2 - 4 minute read
The global currency system as we know it might be on the brink of massive changes. According to economist and NYU professor Nouriel Roubini, the strategic rivals of the United States, including China, Russia, and their allies, are preparing to move away from the dollar and create an alternative monetary system. Roubini explains that this would create a “bipolar” reserve currency system, posing significant economic implications for the US.
In recent interviews with Yahoo Finance and CNBC-TV18, Roubini emphasized that the tension between the US and China is becoming colder every day. He explained that China, which has over $1 trillion in reserves, will gradually propose the RMB as an alternative to the US dollar. The shift would happen over some time, but Roubini believes the process is already underway.
Roubini suggests that this trend would harm global growth and make the cost of production increase because countries would go from a unipolar to a bipolar global reserve currency system. This would lead countries to consider secure trade, friend-shoring, and just-in-case supply chains in place of free trade, offshoring, and just-in-time supply chains. The economist warned that these costly changes would reduce global growth and increase the cost of production.
Moreover, Roubini predicts that the worst of the severe banking stress in the US is yet to come as the country’s lending system can result in reduction in economic growth. This credit crunch could push the US economy into a recession later this year, according to Roubini.
The shift from the US dollar as the primary global reserve currency would lower the funding of America’s twin fiscal and current account deficits. Given the US’s already large public and private debt, this shift could push the cost of financing higher. Ultimately, traders must pay close attention to geopolitical conflicts and rumors of future currency shifts and respective countries’ currency instability.
The Bottom Line
Strategic rivals of the US are preparing to leave the US currency and create an alternative monetary system, leading us from a unipolar to a bipolar global reserve currency system. This steady shift could negatively impact global growth and increase the cost of production. The US banking system crisis is also expected to worsen, leading the US into a possible economic recession, which would be disastrous for traders. Given the instability of different countries’ currencies, traders must pay close attention to geopolitical conflicts and rumors of future currency shifts.