Dethroning the dollar

The search to find an alternative to the dollar

China, Russia and others don’t want to rely on American high-finance




On january 15th America and China signed the first phase of a trade deal that eases tensions, with China agreeing to buy an additional $200bn of American products over two years. It may look as if peace is breaking out in global economic relations, but beneath the surface the tectonic plates of commerce are shifting.

America’s financial muscle-flexing—through the use of sanctions, tariffs and bans on blacklisted firms—has not escaped the attention of other countries, which have been intensifying efforts to avoid the global dollar-based financial plumbing. Though these could herald a more balanced international monetary system, they also carry risks for the world economy.

The Trump administration has turned its financial might on not only China but also Iran, Russia and a host of others—including even allies such as the European Union and Turkey. The latest Iranian sanctions, announced last week, will heap more pain on an economy already pummelled by economic missiles aimed at banks, oil production and shipping.

So dollar-centric is global commerce that other countries have long found it difficult to trade, even among themselves, without recourse to America’s currency, banks and payments infrastructure. At least half of all trade invoices are in dollars.

A majority of cross-border transactions are ultimately cleared through New York.

America started using the dollar system as a geopolitical weapon in earnest after the attacks of September 11th 2001. President Donald Trump has taken this policy to a new level of intensity, using sanctions as his main foreign-policy tool and even targeting allies with “secondary” sanctions that punish anyone who trades with states in America’s bad books.

America’s power ultimately stems from its ability to prohibit firms from using its financial system, in turn leaving them isolated and unable to interact with most counterparties.

Often the effect is fatal.

The moves to explore alternatives to dollar-dependence in the face of this bellicosity are varied.

Russia has substantially de-dollarised its trade flows, foreign debt and bank assets. Its energy giants have started switching contracts to roubles.

Russia, China, India and others are discussing—and signing—bilateral or wider deals to settle trade in national currencies. They are also exploring alternatives to swift, the dominant payments-messaging network, over which America holds sway.

Europe, meanwhile, has built Instex, a clearing-house, that could allow its firms to trade with Iran while bypassing America’s financial cops.

The search for workarounds has been given further impetus by the technological revolution sweeping through finance. Central bankers from Europe to China are stepping up work on public digital currencies. These could help bring down the cost of electronic cross-border payments, which is still relatively high. Some foresee the creation of cryptobaskets of reserve currencies.

It would be overdoing it to say these initiatives pose an immediate threat to the dollar. Instex has yet to be used; the swift alternatives have yet to gain traction. The dollar’s share is holding up on most measures (though in forex reserves it has slipped from around 70% to 60% since 2000). It continues to enjoy strong network effects. The most complex bits of global finance, including a huge mesh of derivatives, are generally dollar-based.

Moreover, potential rivals have drawbacks.

The euro is hobbled by structural and governance problems, not least the lack of a proper banking or markets union in the euro zone, and a dearth, relative to America, of risk-free financial assets such as German bunds.

Blockchains alone cannot overcome such flaws.

The yuan, too, has had false dawns.

The tightening of capital controls after a financial crash in 2015 put paid to brash predictions that it would overtake the dollar by the early 2020s.

Nevertheless, an inflection point has been reached.

Since Mr Trump began firing off financial ordnance, his targets have gone from merely musing about breaking free from the dollar to doing something about it, albeit tentatively for most. It is hard to see those efforts being wound down, even if America eases up.

A world in which the dollar is tested from several sides will be unpredictable. In the longer term, more balance among global reserve currencies may make the global monetary system less vulnerable to shock.

And the dollar’s current pre-eminence is not an unalloyed good for America: it distorts the currency’s value (upwards) and market interest rates (downwards).

In the interim, however, the new era of monetary experimentation carries three big risks.

First, a further escalation of sanctions could cause a financial shock, for instance if China’s giant banks, which together have over $1trn of dollar assets, were targeted.

The second worry is that the more politicised America’s financial hegemony becomes, the less reliable it will be in its long-standing role as a lender of last resort to offshore dollar-based financial markets and banks.

The third is that transitions in the global monetary order are inherently unpredictable.

Some economists believe the Depression was partly caused by the absence of a hegemon to steady the world economy. Mr Trump’s upping of the financial pressure will have repercussions far beyond Tehran or Moscow.


The Federal Reserve is the cause of the bubble in everything

We know from experience that liquidity-fuelled asset markets usually end badly

Michael Howell


It’s liquidity, stupid. Rephrasing the words of Bill Clinton’s adviser James Carville helps explain why many stocks are hitting record highs, why gold is breaking higher and why economies look set to rebound sharply this year.

About a year ago we described how modern financial systems have grown dependent on central bank balance sheets, and why another round of easing from the US Federal Reserve — a “QE4” — was vital for markets.

Fed chair Jay Powell has so far proved sufficiently flexible to reverse the balance sheet shrinkage, to which his immediate two predecessors, Ben Bernanke and Janet Yellen, had been committed.

The “Fed Listens”, as the name of its tour of US cities suggests and, true to form, recent worries in the repo market spurred the central bank to inject a further $400bn into the financial sector.

It increased its balance sheet by about 10 per cent between last September and the year end.

Yet, the Fed’s spin-doctors are trying to persuade us that this is not quantitative easing.
Certainly, it has not involved direct buying of US Treasury notes and bonds, but it has still led to a sizeable uptake of short-term Treasury bills.


The difference between QE and “not QE” is mysterious, then, because liquidity has expanded and, in the process, relieved funding pressures and reduced systemic risks.

As a result, the prices of haven assets, such as the 10-year US Treasury note, have fallen, while risky assets such as equities have gone up.

Gold has put on nearly one-third.

We measure liquidity through the funds that flow through both the traditional banking system, and through the repo and swap markets. The global credit system increasingly operates through these latter wholesale markets, and often with the active participation of central banks.

For some years now, the wholesale money markets have been fuelled by vast inflows from corporate and institutional cash pools, such as those controlled by cash-rich companies, asset managers and hedge funds, the cash-collateral business of derivative traders, sovereign wealth funds and foreign exchange reserve managers.

Today, these pools probably exceed $30tn and have outgrown the banking systems, as their unit sizes easily exceed the insurance thresholds for government deposit guarantees. This forces these pools to invest in alternative short-term secure liquid assets. In the absence of public sector instruments such as Treasury bills, the private sector has had to step in by creating short-term vehicles known as repurchase agreements, or repos, and asset-backed commercial paper. The repo mechanism bundles together “safe” assets such as government bonds, foreign exchange and high-grade corporate debt, and uses these as security against which to borrow.

While credit risk is to some extent mitigated, the risk of not being able to roll over or refinance positions remains.

At the same time, markets have remained fixated on policy interest rates, which are supposed to control the pace of real capital spending and, hence, the business cycle. That, at least, is what the textbooks tell us. But the world has moved on. We must think of western financial systems as essentially capital re-distribution mechanisms, dominated by these giant pools of money that are used to refinance existing positions, rather than raising new money. New capital spending has itself become eclipsed by the need to roll over huge debt burdens.

If debts are not to be reneged upon, they must either be repaid or somehow refinanced.

However, not only is much of the new debt taken on since the 2008 financial crisis unlikely to be paid back but, more worryingly, it is compounding ever higher. Our latest estimates suggest that world debt levels now exceed $250tn, equivalent to a whopping 320 per cent of world gross domestic product — and roughly double the $130tn pool of global liquidity.

This refinancing role means that quantity (liquidity) matters more than quality (price, or interest rates). Central banks play a key role in determining liquidity, or this funding capacity, by expanding and shrinking their balance sheets, and in the US, of course, this is closely linked to the Fed’s QE operations. Consequently, more and more liquidity needs to be added to facilitate the re-financing of the world’s debt.

QE is here to stay. We should expect QE5, QE6, QE7 and beyond.
Take a step back, though. A rising tide of liquidity floats many boats, but we know from experience that liquidity-fuelled asset markets usually end badly, as they did in 1974, 1987, 2000 and in 1989 in Japan.

In this regard, the scale of recent Fed interventions needs to be understood.

Last year, US markets enjoyed their biggest effective inflow of liquidity in more than 50 years, by our measures.

That liquidity is already spilling around the world, with our global indices registering their sixth best year on record.So remember what former Citigroup chief Chuck Prince said about “still dancing”, on the eve of the 2008 crash.

Enjoy the party, yes.

But dance near the door.


The writer is managing director of CrossBorder Capital

The Department Store of the Future Will Look a Lot Like the Past

Department stores were once the cutting edge of retail. Can they reclaim some of their old magic?

By Justin Lahart


Department stores were once the cutting edge of retail, blamed for hurting smaller retailers. Here, the gift section of a Sears and Roebucks department store in Morton Grove, Ill., in 1961. Photo: Associated Press


The department store transformed America. Now some of the very forces that fueled its rise have been turned against it. The only way out may be for it to recapture something of its past.

In an era in which online stores such as Amazon.com are battling with giants like Walmartand Targetto offer customers anything under the sun, shopping at a department store for many Americans is almost quaint. Retail sales figures from the Commerce Department this past week showed that overall U.S. department store sales were down 7.2% in November and December from a year earlier.

The holidays were especially unkind to struggling J.C. Penney,which earlier this month reported that sales at stores open for more than a year fell 7.5% in the nine weeks that ended Jan. 4 from a year earlier. When Macy’sreported that comparable store sales were down just 0.6% on the year in November and December on the year, it was taken as a win—analysts had expected a much sharper decline.


But department stores were once the cutting edge of retail. From their beginnings in the latter half of the 19th century, they reshaped U.S. commerce, changing the shopping experience: Before their advent, customers would have to ask a clerk to fetch what they wanted and often haggle over the price.

By dividing what they sold into departments, they were able to offer customers all of their needs under one roof while allowing them to better track sales and inventory. As the buying power of the department stores increased, they were able to cut out the jobbers, or middlemen, upon whom they had once relied.

Many merchants struggled to compete, and an anti-department store movement spread.

“Department stores were reviled by small retailers that saw them as competing unfairly,” says University of Essex historian Vicki Howard, author of “From Main Street to Mall: The Rise and Fall of the American Department Store.” Small stores’ problems only became more acute with the advent of mail-order houses such as Sears, Roebuck and Company and Montgomery Ward, which both went on to become department stores themselves.

Department stores reshaped not only retail, but culture, providing common spaces where women, in particular, could meet — and work — outside of the home. Such was the power of the department stores that in the late 1930s they successfully spearheaded an effort to move Thanksgiving earlier in order to lengthen the holiday shopping period from Black Friday to Christmas.

But a century after department stores’ rise, massive outlets like Walmart’s supercenters introduced economies of scale and deep discounts that department stores struggled to match. Their market share began to sharply deteriorate in the 1990s. Starting in the 2000s internet retailers created a fresh competitive threat, just as the mail-order houses had at the turn of the previous century.

In 1992, department stores captured 14.3% of overall retail sales, excluding gasoline station and motor vehicle dealer sales, according to the Commerce Department. The list of department stores that have failed since then is long, including Alexanders, Caldor, Bradlees and Montgomery Ward. Last year Bon Ton and Sears Holdingboth filed for bankruptcy. Then there are the dozens of regional stores, such as Detroit’s J.L. Hudson Company, and scores of stand-alone stores, that have been felled. Last year, department stores’ retail sales share came to just 3.7%.

But department stores’ flagging fortunes may not stem simply from their inability to match supercenters and internet retailers on price and convenience. One other thing that set department stores of yore apart from their competition is that they were destinations in themselves. They turned shopping into something people actually enjoyed doing. Customers would spend hours lingering in the aísles.

“Were major department stores to focus on what makes the store magical from the windows to the upper floors, they could get the business back,” argues Burt Flickinger, managing director of consulting firm Strategic Resource Group.

Cowen & Co. analyst Oliver Chen believes that in addition to creating the types of experiences that draw customers in, department stores need to put more effort into curating what they sell in order to differentiate themselves. In an era when shoppers can easily check their phones to see what your competitors have on offer, looking the same as everyone else doesn’t work. “The underlying issue is, how does the store function in a world where everything is available online,” says Mr. Chen.

To varying degrees, department stores have been working to recapture their old magic.

Nordstrom has invested heavily in the look of its stores and offers products that are often hard to find elsewhere. It has also introduced services to encourage customers to linger, like the two bars (one in the women’s shoe department) it has in the flagship store it opened in New York last year.

Macy’s has been closing underperforming stores, remodeling the ones that are doing well, and introducing concepts such as Story, a store within the store that changes its merchandising theme ever few months . Despite its limited resources—it is saddled with about $4 billion in debt—J.C. Penney is experimenting with new ideas in a remodeled store in Hurst, Texas.

In an era where a simple click can whisk all manner of things to customers ‘doors, there is no telling whether such efforts to remake the department store into a destination will work. But the alternative—doing nothing—will only hasten department stores’ demise.

Has the World Economy Reached Peak Growth?

Whether or not the 2010s were a "lost decade," one thing is clear: many countries fell short of their potential, possibly squandering their last best shot of registering strong GDP growth. In the decade ahead, demographic realities will catch up to China and the West, and the world will need a productivity miracle to offset the effects.

Jim O'Neill

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LONDON – At the start of a new decade, many commentators are understandably focused on the health of the global economy. GDP growth this decade most likely will be lower than during the teens, barring a notable improvement in productivity in the West and China, or a sustained acceleration in India and the largest African economies.

Until we have final fourth-quarter data for 2019, we won’t be able to calculate global GDP growth for the 2010-2019 decade. Still, it is likely to be around 3.5% per year, which is similar to the growth rate for the 2000s, and higher than the 3.3% growth of the 1980s and 1990s. That slightly stronger performance over the past two decades is due almost entirely to China, with India playing a modestly expanding role.

Average annual growth of 3.5% for 2010-2019 means that many countries fell short of their potential. In principle, global GDP could have increased by more than 4%, judging by the two key drivers of growth: the size of the workforce and productivity. In fact, the 2010s could have been the strongest decade of the first half of this century. But it didn’t turn out that way. The European Union endured a disappointing period of weakness, and Brazil and Russia each grew by much less than in the previous decade.

The prospects for the coming decades are not as strong. China’s labor-force growth is now peaking, and the populations of Japan, Germany, Italy, and other key countries are aging and in decline. True, some countries and regions that underperformed in the teens could now catch up; but much will depend on the realization of several positive developments.

For example, given the EU’s demographics, it would take a significant improvement in productivity to boost the rate of GDP growth. More expansionary fiscal policies in many countries – including, possibly, Germany – could produce a temporary acceleration this year and perhaps through 2021. But it is hard to see how a stimulus-driven expansion could be sustained much beyond that point. Europeans can talk all they want about “structural reform.” But without effective productivity-enhancing measures, the EU’s growth potential will remain in decline.

As for Brazil and Russia, it would be highly disappointing if both countries were to register the same weak growth of the past decade. Yet, to get from around 1% annual growth to 3.5-4% annual growth would probably require another commodity-price boom, in addition to major productivity enhancements. Given that both countries tend to eschew reform whenever commodity prices are booming – a classic symptom of the “commodities curse” – it is doubtful that either will reach its potential this decade (though, if one had to bet, Brazil has a better chance than Russia).

In China, a further deceleration in trend GDP growth is highly likely, owing to demographic realities. When I offered my earlier assessment of the BRICs (Brazil, Russia, India, and China) at the start of this century, it was already clear that by the end of the 2010s, China would be feeling the growth-constraining effects of a peaking workforce.

Accordingly, I estimated that its real (inflation-adjusted) annual GDP growth in the 2020s would be around 4.5-5.5%. To achieve growth above that range would require a significant increase in productivity. In light of China’s investments in technology and shift to more domestic consumption, productivity certainly could improve. But whether that will be enough to overcome China’s other well-known challenges remains to be seen.

For its part, the United Kingdom could achieve stronger growth this decade, but it could also suffer a slowdown, depending on how it deals with Brexit and its aftermath. In any case, the country’s influence on global GDP is likely to be modest.

Then there is the United States, where annual growth potential appears to be just over 2%. Without more fiscal stimulus and an indefinite continuation of ultra-easy monetary policies, it is difficult to see how the US could exceed this rate. Moreover, it has been more than a decade since the US experienced a recession. Were that to happen in the months or years ahead, the US would have an even smaller chance of reaching its growth potential for the 2020s.

Last but not least are the still-smaller economies with enormous growth potential. While countries such as Indonesia (and perhaps Mexico and Turkey) are becoming more relevant in an assessment of global GDP, it is India that promises to have the largest influence in the 2020s and beyond. The country’s demographics will remain in an economic sweet spot for at least another decade.

Were the Indian government to adopt the right mix of growth-enhancing reforms, it could easily achieve annual growth in the range of 8-10%. And, because India is already close to being the world’s fifth-largest economy, that would have a significant influence on global GDP growth. The problem, of course, is that the current government has shown no indication that it will pursue positive reforms. On the contrary, it has launched a debilitating new culture war.

That leaves Africa. As matters stand, no African economy is large enough to influence global GDP on its own. But, as a region, Africa’s GDP is close to that of India, which means that if enough of its major economies can achieve strong growth, the effects will be felt more broadly.

The rise of Africa seems both desirable and inevitable to me.

Whether the continent can drive global GDP growth will be a key question for the coming decade.


Jim O’Neill, a former chairman of Goldman Sachs Asset Management and a former UK Treasury Minister, is Chair of Chatham House.