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Since the start of the war in Ukraine, prices are rising. They have been doing so already from the end of 2021 as the world was finding its way out of the pandemic (listen to the podcast here). But just as if this was not enough, the war is bringing another layer of uncertainty, a much more volatile layer, the kind that can inflame the globe and lead it to a path that the world had not experienced for several decades.

These rising prices are leading to uncertainty,

  • Uncertainty about devastation in Ukraine and the length/outcome of the conflict.
  • Uncertainty regarding the sanctions on Russia that are isolating its producers, major players and oligarchs.
  • Uncertainty about the gradual tightening of these sanctions, one week after another.
  • Uncertainty about supplies in oil, gas and other major raw materials.

Oil prices are back well above the $100 threshold. This is happening at the most unwelcomed time. The global economy has experienced unprecedented disruptions in the last 2 years, first because of the pandemic, and now because of the war.

The effects will be much deeper than first anticipated. These jumps in oil prices will eventually percolate all the way to the consumer, across a whole range of value chains. There is a domino effect quickly cascading through the whole economy globally and locally.

These unforeseen domino effects are what could be called second round effects. How much of these tensions will be passed down to the rest of the economy and how much of that transition will remain permanent?

One of the mechanisms that fuels imported inflation has to do with foreign exchange parities. The US$ has been over the last few decades the currency of reference for the payment of commodities, especially oil.

Over the last decades since the creation of the Bretton Woods system, the name of the game for the greatest majority of countries in the world has been to maintain a sufficient and proper level of currency reserves, which are usually mostly US$. In that regime of the global monetary system, a country’s stability and long term viability can be judged according to its capacity to accumulate a certain amount of hard currency reserves. This allows it to pay its energy bills. Rating agencies, like Standard and Poors, Fitch or Moody’s rely on that very simple criteria among many other elements. And the rest of the macroeconomic adjustments are geared to accommodate that very crucial point in the stability of a country. Just like a regular household, if a country cannot pay its energy bills, its food supplies and other basic necessities, then its whole stability is at risk. That has been the key focus of all macroeconomic policies around the world in the last few decades.

As a result, maintaining a stable parity of the national currency versus the key currency reserves, i.e the US$ and the Euro, remains of paramount importance. This can be achieved through a mix of long term, medium term and short term initiatives. The macroeconomic doctrine in most countries allows them to reach that long term and medium term stability. That is at least the belief that underlies the doxa expressed at the IMF and the world bank. The closer a country aligns itself to these principles, the more likely the central bank can maintain a stable parity of its currency versus the US$ and the Euro. This has been up to now, the way a country could build up credibility and trust with investors who would then lower the risk premium it would ask from the countries it is investing in. That increased trust would translate into a more stable currency versus the US$. That virtuous feedback  loop would then put the country on an upward spiral where even more hard currencies could pile up in the coffers of the respective central bank. The reserves held in the coffers of the central bank would then be used for exceptional short term interventions in order to stabilize the parity.

Reserves in hard currency play a major role and have been at the heart of how the world operates and has been operating for the last decades since the second world war. So, it just makes sense to pay attention to that topic. That’s how countries have bought raw materials, essential food products and energy supplies. Reserve currencies constitute a safety blanket that every single economy must have in order to ensure its basic survival.

The current conflict and the sanctions imposed on Russia is bringing the topic of reserve currencies to the forefront. We took it for granted for all these years, but all of a sudden, we can feel the cracks of the tectonic plates of the monetary system. It is shifting and it is about to be a paradigm shift.

So the current events lead us to several questions regarding reserve currencies. What is going to happen to the very notion of a reserve currency ? In fact, what does it really mean to be a reserve currency ? Will the current global institutions remain in place as they stand ? What kind of new body of decisions is even likely to emerge from the current turmoil ?

To answer these questions, I suggest we take a first look at the total amount of reserves in foreign exchange held by all the countries of the world as of today.

Out of the BRICS (Brasil, Russia, India, China, South Africa), the total reserves amount to USS$5 trillions. That’s a third of global reserves in Foreign Exchange as a whole.

What we are also noticing is how the total reserves in foreign exchanges are concentrated in 10 countries; China, Japan, Switzerland, Russia, India, Taiwan, Hong Kong, Taiwan, South Korea, Saudi Arabia and Singapore. These 10 countries alone hold ⅔ of the global foreign exchange reserves. So among these top 10 countries, you find the major BRICS countries. In fact, Brazil comes in 11th position at $362 billion in foreign exchange reserves.

Why am I telling you this?

It’s because the developments of the last few weeks are marking a tremendous inflexion in that monetary realm that we have been used to in the last few decades. Russia’s announcement on March 23 that it would only accept Rubles for settlement of its gas exports marks a turning point. It is very important information and it deserves further explanations.

Let me repeat what that information was. Russian authorities decided to ban the dollar and the euro to pay for the Russian gas that Russia exports. That measure just went into effect. It means that all the Russian gas exported to the European Union can no longer be paid for in euros or dollars. Russia is demanding that it be paid in rubles or Chinese yuan. That measure went into effect as a consequence of the sanctions announced against Russia a few weeks earlier.

So this is very important information. You have to realize that since 1945, we are in a universe resulting from the 2nd World War. The post World War II brought the Bretton Woods agreements. These are the agreements that established the dollar as the main currency of the world, a reserve currency, or if you prefer, you can define it as a settlement currency. This privilege given to the dollar was subject to discipline on the part of the United States of America. Thanks to that discipline, it would allow the dollar to be “as good as gold”, and therefore could be exchanged at any time. The paper dollars could be exchanged at any time for gold which was in the coffers of Fort Knox in the United States. And it could be exchanged around $35 for an ounce of gold, that is to say for 31 g. However, that characteristic of “as good as gold” lasted up to a certain point. That is, up to the Vietnam War.


As soon as holders of US$ realized that gold could not be converted into gold, they started considering a withdrawal of these reserves. Right at the same time, President Nixon realized the risk of not being able to convert these US$ in circulation into gold, and he suspended that convertibility on August 15, 1971.

Let’s review what really happened because it will inform you about the current events, and why they are unfolding the way they do.

This system was therefore shattered at the beginning of the 1970s, on August 15, 1971 to be precise with the end of the Bretton Woods agreements, at least part of them, that is to say the free convertibility gold dollar.

So how did that happen?

Throughout the 1960s the United States had been running more and more deficits, and had in fact become unable to repay their dollars in Gold. We began to live in a fiction. In fact, the United States had already created far more dollars than there was gold in its coffers. So the US$ was a currency that was actually sitting on a simple belief. And obviously beliefs can be called into question at any time. So that’s why on August 15, 1971, President Richard Nixon suspended, in fact abolished, the free convertibility of the dollar into gold. That meant you could still buy gold with dollars, but that also meant that this convertibility at a fixed rate of $35 for an ounce no longer existed from that moment on.

And it was at the Jamaica conference in 1976 that gold became demonetized. Gold had already been quoted on international markets as a raw material and therefore its price had evolved significantly upwards. But what is very important to understand is that the dollar and the West in general continued to depend on that belief system. Even if the dollar was no longer convertible into gold, it was an extraordinary acquired advantage for the West and for the United States in particular. Having a national currency that served as the currency of account and reserves was an extraordinary advantage.

It was so important that De Gaulle had pointed it out in the mid 60s on the advice of Jacques Rueff, one of the greatest economists of the time. Because if you have a currency that is accepted around the world as a currency of payment and as a reserve currency, you need a guiding rail that brings you back to reality, a third rail so to speak, that would prohibit you from issuing it in excess of the gold available, since it has to be convertible into Gold. If you no longer have this third rail, it becomes very easy to create US$ as much as you want, more and more dollars, and even more dollars. This is in fact what happened from the 1970s. De Gaulle called this the “deficit without tears”.

In fact, go back to that movie that I had mentioned a few weeks ago. At the 50th minute of that movie called “Roll Over”, one of the main characters says something that summarizes hundreds of pages of monetary theory. In just 20 seconds, the whole monetary world was summarized.

So now that I painted that backdrop, I advise you to go back to the list of countries that hold US$ as reserve currencies. It’s worth engaging in a reflection that could guide us into understanding what decisions these countries could take with these reserves.

The reason why I am mentioning this is because it appears that we are entering a new phase of monetary history. It’s unfolding as we speak, right in front of us, in slow motion. Even the head of the IMF is recognizing it.

We’ll get back to these topics in the next posts. Let me know what you think and looking forward to hearing your comments.

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