At the Boao Forum for Asia Annual Conference in China, Malaysian Prime Minister Anwar Ibrahim called for a revival of discussion for the creation of the Asian Monetary Fund (AMF). The call was to reduce reliance on the Dollar, the International Monetary Fund (IMF), and the World Bank. Shortly after the Asian Financial Crisis of 1997, Japan proposed the creation of the AMF.
Asia did not create the AMF because China was skeptical, and the U.S. and European-led IMF and World Bank were uninvolved. The financing was not available. However, China’s economy has grown exponentially, and the geopolitical situation has changed significantly since 1997. China is now leading the international push for de-dollarization. The idea of two world economies is quickly becoming a reality. When we try to understand how we got to the current geopolitical divide between East and West, the Asian Financial Crisis of 1997 sheds some light on why the world is de-dollarizing.
Thailand's crumbling economy sent shockwaves through the Asian markets. In July 1997, Thailand devalued its currency against the Dollar following months of economic pressure that depleted its official currency reserves. Soon after Thailand's currency devaluation, Malaysia, the Philippines, and Indonesia devalued their currencies. Foreign investments dried up, which tightened liquidity markets across the region. Pressures mounted so that South Korea almost defaulted. It was a mess across the entire region.
Japan proposed the AMF as a solution on the back side of the crisis. The Association of Southeast Asian Nations (ASEAN) countries overwhelmingly supported the proposal, but China was skeptical. In September, the Hong Kong IMF held a vote. Europe and the United States voted the idea down. Without access to liquidity, Asian nations felt betrayed and isolated from the Western economic machine.
The Asian nations didn’t have access to Dollar Swaps, usually called swap lines. Swap lines are a lending instrument between central banks when member banks have liquidity issues. Swap lines are short-term currency exchanges for short durations, like seven days, but can be longer. The Federal Reserve has open swap lines with the European Central Bank, Bank of Japan, Bank of England, Bank of Canada, and the Swiss National Bank.
When Credit Suisse Bank had liquidity issues in October, the Federal Reserve sent $6.27B to Switzerland via a swap line . Large Asian economies like China, India, South Korea, Saudi Arabia, Iran, Indonesia, and Russia don’t have access to the swap lines, and all those nations are moving toward de-dollarization.
The global economic crisis of 2008 was another thorn in Asia's side. The situation was created by Western nations' mismanagement of debt instruments, but the Asian countries didn't have access to swap lines. However, the five authorized central banks received $620 billion in dollar swaps in 2008. Allied banks were given the means to solve and prevent further crises, but unallied banks were not given any help. The U.S. and Europe let Asia suffer in 1997 and 2008 from problems the Dollar created being the reserve currency. Understandably, every nation would want access to the primary reserve currency for liquidity and look for alternatives when access is blocked.
What the West calls sanctions, the rest of the world calls weaponization of the Dollar. In 2014, Russia invaded Crimea. The Obama administration placed severe sanctions on Russia, and nations began de-dollarizing their economies. Russia systemically de-dollarized its economy and increased its gold buying. Eight years later, it invaded Ukraine again. Also, Russia built a system to compete with the SWIFT banking system, the SPFS, to protect itself.
SWIFT (Society for Worldwide Interbank Financial Telecommunication) is an international messaging system between banks. Sanctions are imposed on countries by cutting off their access to SWIFT. Following the Ukrainian invasion in 2022, the international community, led by the U.S., placed unprecedented sanctions on Russia through SWIFT. In response, Russia stopped reporting member banks of the SPFS. Reuters reported 2022 saw the most significant growth of the SPFS, with now more than 440 member banks, including full integration with Iran.
The world is losing confidence in the U.S. Dollar as a stabilizing currency. Since the Federal Reserve began raising interest rates last year, the world has been playing catch up. As U.S. interest rates rise, the Dollar strengthens against other currencies, meaning a lower standard of living for people trading in different currencies. Recently, regional U.S. banks have suffered liquidity issues that created a global banking scare and ultimately the final straw catalyst in the collapse of banking giant Credit Suisse. Resentment is growing toward the Dollar. The U.S. has known for a long time that the day would come when confidence would dwindle. China recently posted a manifesto against the Dollar on its government website. China quoted President Nixon's Treasury Secretary John Connally, "the Dollar is our currency, but it is your problem."
What Does it Mean?
The West has been sticking to Asia for decades. As the Asian economies grow and become more sophisticated, it makes perfect sense they want a seat at the international economic table. The proposal to create the AMF as an alternative to the IMF is logical. The BRICS (Brazil, Russia, India, China, and South Africa) have already established the New Development Bank (NDB) to fund development in BRICS nations. As the BRICS, ASEAN, Middle Eastern, and Shanghai Cooperation Organization nations form an economic alliance to compete with the Western economy, they will want an international financing operation independent of Western influence. The AMF would be a source of liquidity to the frequently ignored and struggling emerging economies in the South Pacific.
It's not good for the Dollar, but the actions are an understandable reaction to decades of unfavorable policies. Anything not good for the Dollar usually bodes very well for precious metals. Precious metals are commodities, so their prices are strongly correlated to the strength of the Dollar. As the Dollar loses purchasing power, precious metal prices increase. In general, the Dollar is still very strong compared to other currencies. Still, gold prices are near all-time highs. If gold is flirting with all-time highs while the Dollar is still relatively strong, what could the gold price be when the world fully splinters into two economies?
More developments are needed before the end of the king Dollar, but de-dollarization is rapidly expanding and risks increasing. The risk of global de-dollarization is inflation. The U.S. has printed a lot of cash since 1971, but most is outside the American supply. Most Dollars that exist are stored as a reserve in foreign central banks. According to the Federal Reserve of St. Louis, 2/3 of all $100 bills are in foreign accounts.
Since 1971, the money supply has expanded by 2,973%, but the total inflation is only 645.27%. Population expansion and technological advancements have occurred so the numbers may differ slightly. Whatever the exact math turns out, there is still an enormous disparity between the expansion of the money supply and the inflation Americans have experienced. If those banks decide to hold a different reserve, like Chinese Yuan or gold, those $100 bills get sent back to the U.S.
Are you ready for another wave of inflation and high-interest rates?
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