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We are approaching the two-year mark since Ray Dalio published his book, “Principles for Dealing with the Changing World Order: Why Nations Succeed and Fail”.
I was curious to know if the world is in fact any closer to his prediction, especially regarding the rise and decline of currencies; and mainly because numerous countries have started transitioning to digital currency as a means to become more independent of the U.S. Dollar. That statement alone indicates he was on to something.
Right now the following countries are using a Central Bank Digital Currency (CBDC)
China - e-CNY, or digital yuan
The Bahamas - Sand Dollar (cute name)
Eastern Caribbean (Antigua and Barbuda, Dominica, Grenada, Montserrat, St. Kitts and Nevis, Saint Lucia, and St. Vincent and the Grenadines) - It’s the first blockchain-based currency introduced by any of the world’s currency unions.
Sweden - e-krona
Nigeria - eNaira
Jamaica - Digital Dollar
And other countries with CBDCs in research or development: Ukraine, United States, and India.
Note: The United States (U.S.) is woefully behind many other countries in this space. We have all the technology and capability to do this, but politics (fear of losing power) get in the way.
Meanwhile, while we cling to our U.S. Dollar, other countries are trying to figure out how to get away from it.
There’s even a neat tracking website where you can see the status of the world’s digital currency implementation provided by the Atlantic Council’s GeoEconomic Center.
According to the Atlantic Council,
“As of March 2023, sixty-four countries are in the advanced stage of [CBDC] development, and over twenty central banks have launched their pilots, including Brazil, Japan, and Russia.”
Turns out, in July 2023, Dalio posted a YouTube video as a follow up to his 2021 book discussing this very thing.
He discusses de-dollarization (reducing a country’s reliance on the dollar), which has gained momentum in the last year. From Russia and China, to numerous non-aligned countries in between, there is growing fear that over-reliance on the dollar gives the United States too much leverage.
A year prior to that 5-minute follow up video above, Dalio posted a 45-minute video to accompany the book. Well worth the 45 minutes.
Okay, so let’s talk about very briefly about inflation, the value of the dollar, and why it is important when discussing digital currency.
The purchasing power of the US dollar has been declining.
In 1971, Richard Nixon separated the U.S. Dollar from the gold standard. Meaning, the Dollar is no longer backed by gold. It’s backed by nothing actually, other than the governments “word” that the Dollar has value.
All of the world’s currency is now fiat money.
fiat (noun) —An arbitrary order or decree. Authorization or sanction. "government fiat."An authoritative command or order to do something; an effectual decree.
This is to say—the currency system has become, essentially, a Ponzi scheme.
A surreal office where the structure of a Ponzi scheme takes a literal form
Simplified, the U.S. government asks for money from the Federal Reserve, the fed prints the money and provides it, the government then sells it through bonds to all kinds of buyers in all kinds of countries, and then borrows more money from the fed to cover the payments and interest. And it just keeps going. After a few trillion dollars, there seems to be no end in sight.
When the Dollar was backed by gold, there was a limited supply. However much gold there was, that’s how much dollars there could be. Meaning, it was impossible to have an infinite amount of dollars, since gold is a real tangible thing you can hold and of limited supply.
Every day citizens should be aware of this.
The only reason the US Dollar has any value is because:
Because the U.S. government says it does.
Because investors and lenders around the world believe that the U.S. government will repay its debts.
So, now, the system we have is [reminiscent of] a classic Ponzi Scheme.
Borrow money for bills, sell bonds to afford the loan payments, borrow more money for new bills, sell more bonds to pay the previous loans payments, and on and on and on….
Question:
Can you guess why the U.S. has never, ever, not once, defaulted or missed a payment???
Answer:
It’s because they just borrow more to cover the payment. You can’t ever default if you can just print more money to make the payments.
Must be nice.
Now, being that the U.S. Dollar is no longer backed by anything, it created an environment where currency can really just be made up. Any country’s government can create any currency it wants to and call it “money”.
Including digital currency.
I mean, hell, people still barter for items. Anything can be "money".
Even Meta (Facebook) created a digital currency.
So, what happens when the U.S. Dollar is backed by nothing, and people (mainly other countries) lose confidence in the U.S. Dollar, and stop buying bonds and start creating alternatives of their own?
Many other countries hold those U.S. bonds, meaning those other countries hold their own savings and currency against the U.S. Dollar, despite the Dollar being backed by literally nothing.
With inflation, the dollar loses value, and so countries look for ways to become independent from the U.S. Dollar because they don’t want to get sucked into our problems.
Well, as of today, October 21, 2023, we are pretty dang close to a recession, if not already in one. No one can seem to agree on it though; which is indicative of a problem itself.
Enter—Central Bank Digital Currencies (CBDCs)
If the gold standard is not going to be implemented again to back the Dollar, which it should be according to some, then there will need to be something else; another way to avoid the looming de-dollarization.
Cryptocurrencies like Bitcoin and Ethereum have emerged as alternative forms of digital money. (Notice I said money, not currency; there’s a difference.)
They are decentralized and not controlled by any single government or central bank.
This makes them appealing to those who want a currency that is not influenced by traditional monetary policies or tied to a particular country's economic stability.
But not the U.S. government. They only believe the Dollar is a currency.
Because the U.S. government doesn’t say cryptocurrencies are “currency” having monetary value, they don’t. Even though people, and some companies, as well a countries, allow payment using them.
Some individuals and institutions view cryptocurrencies, such as Bitcoin, as digital gold. Some see them as a hedge against inflation and currency devaluation (de-dollarization), much like gold has been historically. But not the U.S. government.
Despite how the U.S. government views them, Cryptocurrencies are enabling cross-border payments and transactions with reduced friction compared to traditional banking systems.
This alone reduces reliance on the U.S. Dollar as an intermediary currency in international trade.
As that grows around the world, it creates a conundrum for the U.S. government.
We need the world to value our currency as much as we do, but the world is proving it may not need it at all.
Now, I will say the U.S. government is not just standing by idle while this happens, they are looking into it, exploring, researching, etc.
They are just very behind.
Many central banks around the globe are exploring or actively developing their own digital currencies. They are seen as a way for governments to have more control over their monetary policy, reduce the use of physical cash, and potentially provide competition to cryptocurrencies.
Some countries are indeed actively seeking to reduce their reliance on the U.S. Dollar, as I type this.
This is good to know information for the average person.
By using CBDCs, or even existing cryptocurrencies like Bitcoin, in international transactions, central banks/countries can bypass the traditional SWIFT system, which is heavily dominated by the U.S. dollar.
The growing interest in digital currencies has real geopolitical implications.
It will impact the global economic order [*cue Ray Dalio*], influence financial power dynamics between governments and citizens, and between countries such as the U.S. and China, and challenge the U.S. Dollar's status as the world's primary reserve currency.
As these digital currency options become more prevalent, governments and regulatory bodies are working to establish frameworks to regulate them. This is to ensure compliance with anti-money laundering (AML) and know-your-customer (KYC) regulations, as well as to address concerns about volatility and consumer protection.
And this is where the U.S. gets tripped up on adoption of a CBDC.
The U.S. has a policy-making problem. It’s slow, usually years behind in regulating and establishing frameworks for things like this. When it comes to Technology and Finance, the U.S. government is always playing catch-up.
Okay, so what does any of this have to do with Ray Dalio’s theory? Is it happening or not?
Who could possibly challenge the U.S. as a world superpower?
Well, China can.
China has been vocal about its intention to reduce its reliance on the U.S. Dollar, given that the dollar’s dominance in global trade and finance gives the U.S. significant geopolitical and economic leverage.
The digital yuan (China’s new CBDC) is a tool to facilitate this reduced reliance on the Dollar, allowing China to settle international transactions without the need for Dollar intermediation.
In the last few years, there have been noticeable shifts in global alliances and partnerships, with countries changing their strategies and allegiances in the face of the obvious changing world order.
China has increasingly been forging new partnerships and strengthening existing ones, notably in sectors like technology, trade, and investment all around the world.
Also, China has grown exponentially over the past few decades to become the second-largest economy in the world. It is a global hub for manufacturing and exports and has significant influence over the global supply chains.
And China’s Belt and Road Initiative (BRI) further illustrates its ambitions, aiming to bolster its global influence through infrastructure development and investments in various parts of the world.
Their technological advancements have facilitated the emergence of digital currencies, which are poised to have significant implications for the global financial system.
China has been a front-runner in this domain, launching its Digital Currency Electronic Payment (DCEP) or digital yuan.
This currency aims to internationalize the yuan and reduce dependency on the U.S. Dollar in global trade, and it could offer China greater control over its financial system and facilitate the enforcement of monetary policy.
You read that right.
China, along with many others, want to reduce their dependence on the U.S. Dollar and are actively working towards it. We should not brush that under the rug.
But don’t worry, we aren’t.
The U.S. views China’s rise, particularly in technology and military domains, as a significant strategic challenge.
Which means the U.S. has recognized the changing world order.
The average citizen should make note of that.
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Both nations are now competing across various fronts, including technology, trade, military, and geopolitics. This competition is shaping global norms, standards, and alliances, with countries often finding themselves needing to navigate the complexities of this bilateral relationship.
In light of these changes, the global [new] world order appears to be moving away from uni-polarity, with multi-polar dynamics becoming more evident.
The U.S. and China, as two dominant players, will continue to influence global trajectories significantly, with their competition shaping the nature of global trade, technology, and geopolitics.
It’s essential to recognize the fluid nature of these dynamics, with evolving strategies and contexts continually reshaping the global landscape.
And it is essential to take it seriously and be informed.
Make no mistake, other countries moving away from the U.S. Dollar is a major problem for the U.S.
Such a scenario is still [somewhat] speculative, although it is becoming more of a reality lately. The outcomes depend on a bunch of variables, including policy responses, market dynamics, and global stakeholder strategies.
But again, we know the U.S. government is slow with that kind of stuff.
If China were to rise above and the U.S. dollar were devalued in the process, this would unleash a series of global economic, geopolitical, and strategic shifts that we are just not prepared for as U.S. citizens.
Anyone who has bought anything this year (2023) knows personally that the U.S. Dollar, does not go as far as it used to.
The devaluation of the U.S. Dollar would lead to significant adjustments in global currency markets. The Chinese digital yuan would potentially see a rise in demand, becoming a key world reserve currency.
The devaluation of the U.S. Dollar also impacts U.S. military spending and capabilities, potentially altering global military balances.
Big problem.
And obviously, devaluation would also cause investors to adjust their portfolios due to changes in currency values and market perceptions. Investment would probably flow heavily towards China and other emerging markets, leading to a reshuffling of global capital allocation, away from the U.S.
This is already happening.
According to Foreign Policy Magazine,
In 2019, nearly $400 billion of new foreign investment into Chinese equities was driven by changes in allocations within benchmark indexes, with American investors accounting for more than a third of these massive portfolio flows. Similarly, global bond indexes that have started adding Chinese government bonds to their benchmarks accounted for an additional investment flow of more than $100 billion into China. Put together, these major shifts in fund allocations could automatically grow U.S. portfolio investment in Chinese companies and government securities to more than $1 trillion by the end of 2021, without the active consent or knowledge of most Americans.
Aside from equities, the proliferation of China’s digital currency will reshape global financial infrastructures and systems, challenging the current U.S. dollar-centric model used around the world.
Trade balances would be affected due to changes in currency values. U.S. exports would probably become more competitive, while imports could become more expensive, affecting global trade patterns.
And the overall power dynamics around the globe would shift as China’s ascent towards being a premier global power. It would reshuffle global geopolitical dynamics, leading to a new alliances, partnerships, and global governance structures.
Or as Ray Dalio says, a New World Order. Which DOES seem to be underway.
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