80 countries are now exploring this transition.
• 😀 The speaker has an extensive background in global financial systems, including contributions to the development of payment systems, clearinghouses, and global depositories.
• 😀 The current global monetary order, designed under Bretton Woods in 1944, is outdated. The new economic power is in Asia, and they are looking for a monetary system that better reflects their growing influence.
• 😀 The concept of 'multicurrency mercantilism' describes a system where countries aim to increase national wealth through trade with local currencies, as opposed to the current capitalist system where private wealth accumulates, often stateless.
• 😀 The sanctions imposed on Russia in 2022 have disrupted the existing financial system, leading other nations to seek alternatives to the dollar, such as trading oil in Yuan, marking the end of the Petrodollar system.
• 😀 Despite concerns from the U.S. and Western powers, this transition to local currency trade will likely be gradual and stable, unless exacerbated by geopolitical conflicts such as a wider war in the Middle East or Asia.
• 😀 The shift in global trade will not cause immediate chaos, as dollar trade still dominates global capital markets, including foreign exchange and bond markets. However, local currency use is steadily increasing.
• 😀 The new world order, based on local currency trade, is likely to accelerate globalization, particularly among emerging economies and countries in the Global South, who will be able to bypass dollar-based sanctions.
• 😀 China's role in global finance is shifting, with increasing gold reserves and a move away from U.S. treasuries. This signals a broader trend where gold is regaining importance as a reserve asset, potentially helping to stabilize inflation and currency systems.
• 😀 New models of monetary stability, including barter systems or the use of gold for transactions, can help countries control inflation and promote development, as demonstrated by Ghana's oil-for-gold trade, which significantly reduced inflation.
• 😀 The speaker highlights the challenges posed by global debt, especially in emerging markets, where borrowing in dollars becomes more expensive as interest rates rise. Ensuring a smooth transition will require global cooperation to manage debt burdens and maintain economic growth.

Q & A

What is the concept of 'multicurrency mercantilism' discussed in the script?

Multicurrency mercantilism refers to a shift away from the US dollar in global trade and finance. It involves countries using local currencies for trade instead of relying on the US dollar. This change stems from the desire to protect national wealth from potential US-led sanctions and to create a more balanced global economic system.

Why did the speaker emphasize that the world is moving away from the US dollar?

The speaker highlights that in 2022, over 80 countries began moving toward using their local currencies in trade, instead of the US dollar. This trend was accelerated by sanctions imposed on Russia, which made many countries realize the risks of relying on the dollar for their financial transactions and trade.

How does the speaker's background influence their perspective on this transition?

The speaker has a wealth of experience in global finance and systems development, including roles at the Federal Reserve, Clearstream, and CLS Bank. This expertise gives them a unique insight into how global financial systems operate and how they might evolve with the move away from the dollar.

What role did the 12,000 sanctions on Russia play in the global shift away from the US dollar?

The 12,000 sanctions imposed on Russia in 2022 prompted other countries to reconsider their dependence on the US dollar. The fear of having assets frozen or seized led many nations to explore alternatives to dollar-based trade in order to protect their financial sovereignty.

What are some of the benefits of transitioning to local currency trade, according to the speaker?

The transition to local currencies can lead to increased financial stability, reduce dependency on the US dollar, and allow nations to control their own inflation and economic policies. The speaker also notes that such a system could lead to more equitable global trade and foster development, especially in the Global South.

What is the 'Angel Paradox,' and how does it relate to the current global economic situation?

The Angel Paradox, proposed by Sir Norman Angel, suggests that when economically interdependent nations go to war or impose sanctions, both sides lose due to the disruption of commerce. The speaker uses this concept to explain the unintended consequences of economic sanctions, such as the devaluation of US treasuries and the rise of alternative financial systems.

How has China's role in the global economy shifted according to the speaker?

China has been moving away from US treasuries and increasing its gold purchases. The speaker highlights China's growing economic influence, with its local currency (the yuan) being used in more trade deals, particularly in the Middle East. The speaker also emphasizes that China does not aim to be a hegemonic power, distinguishing its approach from the US's history of global dominance.

What is the potential impact of moving back to the gold standard, as mentioned in the transcript?

The speaker suggests that returning to the gold standard could help control inflation and restore monetary discipline. By anchoring currencies to gold, countries could potentially avoid the inflationary cycles that have plagued economies since the US abandoned the gold standard in 1971.

Why is the debt crisis mentioned as a challenge to the transition to a new monetary order?

The speaker points out that the $37 trillion in global debt, much of it held in US dollars, will become more difficult to service as interest rates rise. Emerging markets, in particular, are feeling the pain as they struggle to pay back debt that is tied to the US dollar, complicating the transition to a system of local currencies.

How does the speaker envision the future of global trade and finance with the rise of local currencies?

The speaker envisions a more decentralized, multipolar financial system where local currencies are used for trade, reducing reliance on the US dollar. This could lead to a more stable global economy, with more equitable wealth distribution, particularly benefiting countries in the Global South. Technological advancements, like the globalizing of currencies and payment systems, could support this transition.