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Friday, June 9, 2023

Why is the world de-dollarizing?

Why are so many countries all of a sudden turning to the yuan to buy their essential commodities? Why is the world de-dollarizing so quickly?

Simple — the Russian sanctions.

Russia is the biggest single commodity producer in the world — they have oil and gas, agro, minerals and anything else. But because of the sanctions, Russia cannot take dollars (or euros) for sales of their commodities.

First, the sanctions disconnected Russia from SWIFT, meaning Russians can’t pay for things they would want to buy with dollars.

So why would Russia take dollars for their commodities — if they can’t buy stuff with those dollars.

Plus their dollar assets get confiscated in the West. So why hold dollars, and dollar assets to park them in, if they will be stolen?

So because of sanctions, Russia has been forced to de-dollarize. Russia didn’t want to de-dollarize — they were obliged by the West.

But Russia still has to trade, because it still has to acquire things it cannot produce at home, and still has a surplus of commodities with which to acquire these foreign goods.

Apart from the West, Russia’s major trading partners are China and Bharat.

So it makes sense for Russia to sell its commodities in yuan and rupees: Sell oil/agro/gas in yuan, and buy Chinese goods with those yuan. Same with Bharat.

But why are other countries signing treaties to trade in yuan, like France and Brazil in the last few days? They’re getting ahead of the curve.

As more commodities trading takes place in yuan and rupees, the more demand for those currencies. Hence it becomes smart to cut a deal with China now — to fix an exchange rate of yuan.

In essence, these deals are longs on the yuan.

The effect is, these trade deals eventually lead to more de-dollarization—which becomes a self-reinforcing cycle, as dollars become less valuable (because they can buy less commodities) so more countries want yuan, leading to more de-dollarization, leading to a weaker dollar.

All this leads to the collapse of the dollar into hyperinflation.

The dollar was valuable because it was the currency in international commodities trade, which created the demand for dollars and dollar assets outside the US — thereby financing the enormous American debts.

With trade de-dollarization, there’s no longer as much demand for dollars overseas, leading to American domestic inflation and an inability to continue piling on debt.

Ultimately, the Federal Reserve will be forced to simply print — which will lead to dollar hyperinflation.

By the way, Russia didn’t cause this. The sanctions which triggered this worldwide de-dollarization was just the final straw.

It didn’t help that American leadership seems capricious and hysterical, making other countries very nervous that they might be sanctioned too.

(This article has been compiled from the tweet thread originally tweeted by Gonzalo Lira (@GonzaloLira1968) on March 30, 2023.)

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