If you have not listened to it already then I can highly recommend this podcast in which Grant Williams interviews Luke Gromen. The podcast covers a lot of ground but the primary focus is the role of the USD in the international financial system in the aftermath of the sanctions imposed on Russia in response to its invasion of Ukraine. I have an understanding of pieces of the puzzle but this interview put them together in ways that I had not fully grasped or seen before.
It is far from clear what comes next for the international financial system in general and the USD in particular. The much discussed demise of the USD may be too apocalyptic but it seems reasonably certain that the status quo is going to change – here is a short summary of some of what the interview offers:
- The first 20, minutes offers a short history of the Bretton Woods arrangements that have defined international finance since the late 1940s including the transition from a system based on the USD being based on gold (Bretton Woods 1) to a system where the USD is based on oil (Bretton Woods 2)
- They discuss how the current regime (“keeping the dollar as good as gold for oil”) is breaking down, analogous to the way the gold foundation broke down in the early 1970s
- John Maynard Keynes gets an honourable mention for his “bancor” reserve currency proposal which was not adopted but might be worth revisiting (nice historical anecdote that the Governor of the Bank of China suggested this in March 2009)
- The USD’s role as an international reserve currency has been described as an “exorbitant privilege” but Gromen argues that the arrangement has also come at a cost via the role it has played in the loss of US domestic manufacturing capacity (Triffin’s Dilemma).
- The consequences of this trade off has come under greater attention post the GFC, initially as the social consequences of lost jobs started to impact domestic politics, and more recently as globalised just in time supply chains struggled to respond to the economic shocks created by the response to Covid 19
- Gromen argues that the USD Department of Defence has wanted to see repatriation of the US industrial base for some time and hence will be happy to see a decline in the USD’s role as an internal reserve currency because they believe it will enhance national security
- Interestingly he argues that it would have looked like weakness for that to happen as a consequence of pressure from China and Russia but can now be presented as a sign of strength, of standing up to Russia (“we showed those Russians”)
- They also discuss what this means for the price of gold
Hopefully I have done a decent job of capturing the key themes but there is a lot here and some may have been lost in my translation so by all means listen yourself. Personally I need to do a bit more research to better understand the references in the interview to the “Triffin Dilemma” and to Keynes’ “bancor” proposal.
Tony – From the Outside