Perceived threats to the dollar’s role in the global financial system are nothing new; they have been a frequent occurrence since the 1980s. But until would-be challengers can find a credible alternative to the dollar for their own savings, the greenback’s dominance will not really be in doubt.
Rumores sobre o declínio do dólar e a ascensão do renmimbi são muito exagerados, como diria Mark Twain...
Project Syndicate, Apr 6, 2023
While China has made great strides in internationalizing its currency, the goal of dethroning the US dollar is still far off. To undermine the dollar’s dominance in cross-border trade, China must loosen capital controls and make the renminbi more attractive to international investors.
NEW YORK – After years of speculation and false starts, it seems that the internationalization of the renminbi is well underway. On March 29, China and Brazil announced plans to trade using their own currencies, rather than the US dollar. The day before, the China National Offshore Oil Corporation and France’s TotalEnergies completed their first-ever renminbi-denominated liquefied natural gas trade. Russian President Vladimir Putin recently said that he wants to use the Chinese currency not just for trading with China but also as a form of payment in trade with other countries in Asia, Africa, and Latin America. And Saudi Arabia has been in talks with China since last year about accepting payments for some oil exports in renminbi.
It is no secret that China would like to convert the renminbi into an international currency and move away from the global dominance of the US dollar. While this is often interpreted as a geopolitical move, a way to insulate China from possible US-led economic sanctions in the future, transforming the renminbi into one of the world’s leading settlement currencies would also greatly benefit the Chinese economy. Moreover, it would help protect the country from an exchange-rate crisis, which is why other countries, including India and ASEAN countries, are trying to internationalize their currencies, too.
The figure below, based on ongoing research by my co-authors and me, illustrates the progress that China has made in its efforts to internationalize the renminbi. The red line traces South Korean firms’ renminbi-denominated exports as a share of its total exports to China between 2006 and 2020, showing the Chinese currency’s share rising from 0% before 2008 to nearly 6% by 2020. In October 2016, the renminbi became part of the basket of currencies underpinning the International Monetary Fund’s reserve asset, special drawing rights, joining an exclusive club alongside the dollar, the euro, the yen, and the British pound.
While these are impressive milestones, one should not exaggerate the degree to which the renminbi is encroaching on the greenback’s position. As the figure shows, the US dollar’s share of South Korean exports to China declined from nearly 98% in 2006 to roughly 87% in 2020. In other words, the dollar has gone from overwhelmingly dominant to slightly less dominant. Even in China-South Korea bilateral trade, the renminbi is not even close to displacing the dollar.
(Share of currencies in Korean exports to China)
Moreover, roughly 99% of South Korean exports to the United States during the same period were denominated in dollars; none were denominated in renminbi. By contrast, the dollar’s share of South Korean exports to Japan was 45%, about equal to that of the yen, with the won and the euro accounting for the rest. In other words, the US dollar continues to dominate global trade, including bilateral trade not involving the US, while the renminbi is essentially used only in transactions involving China.
Part of the reason for the greenback’s continued preeminence is that, in addition to its status as a trading power, the US has very large and liquid capital markets where foreign investors can park their dollar-denominated assets. Because of its capital controls, China’s domestic financial market is far less liquid, making the renminbi unattractive to international investors.
Theoretically, China could raise the renminbi’s global profile by loosening capital controls. But doing so could come at significant cost, exposing the Chinese economy to the (often negative) consequences of US interest-rate movements and global financial cycles. Moreover, premature capital-account liberalization could exacerbate existing distortions within China’s financial system, where domestic savings are not always channeled to the most productive firms. The Chinese authorities are keenly aware of these risks, which is why they have been prioritizing financial stability over renminbi internationalization.
There are, however, other ways to promote the renminbi. A series of currency swap agreements between the People’s Bank of China and its counterparts in other countries, for example, could help make the renminbi less risky for international firms and investors.
In addition, a digital renminbi could facilitate partial capital-account liberalization without formally removing capital controls. By removing the anonymity of foreign investors, a digital renminbi would allow the PBOC to limit cross-border financial transactions to less volatile types and more conveniently activate a circuit-breaker when needed. Being able to separate inflows of “hot money” from more stable types of foreign investment could convince the central bank to relax some capital controls and allow financial capital to flow more freely.
In sum, while China has achieved notable progress toward making the renminbi a global reserve currency, it is still far from reaching its goal. While it could use a digital currency to deliver de facto partial capital-account liberalization, it will not undermine the dollar’s hegemony without going much further in loosening capital controls.
Shang-Jin Wei, a former chief economist at the Asian Development Bank, is Professor of Finance and Economics at Columbia Business School and Columbia University’s School of International and Public Affairs.
A China Optimist’s Lament
With a shrinking working-age population, China, until recently the world’s greatest growth story, needs an acceleration in productivity growth to reclaim that mantle. That is why President Xi Jinping’s increased emphasis on security, power, and control comes at the worst possible time.
Stephen S. Roach
Project Syndicate, 22.12.2022
New Haven – I have been a congenital China optimist for most of the past 25 years. I first came to that view in the depths of the Asian financial crisis in 1997-98. The so-called East Asian growth miracle was in tatters and China was widely portrayed as the final domino that would fall in what was then viewed as the first crisis of globalization. Having shuttled back and forth to the region during that period as Morgan Stanley’s chief economist, I had quickly come to appreciate the power of China’s market-based economic transition. So, in March 1998, I took a very different view on the pages of the Financial Times with my first published commentary on China, “The Land of the Rising Dragon.”
My argument, in a nutshell, was that China would supplant Japan as the new engine of post-crisis Asia. Japan was floundering in the aftermath of its post-bubble implosion, whereas a reform-oriented China had the wherewithal, determination, and strategy to withstand the currency contagion of a devastating external shock and sustain rapid economic growth. As China delivered, boosted by its accession to the World Trade Organization in late 2001, and Japan sunk into its second lost decade, the Chinese economy took off like a rocket.
It was the beginning of an extraordinary journey for me as Wall Street’s resident China optimist. In the spring of 1998, I spent a day in Seattle with then Chinese Finance Minister Xiang Huaicheng. He had read my piece in the FT and wanted to exchange views on the Chinese and US economies. He implored me to think of China less in terms of legacy state-owned enterprises (SOEs) and more through the lens of a rapidly emerging entrepreneurial subculture driven by township-village enterprises (TVEs).
Xiang was kind enough to organize a subsequent tour of several TVEs in Fujian Province. The most impressive was the Hengtong Group, a rapidly growing producer of high-quality fiber optic and telecom cables. Loaded with state-of-the-art technology from the United States and Germany, and staffed with a surprisingly large number of college graduates, Hengtong was the opposite of China’s long-ossified SOEs.
That experience whetted my appetite. I deepened my research into the seemingly paradoxical dynamism of China’s blended economy, with newly reformed and increasingly marketized SOEs starting to list shares in international capital markets in a balancing act with a rapidly growing private sector. Could China avoid the chronic problems that had long afflicted other blended systems, including Japan?
This same question was posed by former Premier Wen Jiabao. I first met Wen in late 2002, a few months before his elevation to the premiership under President Hu Jintao. His curiosity impressed me more than his skills as a strategist, which had distinguished his predecessor, Zhu Rongji.
But Wen had the courage to spark a debate about one of China’s toughest problems: In a public press conference in March 2007, he warned that while the economy was superficially strong, it risked becoming “unstable, unbalanced, uncoordinated, and unsustainable.” To Wen’s great credit, he posed the paradox of the “Four Uns” just a few months before the eruption of America’s subprime mortgage crisis, which would culminate in the 2008-09 global financial crisis.
At this point, I doubled down as a China optimist. The resilience of the blended system – the legacy of Deng Xiaoping’s “reform and opening up” – held the key to what I believed would be a powerful rebalancing of the Chinese economy. Wen’s Four Uns could be resolved only by a structural shift from exports and investment to consumer-led growth, from manufacturing to services, from surplus saving to saving absorption by investing in a long-deficient social safety net, and by shifting from foreign to indigenous innovation.
China’s flexible, blended, increasingly dynamic private sector could do all that and more. In the years following Wen’s proclamation, China’s five-year plans aligned with this rebalancing agenda. The case for a structural transformation to a more market-based system was increasingly on track. Optimists, like me, felt vindicated.
Then came Xi Jinping. At first, China’s fifth-generation leader seemed to be cut from the same cloth as the reform-oriented Deng. A sweeping set of reforms proposed at the Third Plenum of the 18th Party Congress in late 2013 was especially encouraging. But shortly thereafter, uncomfortable frictions started to creep into the rebalancing strategy.
In 2017, Xi kicked off the 19th Party Congress with a regression to Marxist ideology that immediately became known as “Xi Jinping Thought.” Consumer-led rebalancing was de-emphasized. An anti-corruption campaign became less about purging wrongdoers from the party and more about eliminating Xi’s political rivals and consolidating his power. And Xi’s geostrategic muscularity broke from Deng’s low-key (“hide and bide”) posture and led to a major conflict with the United States.
But 2022 was the ultimate wake-up call for China optimists. Xi’s great-power gambit aligned China in an “unlimited partnership” with Russia on the brink of the Kremlin’s unprovoked invasion of Ukraine. Xi’s stubborn insistence on an untenable “zero-COVID” policy tapped an undercurrent of dissent not seen in a generation. And the 20th Party Congress in October was less about Xi’s claim to an unprecedented third term as general secretary and more about his fixation on security in what he dubbed to be a threatening world of “perilous, stormy seas.”
With a shrinking working-age population, China, until recently the world’s greatest growth story, needs an acceleration in productivity growth to reclaim that mantle. Yet Xi’s increased emphasis on security, power, and control undermines productivity at a time when China needs it the most. The growth miracle can only suffer as a result.
China had come close to the promised land. Its modern economy was on an extraordinary trajectory. The rebalancing agenda promised more to come. But Xi broke that promise. The political economy of autocracy has thrown cold water on those of us who used to be diehard China optimists.
Stephen S. Roach, a faculty member at Yale University and former chairman of Morgan Stanley Asia, is the author of Unbalanced: The Codependency of America and China (Yale University Press, 2014) and Accidental Conflict: America, China, and the Clash of False Narratives (Yale University Press, 2022).
*
Um pouco exagerado, mas tocando nos pontos certos...
Project Syndicate, Praga – 5.11.2022
The Age of Megathreats
For four decades after World War II, climate change and job-displacing artificial intelligence were not on anyone’s mind, and terms like "deglobalization" and "trade war" had no purchase. But now we are entering a new era that will more closely resemble the tumultuous and dark decades between 1914 and 1945.
Nouriel Roubini
New York – Severe megathreats are imperiling our future – not just our jobs, incomes, wealth, and the global economy, but also the relative peace, prosperity, and progress achieved over the past 75 years. Many of these threats were not even on our radar during the prosperous post-World War II era. I grew up in the Middle East and Europe from the late 1950s to the early 1980s, and I never worried about climate change potentially destroying the planet. Most of us had barely even heard of the problem,
Moreover, after the US-Soviet détente and US President Richard Nixon’s visit to China in the early 1970s, I never really worried about another war among great powers, let alone a nuclear one. The term “pandemic” didn’t register in my consciousness, either, because the last major one had been in 1918.And I didn’t fathom that artificial intelligence might someday destroy most jobs and render Homo sapiens obsolete, because those were the years of the long “AI winter.”
Similarly, terms like “deglobalization” and “trade war” had no purchase during this period. Trade liberalization had been in full swing since the Great Depression, and it would soon lead to the hyper-globalization that began in the 1990s. Debt crises posed no threat, because private and public debt-to-GDP ratios were low in advanced economies and emerging markets, and growth was robust. No one had to worry about the massive build-up of implicit debt, in the form of unfunded liabilities from pay-as-you-go social security and health-care systems. The supply of young workers was rising, the share of the elderly was still low, and robust, mostly unrestricted immigration from the Global South to the North would continue to prop up the labor market in advanced economies.
Against this backdrop, economic cycles were contained, and recessions were short and shallow, except for during the stagflationary decade of the 1970s; but even then, there were no debt crises in advanced economies, because debt ratios were low. The kind of financial cycles that lead to crises were contained not just in advanced economies but even in emerging markets, owing to the low leverage, low risk-taking, solid financial regulation, capital controls, and various forms of financial repression that prevailed during this period. The advanced economies were strong liberal democracies that were free of extreme partisan polarization. Populism and authoritarianism were confined to a benighted cohort of poorer countries.
GOODBYE TO ALL THAT
Fast-forward from this relatively “golden” period between 1945 and 1985 to late 2022, and you will immediately notice that we are awash in new, extreme megathreats that were not previously on anyone’s mind. The world has entered what I call a geopolitical depression, with (at least) four dangerous revisionist powers – China, Russia, Iran, and North Korea – challenging the economic, financial, security, and geopolitical order that the United States and its allies created after WWII.
There is a sharply rising risk not only of war among great powers but of a nuclear conflict. In the coming year, Russia’s war of aggression in Ukraine could escalate into an unconventional
With Chinese President Xi Jinping further consolidating his authoritarian rule, and with the US tightening its trade restrictions against China, the new Sino-American cold war is getting colder by the day. Worse, it could all too easily turn hot over the status of Taiwan, which Xi is committed to reuniting with the mainland, and which US President Joe Biden is apparently committed to defending. Meanwhile, nuclear-armed North Korea has once again been seeking attention by firing rockets over Japan and South Korea.
Cyberwarfare occurs daily between these revisionist powers and the West, and many other countries have adopted a non-aligned posture toward Western-led sanctions regimes. From our contingent vantage point in the middle of all these events, we don’t yet know if World War III has already begun in Ukraine. That determination will be left to future historians – if there are any.
Even discounting the threat of nuclear Armageddon, the risk of an environmental Apocalypse is becoming increasingly serious, especially given that most of the talk about net-zero and ESG (environment, social, and governance) investing is just greenwashing – or greenwishing. The new greenflation is already in full swing, because it turns out that amassing the metals needed for the energy transition requires a lot of expensive energy.
There is also a growing risk of new pandemics that would be worse than biblical plagues, owing to the link between environmental destruction and zoonotic diseases. Wildlife, carrying dangerous pathogens, are coming into closer and more frequent contact with humans and livestock. That is why we have experienced more frequent and virulent pandemics and epidemics (HIV, SARS, MERS, swine flu, bird flu, Zika, Ebola, COVID-19) since the early 1980s. All the evidence suggests that this problem will become even worse in the future. Indeed, owing to the melting of Siberian permafrost, we may soon be confronting dangerous viruses and bacteria that have been locked away for millennia.
Moreover, geopolitical conflicts and national-security concerns are fueling trade, financial, and technology wars, and accelerating the deglobalization process. The return of protectionism and the Sino-American decoupling will leave the global economy, supply chains, and markets more balkanized and fragmented. The buzzwords “friend-shoring” and “secure and fair trade” have replaced “offshoring” and “free trade.”
But on the domestic front, advances in AI, robotics, and automation will destroy more and more jobs, even if policymakers build higher protectionist walls in an effort to fight the last war. By both restricting immigration and demanding more domestic production, aging advanced economies will create a stronger incentive for companies to adopt labor-saving technologies. While routine jobs are obviously at risk, so, too, are any cognitive jobs that can be unbundled into discrete tasks, and even many creative jobs. AI language models like GPT-3 can already write better than most humans and will almost certainly displace many jobs and sources of income. In due course, some scientists believe that Homo sapiens will be rendered entirely obsolete by the rise of artificial general intelligence or machine super-intelligence – though this is a highly contentious subject of debate.
Thus, over time, economic malaise will deepen, inequality will rise even further, and more white- and blue-collar workers will be left behind.
HARD CHOICES, HARD LANDINGS
The macroeconomic situation is no better. For the first time since the 1970s, we are facing high inflation and the prospect of a recession – stagflation. The increased inflation in advanced economies wasn’t “transitory.” It is persistent, driven by a combination of bad policies – excessively loose monetary, fiscal, and credit policies that were kept in place for too long – and bad luck. No one could have anticipated how much the initial COVID-19 shock would curtail the supply of goods and labor and create bottlenecks in global supply chains. The same goes for Russia’s brutal invasion of Ukraine, which caused a sharp spike in energy, food, fertilizers, industrial metals, and other commodities. Meanwhile, China has continued its “zero-COVID” policy, which is creating additional supply bottlenecks.
While both demand and supply factors were in the mix, it is now widely recognized that the supply factors have played an increasingly decisive role. This matters for the economic outlook, because supply-driven inflation is stagflationary and thus increases the risk that monetary-policy tightening will produce a hard landing (increased unemployment and potentially a recession).
What will follow from the US Federal Reserve and other major central banks’ current tightening? Until recently, most central banks and most of Wall Street belonged to “Team Soft Landing.” But the consensus has rapidly shifted, with even Fed Chair Jerome Powell recognizing that a recession is possible, that a soft landing will be “very challenging,” and that everyone should prepare for some “pain” ahead. The Federal Reserve Bank of New York’s model shows a high probability of a hard landing, and the Bank of England has expressed similar views about the United Kingdom. Several prominent Wall Street institutions have also now made a recession their baseline scenario (the most likely outcome if all other variables are held constant).
History, too, points to deeper problems ahead. For the past 60 years in the US, whenever inflation has been above 5% (it is above 8% today), and unemployment has been below 5% (it is now 3.5%), any attempt by the Fed to bring inflation down toward its 2% target has caused a recession. Thus, a hard landing is much more likely than a soft landing, both in the US and across most other advanced economies.
STICKY STAGFLATION
In addition to the short-term factors, negative supply shocks and demand factors in the medium term will cause inflation to persist. On the supply side, I count eleven negative supply shocks that will reduce potential growth and increase the costs of production. Among these is the backlash against hyper-globalization, which has been gaining momentum and creating opportunities for populist, nativist, and protectionist politicians, and growing public anger over stark income and wealth inequalities, which is leading to more policies to support workers and the “left behind.”However well-intentioned, such measures will contribute to a dangerous wage-price spiral.
Other sources of persistent inflation include rising protectionism (from both the left and the right), which has restricted trade, impeded the movement of capital, and heightened political resistance to immigration, which in turn has put additional upward pressure on wages. National-security and strategic considerations have further restricted flows of technology, data, and talent, and new labor and environmental standards, as important as they may be, are hampering both trade and new construction.
This balkanization of the global economy is deeply stagflationary, and it is coinciding with demographic aging, not just in developed countries but also in large emerging economies such as China. Because young people tend to produce and save more, whereas older people spend down their savings and require many more expensive services in health care and other sectors, this trend, too, will lead to higher prices and slower growth.
Today’s geopolitical turmoil further complicates matters. The disruptions to trade and the spike in commodity prices following Russia’s invasion were not just a one-off phenomenon. The same threats to harvests and food shipments that arose in 2022 may well persist in 2023. Moreover, if China does finally end its zero-COVID policy and begin to restart its economy, a surge in demand for many commodities will add to the global inflationary pressures. There is also no end in sight for Sino-Western decoupling, which is accelerating across all dimensions of trade (goods, services, capital, labor, technology, data, and information). And, of course, Iran, North Korea, and other strategic rivals to the West could soon contribute in their own ways to the global havoc.
Now that the US dollar has been fully weaponized for strategic and national-security purposes, its position as the main global reserve currency could eventually begin to decline, and a weaker dollar would of course add to inflationary pressures in the US. More broadly, a frictionless world trading system requires a frictionless financial system. But sweeping primary and secondary sanctions have thrown sand in what was once a well-oiled machine, massively increasing the transaction costs of trade.
On top of it all, climate change, too, will create persistent stagflationary pressures. Droughts, heat waves, hurricanes, and other disasters are increasingly disrupting economic activity and threatening harvests (thus driving up food prices). At the same time, demands for decarbonization have led to underinvestment in fossil-fuel capacity before investment in renewables has reached the point where they can make up the difference. Today’s large energy-price spikes were inevitable.
The increased likelihood of future pandemics also represents a persistent source of stagflation, especially considering how little has been done to prevent or prepare for the next one. The next contagious outbreak will lend further momentum to protectionist policies as countries rush to close borders and hoard critical supplies of food, medicines, and other essential goods.
Finally, cyberwarfare remains an underappreciated threat to economic activity and even public safety. Firms and governments will either face more stagflationary disruptions to production, or they will have to spend a fortune on cybersecurity. Either way, costs will rise.
THE WORST OF ALL POSSIBLE ECONOMIES
When the recession comes, it will not be short and shallow but long and severe. Not only are we facing persistent short- and medium-term negative supply shocks, but we are also heading into the mother of all debt crises, owing to soaring private and public debt ratios over the last few decades. Low debt ratios spared us from that outcome in the 1970s. And though we certainly had debt crises following the 2008 crash – the result of excessive household, bank, and government debt – we also had deflation. It was a demand shock and a credit crunch that could be met with massive monetary, fiscal, and credit easing.
Today, we are experiencing the worst elements of both the 1970s and 2008. Multiple, persistent negative supply shocks have coincided with debt ratios that are even higher than they were during the global financial crisis. These inflationary pressures are forcing central banks to tighten monetary policy even though we are heading into a recession. That makes the current situation fundamentally different from both the global financial crisis and the COVID-19 crisis. Everyone should be preparing for what may come to be remembered as the Great Stagflationary Debt Crisis.
While central banks have been at pains to sound more hawkish, we should be skeptical of their professed willingness to fight inflation at any cost. Once they find themselves in a debt trap, they will have to blink. With debt ratios so high, fighting inflation will cause an economic and financial crash that will be deemed politically unacceptable. Major central banks will feel as though they have no choice but to backpedal, and inflation, the debasement of fiat currencies, boom-bust cycles, and financial crises will become even more severe and frequent.
The inevitability of central banks wimping out was recently on display in the United Kingdom. Faced with the market reaction to the Truss government’s reckless fiscal stimulus, the BOE had to launch an emergency quantitative-easing (QE) program to buy up government bonds. That sad episode confirmed that in the UK, as in many other countries, monetary policy is increasingly subject to fiscal capture.
Recall that a similar turnaround occurred in 2019, when the Fed, after previously signaling continued rate hikes and quantitative-tightening, stopped its QT program and started pursuing a mix of backdoor QE and policy-rate cuts at the first sign of mild financial pressures and a growth slowdown. Central banks will talk tough; but, in a world of excessive debt and risks of an economic and financial crash, there is good reason to doubt their willingness to do “whatever it takes” to return inflation to its target rate.
With governments unable to reduce high debts and deficits by spending less or raising revenues, those that can borrow in their own currency will increasingly resort to the “inflation tax”: relying on unexpected price growth to wipe out long-term nominal liabilities at fixed interest rates.
How will financial markets and prices of equities and bonds perform in the face of rising inflation and the return of stagflation? It is likely that, as in the stagflation of the 1970s, both components of any traditional asset portfolio will suffer, potentially incurring massive losses. Inflation is bad for bond portfolios, which will take losses as yields increase and prices fall, as well as for equities, whose valuations are hurt by rising interest rates.
For the first time in decades, a 60/40 portfolio of equities and bonds suffered massive losses in 2022, because bond yields have surged while equities have gone into a bear market. By 1982, at the peak of the stagflation decade, the average S&P 500 firm’s price-to-earnings ratio was down to eight; today, it is closer to 20, which suggests that the bear market could end up being even more protracted and severe. Investors will need to find assets to hedge against inflation, political and geopolitical risks, and environmental damage: these include short-term government bonds and inflation-indexed bonds, gold and other precious metals, and real estate that is resilient to environmental damage.
THE MOMENT OF TRUTH
In any case, these megathreats will further contribute to rising income and wealth inequality, which has already been putting severe pressure on liberal democracies (as those left behind revolt against elites), and fueling the rise of radical and aggressive populist regimes. One can find right-wing manifestations of this trend in Russia, Turkey, Hungary, Italy, Sweden, the US (under Donald Trump), post-Brexit Britain, and many other countries; and left-wing manifestations in Argentina, Venezuela, Peru, Mexico, Colombia, Chile, and now Brazil (which has just replaced a right-wing populist with a left-wing one).
And, of course, Xi’s authoritarian stranglehold has given the lie to the old idea that Western engagement with a fast-growing China would ineluctably lead that country to open itself up even more to markets and, eventually, to democratic processes. Under Xi, China shows every sign of becoming more closed off, and more aggressive on geopolitical, security, and economic matters.
How did it come to this? Part of the problem is that we have long had our heads stuck in the sand. Now, we need to make up for lost time. Without decisive action, we will be heading into a period that is less like the four decades after WWII than like the three decades between 1914 and 1945. That period gave us World War I; the Spanish flu pandemic; the 1929 Wall Street crash; the Great Depression; massive trade and currency wars; inflation, hyperinflation, and deflation; financial and debt crises, leading to massive meltdowns and defaults; and the rise of authoritarian militarist regimes in Italy, Germany, Japan, Spain, and elsewhere, culminating in WWII and the Holocaust.
In this new world, the relative peace, prosperity, and rising global welfare that we have taken for granted will be gone; most of it already is. If we don’t stop the multi-track slow-motion train wreck that is threatening the global economy and our planet at large, we will be lucky to have only a repeat of the stagflationary 1970s. Far more likely is an echo of the 1930s and the 1940s, only now with all the massive disruptions from climate change added to the mix.
Avoiding a dystopian scenario will not be easy. While there are potential solutions to each megathreat, most are costly in the short run and will deliver benefits only over the long run. Many also require technological innovations that are not yet available or in place, starting with those needed to halt or reverse climate change. Complicating matters further, today’s megathreats are interconnected, and therefore best addressed in a systematic and coherent fashion. Domestic leadership, in both the private and public sector, and international cooperation among great powers is necessary to prevent the coming Apocalypse.
Yet there are many domestic and international obstacles standing in the way of policies that would allow for a less dystopian (though still contested and conflictual) future. Thus, while a less bleak scenario is obviously desirable, a clear-headed analysis indicates that dystopia is much more likely than a happier outcome. The years and decades ahead will be marked by a stagflationary debt crisis and related megathreats – war, pandemics, climate change, disruptive AI, and deglobalization – all of which will be bad for jobs, economies, markets, peace, and prosperity.
Nouriel Roubini, Professor Emeritus of Economics at New York University’s Stern School of Business, is Chief Economist at Atlas Capital Team, CEO of Roubini Macro Associates, Co-Founder of TheBoomBust.com, and author of MegaThreats: Ten Dangerous Trends That Imperil Our Future, and How to Survive Them (Little, Brown and Company, 2022). He is a former senior economist for international affairs in the White House’s Council of Economic Advisers during the Clinton Administration and has worked for the International Monetary Fund, the US Federal Reserve, and the World Bank. His website is NourielRoubini.com, and he is the host of NourielToday.com.
The Strategy Against Russia Is Working and Must Continue
Meanwhile, the European Union has fully mobilized to confront the energy crisis. We have filled our gas storage facilities to above 80% – well ahead of the November 1 target date – and agreed to clear targets to reduce gas consumption through the winter. To help vulnerable consumers and businesses manage price surges, we are moving forward with proposals such as a windfall tax on energy companies that have made excess profits.
Moreover, in coordination with the G7 and other likeminded partners, we are discussing plans to cap the price of Russian oil exports. And we are helping our partners in the Global South to handle the fallout from Russia’s brutal aggression and cynical weaponization of energy and food.
In short: the overall strategy is working. We must continue to support Ukraine, pressure Russia with sanctions, and help our global partners in a spirit of solidarity.
Those who question whether sanctions are working are on increasingly shaky ground. In general, sanctions have a double function: to signal and to compel. The signal expresses opposition to a state’s conduct – which in this case includes violations of international law and wanton attacks on civilians and civilian infrastructure. And while we are not at war with Russia, the compelling aims both to force a change in its behavior and to erode the economic and technological means for its aggression.
In a very clear signal, the EU has made the historic decision to end its reliance on Russian energy. The Kremlin has broken its contracts by dramatically reducing gas export volumes, rattling markets in the process. The ability to engage in such blackmail may seem like a Russian strength; but it ultimately is a losing strategy. Contrary to popular belief, Russia cannot easily find sustainable substitutes for the European market, because much of its gas-export infrastructure (pipelines and LNG terminals) is geared toward Europe. Redirecting the flow of gas to countries like China will take years and cost billions of dollars.
True, Russia has benefited from the recent gas-price hikes. But that doesn’t mean the sanctions have failed. Rather, we must wait to see the full effects of Europe’s decision to cut its energy imports from Russia. So far, Europe has only banned Russian coal imports and reduced its purchases of Russian oil. Yet even here, the impact has been discernible.
Russia’s coal export volumes recently fell to their lowest level since the start of the invasion, reflecting the Kremlin’s failure to find other buyers. Similarly, since the EU announced that it would reduce its imports of Russian oil by 90% by the end of 2022, oil prices have come down. And the Kremlin will be reducing its revenues by even more if it makes still more cuts to its gas deliveries to Europe.
As German Foreign Minister Annalena Baerbock has observed, Europe may have paid a low financial price for Russian gas in the past, but that was because it was paying in terms of its security. Russia attacked Ukraine because it was convinced that the EU would be too divided and dependent on Russian energy to act. But Russian President Vladimir Putin miscalculated.
By reducing its dependence on Russian energy, Europe is freeing itself from the old belief that economic interdependence automatically reduces political tensions. This might have made sense 40 years ago, but it certainly doesn’t now, when economic interdependence has become weaponized.
But the proper response is not to turn inward. We still need an open economy; but we must not permit interdependence without resilience and diversification. We need to account of the political identities of those with whom we trade and interact. Otherwise, we will fall into the same kind of trap that Putin has been setting for 20 years.
The sanctions have demonstrably also had a compelling effect. The loss of access to Western technology has begun to hit the Russian military, whose tanks, planes, telecommunication systems, and precision weapons also rely on imported components.
Moreover, a leaked internal Russian government report warns of prolonged damage to the Russian economy from the import restrictions. In agriculture, 99% of poultry production depends on imported inputs. In aviation, 95% of passengers in Russia travel on foreign-made planes; and now, a lack of spare parts is shrinking the Russian commercial aviation fleet. In pharmaceuticals, 80% of domestic production relies on imported raw materials. Finally, in communications and information technology, Russia could run short of SIM cards by 2025, and other parts of its telecommunications sector are being set back by many years. Remember, this bleak assessment came from official internal Russian sources.
Will sanctions alone be sufficient to defeat the invader? No, but that is why we are also providing massive economic and military support to Ukraine and working to deploy an EU military training mission to strengthen the Ukrainian armed forces further. The war is not over, and Putin’s regime still holds some cards. But with the current Western strategy in place, the Kremlin will find it virtually impossible to turn the tide. Time and history are on the Ukrainians’ side – as long we stick with our strategy.
LONDON – Russia’s war in Ukraine, Vladimir Putin and Xi Jinping’s recent meeting in Moscow, and China’s apparent success in brokering a diplomatic rapprochement between Iran and Saudi Arabia have fueled renewed chatter about threats to the global primacy of the United States – and particularly to that of the US dollar.
I encountered such commentary in the responses to my recent Global Policyarticle assessing the future of the BRICS (Brazil, Russia, India, China, and South Africa). The group is now considering an enlargement that would bring in countries like Iran and Saudi Arabia, raising questions about its criteria for membership and the role of its own New Development Bank. But would a larger and more influential BRICS-Plus really create risks to the dollar?
Perceived threats to the dollar’s role in the global financial system are nothing new; they have been a frequent occurrence since I began my career in the 1980s. Obviously, if there comes a time when the US ceases to be the world’s largest economy, the dollar’s status will be called into question. The same was true of pound sterling in the first half of the twentieth century (though the pound was not knocked off its global perch until well after the United Kingdom had been surpassed economically).
The eclipse of the dollar would not necessarily be a bad thing for the US, given all the added responsibilities that come with issuing the world’s main reserve currency. In a global economy where the US already is no longer as dominant as it once was, it is not optimal to have everyone else be so dependent on the American monetary system and the Federal Reserve’s domestically driven priorities. Other economies would much prefer that their own currencies, monetary policies, and trade patterns not be so influenced by those of the US.
But the fact that a US-excluding group of emerging powers has higher aspirations for itself does not necessarily mean anything for the US-centered financial system. After all, the BRICS and potential BRICS-Plus countries face many significant challenges of their own, and it is not clear what they hope to achieve together beyond issuing symbolic statements. Crucially, the group’s most important economies are China and India, bitter adversaries that rarely cooperate on anything. Until that changes, it is fanciful to think that the BRICS or even an expanded grouping could mount any serious challenge to the dollar.
I often despair at the lack of cooperation between China and India – the world’s two most populous countries by far. If they could overcome their historic animosity and develop an ambitious shared agenda for expanding trade and tackling issues like health threats and climate change, the idea of a BRICS-driven challenge to the financial and monetary status quo would become not just plausible but imminent.
In this spirit, I have long argued that China should make te first move by inviting India to help co-design elements of its signature Belt and Road Initiative. Realizing the BRI’s ambitious agenda of transnational infrastructure investments in cooperation with India would make a far more powerful and lasting contribution to Asia and beyond. Otherwise, the BRI will remain a narrowly Chinese initiative that exists primarily to impose Chinese preferences on others.
The potential addition of Saudi Arabia and Iran comes with similar caveats. Yes, bringing on two major oil producers (in addition to Russia) increases the likelihood of some oil being priced in currencies other than the dollar. But unless edging out the dollar is an explicit, genuinely shared, and deeply held goal, such invoicing changes will be exciting only to niche financial writers. I have lost count of the times I have heard arguments about why oil could soon be priced in a new currency. First it was going to be the Deutsche Mark, then the yen, then the euro. It’s still the dollar.
Finally, and most importantly, for any BRICS (or BRICS-Plus) member to pose a strategic challenge to the dollar, it would have to permit – indeed encourage – foreign and domestic savers and investors to decide for themselves when to buy or sell assets denominated in its currency. That means no capital controls of the kind that China has routinely deployed. Until the BRICS and potential BRICS-Plus countries can find a credible alternative to the dollar for their own savings, the greenback’s dominance will not really be in doubt.