The Geopolitical Consequences of a DeDollarized World

In a small village nestled between two great nations, a wise yogi named Krishnamacharya tended the sacred river that flowed through the heart of the village. For generations, the river had symbolized the harmony between the kingdoms, its gentle flow a reminder of the delicate balance of power.

One fateful day, a trusted advisor to the king of the larger kingdom, fueled by ambition and greed, betrayed the king's trust and forged a secret alliance with a rival kingdom. The advisor's deceit sparked a chain reaction of events, like ripples on the river's surface.

The smaller kingdom, feeling threatened, fortified its borders and prepared for war. The larger kingdom, blinded by the advisor's treachery, failed to recognize the impending danger. As tensions escalated, the river's tranquil flow began to churn and swirl.

Krishnamacharya, sensing the discord, stood on the riverbank and declared, "The Great River has changed its course!" The villagers, confused, looked on as the river's waters began to shift, carving a new path through the landscape.

The kingdoms, now at war, realized too late that their conflict had altered the overall balance of power. The river's unexpected turn had become a metaphor for the unpredictable consequences of geopolitical betrayal.

Rivers shift you see. And when they do, the very power that you are proud of withers away.

So use your power very carefully!

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How Plundered Gold from Plassey Changed the World and the West

As June ended in 1757, one of the richest provinces in India, Bengal's wealth lay there with Siraj-ud-Daullah having lost the war to Robert Clive.

He sent ships loaded with gold and silver coins to Britain via Calcutta.

In 1763, one of the ships carrying the loot that Robert Clive had accumulated from India was on a ship called "Lord Clive". It sank off the coast of Uruguay.

In 1763, a British ship named Lord Clive was sailing off the coast of what's now Uruguay. The ship was allegedly stocked with massive amounts of rum, as well as treasure chests full of gold and silver coins. During a raid, Spanish troops attacked the city of Colonia del Sacramento with cannon fire. The Lord Clive was struck in the bombardment, and went down. And so did all the ship's treasure. In 2004, the Lord Clive was located underneath some rocks at the bottom of the River Plate. Despite knowing where it was, the Uruguayan government has never permitted anyone to recover the ship — until now. Rubén Collado is an Argentinian treasure hunter who is attempting to salvage the shipwreck. With permission from the Uruguayan government, Collado is looking for investors to fund the mission. Recovering the ship will be expensive, but tales of the legendary treasure are an alluring pitch. (Source: Sunken Ship Full of Treasure Lies Off Uruguayan Coast / King 5)

That money plundered and sent over to England became the basis for the industrial revolution. Without the treasures looted from India, the world would have never known the change that occurred post-1760. All on the back of the Indian wealth.

In fact, Brooks Adams, grandson of John Quincy Adams (the 6th, US President) and great-grandson of John Adams (the 2nd US President), wrote in his book about the impact of Indian money in this way. (On page 317)

"Possibly since the world began, no investment has ever yielded the profit reaped from the Indian plunder, because for nearly fifty years Great Britain stood without a competitor."

In fact, it won't be wrong to say that today's world, that we see, is largely shaped by the looted gold from India.

That became the basis for also establishing the US Dollar as the reserve currency during the Bretton Woods. A system that was based on Gold reserves with US Dollar as the reserve currency.

A system that one economist felt was doomed to fail.

The Triffin Dilemma - Warning of the Inevitable DeDollarization

In early 1960s, a Belgian American economist named Robert Triffin identified an interesting dilemma. He shared that in his 1960 book, Gold and the Dollar Crisis: The Future of Convertibility.
He announced that the Bretton Woods system was doomed. It was destined to fail!

He highlighted that the post-World War II strategy of injecting dollars into the global economy, particularly through initiatives like the Marshall Plan, was undermining the gold standard. Triffin advocated for the creation of new international reserve units that would not rely on gold or any single national currency. Instead, these units would enhance global liquidity and stabilize the international monetary system.

The Bretton Woods Agreement was established in July 1944 during the United Nations Monetary and Financial Conference held in Bretton Woods, New Hampshire. This agreement laid the foundation for the international monetary system that operated from the end of World War II until the early 1970s.
Countries agreed to peg their currencies to the U.S. dollar, which in turn was convertible to gold at a fixed rate of $35 per ounce. This established the U.S. dollar as the primary global reserve currency.

The Nixon Shock and the Petrodollar

The Bretton Woods system functioned effectively until the early 1970s when increasing U.S. deficits and growing international demands for gold led to its collapse. In 1971, President Richard Nixon announced the suspension of gold convertibility. It was called the "Nixon Shock."

The US was experiencing growing trade deficits in the 1960s and the 70s. More goods were being imported than the US could export. So more net dollars were going out. This led to a highly inflationary scenario. Spending on domestic social programs and the Vietnam War added to the woes.

As the other countries accumulated more dollars, they started demanding gold in exchange instead, since the dollar was convertible to gold. The first crack appeared in July 1971 when Switzerland redeemed $50 million worth of its dollar holdings for gold bullion from the U.S. Treasury. Soon after, France followed suit, acquiring $191 million in gold.

These redemptions were a vote of no confidence in the dollar's value and a harbinger of more serious troubles to come for the Bretton Woods system of fixed exchange rates.

Sensing the growing crisis, the US establishment worked out its options. It recommended devaluing the dollar against gold as a measure to defend the currency against "foreign price-gougers."

The implicit admission was that the dollar had become overvalued relative to the nation's diminishing gold stockpile. A devaluation would restore the dollar's credibility and discourage further redemptions by making the existing gold reserves go further.

The US was basically in a devastating position. Something that the Congressional recommendation clearly admitted.

However, this congressional recommendation highlighted the untenable position the U.S. found itself in as an issuer of the world's reserve currency. Maintaining confidence in the dollar was becoming increasingly difficult under the Bretton Woods system's constraints.

The stage was set for a seismic shift in global monetary policy as the rift between the dollar's domestic and international roles could no longer be reconciled.

Where economics failed, weapons came in handy!

And so, just in a few months in 1973, a deal was struck with the Saudis to sell oil only in US Dollars. The other countries had to follow suit.

The lack of convertibility to gold  and high inflation rates resulted in a lack of trust and a declining demand for U.S. dollars on the world market and a falling exchange rate. In an effort to shore up demand for the dollar, in 1973 Nixon struck a deal with Saudi Arabia that they would denominate all oil sales in dollars and in exchange the U.S. would supply weapons and protection to the Saudis. This system of requiring oil sales to be performed in dollars increased the demand for dollars (since everyone needs oil) and became known as the “Petrodollar”. These petrodollars not only increased demand for the U.S dollar but also allowed the U.S. to export its inflation as these dollars never return to the U.S. but instead are used strictly for foreign trade. By 1975, all of OPEC had agreed to denominate all oil sales in Dollars in exchange for weapons and military assistance. So through a combination of Roosevelt’s Bretton Woods agreement and Nixon’s petrodollar scheme the U.S. dollar has been the standard for 70 years now. (Source: Oil, Petrodollars and Gold / Inflation Data)

How was it put in place? By the sheer threat of war. While Saudi Arabia's "security" was backed by US weapons, any act of selling oil in any currency other than the US Dollar was deemed as an "act of war."

From then on, war became the only language that the United States establishment understood.

Until 9/11, War was used to establish the US Dollar as the reserve currency. And when the USSR had disintegrated and the US became the sole superpower, US Dollar itself became a weapon!

In her book Paper Soldiers: How the Weaponization of the Dollar Changed the World Order, Bloomberg News correspondent Saleha Mohsin unpacks the power of the US Dollar.

If one looks at things closely, from then on, even the phrase "Rules-based Order" really meant an 'Order' where the US Dollar reigned supreme. That was the Global Order that the West was working hard to hoist on the world.

In August 2023, almost 53 years to the date when Richard Nixon abandoned the Bretton Woods system leading the way to the petrodollar world, India made a small trade effectively cocking a snook at American supremacy itself.

A seemingly harmless action that was, as the US would call since 1973 - an act of war!

This was preceded by a threat from the Saudis to ditch the petrodollar.

Saudi Arabia is threatening to sell its oil in currencies other than the dollar if Washington passes a bill exposing OPEC members to U.S. antitrust lawsuits, three sources familiar with Saudi energy policy said. They said the option had been discussed internally by senior Saudi energy officials in recent months. Two of the sources said the plan had been discussed with OPEC members and one source briefed on Saudi oil policy said Riyadh had also communicated the threat to senior U.S. energy officials. (Source: "Exclusive: Saudi Arabia threatens to ditch dollar oil trades to stop 'NOPEC' - sources" / Reuters)

The No Oil Producing and Exporting Cartels Act (NOPEC) bill was however not been passed till date.

This assertion of trading oil in other currencies was reiterated by Saudi Arabia’s Finance Minister, Mohammed Al-Jadaan at the World Economic Forum at Davos from 16–20 January 2023.

Saudi Arabia’s Finance Minister, Mohammed Al-Jadaan, stunned reporters in Davos in January when he expressed that the oil-rich nation was open to trading in currencies beside the U.S. dollar for the first time in 48 years. “There are no issues with discussing how we settle our trade arrangements, whether it’s in the U.S. dollar, the euro, or the Saudi riyal,” Al-Jadaan said. (Source: Saudi Arabia says it's 'open' to the idea of trading in currencies besides the US dollar / Yahoo News)

Behind the scenes, the US has been putting a lot of pressure on the Saudis to not ditch the US Dollar.

The United States is negotiating behind the scenes with Saudi Arabia, pressuring the country to keep selling its oil in dollars. Washington is concerned that Riyadh may price its crude in other currencies, particularly China’s renminbi. Saudi Arabia is one of the world’s top three oil producers. Since the 1970s, Riyadh has agreed to sell its crude in dollars, helping maintain the greenback’s hegemonic status as the global reserve currency. The Wall Street Journal reported that the US is working on a diplomatic deal in which Saudi Arabia would agree to normalize relations with Israel’s apartheid regime. In return, Riyadh wants Washington to pledge to always protect it, as well as help in developing a nuclear program. Although the negotiations are ostensibly about Israel-Palestine, the Wall Street Journal noted that the US is using the deal to pressure “Saudi Arabia to impose limits on its growing relationship with China”. (Source: "US pressures Saudi Arabia to sell oil in dollars, not Chinese yuan, amid Israel negotiations" / Geopolitical Economy)

As the world changes in terms of the US Dollar and its impact on the world, gold again takes center stage.

Gold and India - a close bond for centuries

In recent months, India's RBI brought home over 100 tons of gold from the UK to its domestic vaults in India. This marks the first significant transfer of gold reserves on such a scale since 1991.

The move is being couched as being part of a broader strategy to diversify storage, save on storage costs, and manage logistical considerations.

As of March 31, 2024, the RBI held 822.1 tonnes of gold, with approximately half stored domestically and the other half overseas. The recent transfer increased the gold held domestically to over 408 tons.

Now, the basis of this goes back around 30 years.

In 1990-91, during a money exchange crisis, India promised some of its gold to the Bank of England to get a $405 million loan. The loan got paid back by November 1991, but the RBI (Reserve Bank of India) decided to keep the gold in the UK.

This choice was made because it's easier to use the gold for trading, making deals, and earning returns when it's kept abroad.

Since the RBI also buys gold from around the world, keeping the storage overseas sometimes helps with these deals.

But all this comes with a risk. Yes, one saves money, but the way the Western powers have been increasingly working these days, keeping money and gold in the vaults in Western countries can prove to be suicidal for a country.

During times of political tension, these risks come to haunt the countries.

For example, recently Western countries froze Russian assets, raising worries about the safety of assets kept abroad. The RBI's move to bring gold back from the UK probably shows these worries.

But it also underscores one more thing. The basis of currency and global reserves may be changing. And gold may be the only risk-free go-to basis. This is reinforced by the fact that India has been on a gold-buying spree.

The RBI has ramped up its gold purchases significantly. In just the first four months of 2024, the RBI bought one and a half times the gold it acquired in the entire previous year. This aggressive buying is partly due to a decline in confidence in dollar assets among central banks globally. Data from the US Treasury Department shows that non-US central banks' holdings of US Treasury bonds have dropped from 49.8% in March 2023 to 47.1% in March 2024. In FY24, the RBI added 27.47 tonnes of gold to its reserves, increasing the total from 794.63 tonnes the previous year. This move is part of a broader strategy to diversify foreign exchange reserves and hedge against inflation and currency volatility. (Source: "What made RBI move 100 tonnes of gold from UK to its vaults? Here's an explainer" / Business Today)

Currently, the top 10 countries by gold reserves is this. It is always changing but it gives a good indication of the major holdings.

But this is only part of the story. The real factor here is the Indian households. As per the latest figures, they hold as much as 27,000 tons of gold.

What does that mean?

More than reserves of the US, Germany, Italy, France, China, Switzerland, Japan, and the Netherlands combined!

This is significant. Because in the just concluded 2024 elections, the Congress Party which forever looks to loot India in the vein of Robert Clive, again betrayed their plans for India. In a country where the household wealth in gold would be a tempting attack point, any unscrupulous ruler who eyes that wealth needs to be sniffed out from hundreds of miles away. Palki Sharma shares the contours of this controversy.

The Prime Minister also laid that out clearly in his speeches. He boiled it down to how it would impact a common Indian.

"The Congress is fighting a battle for its survival and can go to any extent (to save itself). Its Maoist manifesto is eyeing gold from temples and 'mangalsutra' (gold chains) of women. The Maoist manifesto will put a break on economic growth and lead the country to bankruptcy," he told the gathering at the sprawling Shivaji Park Ground. (Source: "Congress' Maoist Manifesto Eyeing Gold From Temples, Mangalsutra": PM Modi" / NDTV)

In today's world, Gold reserves and accumulation are a great prize. Something that the greedy rich can kill for.

Now, back to the need for gold repatriation. Is it only India?

Gold Repatriation - Domino Effect of Dollar Weaponization

The World is not stupid. Every action in the world has its own consequences.

Sanctions on Russia were in many ways a watershed.

It made countries outside the Western countries sit up and think. As Rod Ringrow, Invesco's head of official institutions, said - countries want to get their gold in their own hands! (Source: Countries repatriating gold in wake of sanctions against Russia, study finds / Reuters)

If it's my gold then I want it in my country' (has) been the mantra we have seen in the last year or so

More and more countries are wary of the "Global Order". For it is no order really. It is a bullying system that can penalize perceived and declare enemies as they would not have any options.

With the US Dollar as the reserve currency, they really don't.

The last 5 years have seen this trend rise. The European countries have been doing it as have the African and South American countries - "Cameroon, Ghana, and Nigeria have publicly announced their intentions, citing concerns over the stability and security of their assets." (Trust in Tatters: Nations Withdraw Gold from US Amid Financial Fears / Linkedin)

In 2019, Poland brought home 100 tons of gold. When he announced the move, National Bank of Poland Governor Adam Glapiński told reporters, “The gold symbolizes the strength of the country.” Hungary and Romania also repatriated some of their gold reserves around that same time period. In the summer of 2017, Germany completed a project to bring half of its gold reserves back inside its borders. The country moved some $31 billion worth of the yellow metal back to Germany from vaults in England, France and the US. In 2015, Australia launched efforts to bring half of its reserves home. The Netherlands and Belgium have also initiated repatriation programs. Gold repatriation underscores the importance of holding physical gold where you can easily access it. Gold-backed exchange-traded funds (ETFs) and “paper gold” have their place. But true security and stability come from the physical possession of precious metals. If you can’t hold it in your hand, you don’t really possess it. That’s exactly why these countries are bringing their gold home — to keep it safe within their own vaults. (Source: "Many Countries Bringing Their Gold Home for Safekeeping" / SchiffGold)

In themselves, these actions may not amount to a lot, but when looked at all of them together along with the geopolitical backdrop, things suddenly start making sense.

The world is changing.

These shifts in the geopolitical economic systems are unprecedented! Gita Gopinath, the IMF Deputy Director, also reinforces it clearly. Such a shift has not happened since the Cold War.

The fragmentation of trade into geopolitically aligned blocs and the slow creep away from the US dollar as world’s leading reserve currency pose enormous risks for future economic growth, Gita Gopinath, the first deputy managing director of the International Monetary Fund (IMF), told an audience at Stanford University on May 7. Gopinath said national security concerns are guiding states away from trading with others they view as “geopolitically distant.” “What we’ve seen in the last several years is that global trade relations are changing in ways we haven’t seen since the end of the Cold War,” Gopinath said. “Increasingly countries are guided by economic and national security concerns about who they trade with and who they invest in.” (Source: "Hardening Trade Blocs, De-Dollarization Threaten Future Economic Growth, Says Gita Gopinath" / Hoover Institution)

But there are other rarely understood consequences of dedollarization that many people do not appreciate.

1. The US has not just exported Inflation but also Growth. One analysis shows how deficits in the US economy have coincided with greater production in the rest of the world.

2. The US abandoned industrialization in favor of making profits from printing dollars. While setting up factories and running them is tough, printing money is easy! Instead of making a widget for a $1, print a note for a dollar and for the US economy, it meant the same thing. Countries outside would lap that dollar up by giving goods and services for a full dollar!

In theory, dedollarization enables reindustrialization. Because if you can export dollars, why build anything else? You make 99.99+ cents on the dollar for a new dollar. It's a very high margin good, made with zero effort and zero pollution. Why make screws or bolts or planes or trains if you can literally print money? Let someone do that overseas. That was the logic of the ~1971-2021 era. But the problem arises when people at home and abroad start realizing they're getting diluted to prop up the dollar. Or when you're in a military standoff with China, and fiat currencies are suddenly less valuable than actual factories. (Source: DEDOLLARIZATION → REINDUSTRIALIZATION? / X post by Balaji)

The issue now is that with Dollar's supremacy at stake and a multipolar world not cozying up anymore, how does the US economy recover from lack of industry in its own country once the takers for the US Dollar fall in the world?

A Poorer West and the World?

One should look at this possibility very seriously. The impact may well be a poorer World.

It will definitely impact the West or the Global North in unprecedented ways.

The economic position of the US, EU and the G-7 countries is at stake.

In the short term, the process of de-dollarization is exploiting the current state of the business cycle in the US and EU. Just a small decrease in the number of transactions in which the dollar is denominated will cause a devaluation of the dollar and a prolonged state of higher interest rates in the US, together with quantitative tightening—all leading to a weakening of the economic position of the US, the EU, and the other G7 countries. (Source: The Rise of BRICS, De-Dollarization, and the Global Economy / Hungarian Conservative)

The rest of the world may however see it very differently.

For most of the Global South, the debt those countries hold is in US Dollar. A falling dollar is good news.

So while for the US establishments, de-dollarization may be a national security situation, but for the others outside of US-EU-G7 combinations, it will be great news.

That is the dichotomy of the geopolitical situation now.

And, all of it started and got accentuated, because the powerful started believing that they could use their own supremacy in currency as a weapon.

Weaponizing trade and economics is never a good idea. Specifically when it needs concurrence and use by everyone.

In a multipolar world, it is suddenly a suicidal wish.

As for DeDollarization, it is not an if now anymore. It's about the when.