Transition From the Dollar Era to Bipolar Economic System Beckons
2023.06.29 10:32
In George Orwell’s novel 1984, there are only three nations in the world: Eurasia, Eastasia, and Oceania. The states’ economies are structured so that surplus production has to be constantly disposed of, which helps maintain totalitarianism in all three systems. To maintain this status quo, the states are engaged in an incessant war among themselves, which is impossible to win. War has become normalized as the default state of world affairs, which is expressed in one of Oceania’s slogans: “War is peace.”
A little more than 70 years have passed since the publication of Orwell’s book. Today, we are living through a real-life restructuring of the world order that is reminiscent in format to the one in 1984, but also has its own specifics. In this article, we explore how the gradual transition to geopolitical and economic multipolarity is unfolding.
War is peace
In Orwell’s book, the protagonist lives in the country of Oceania, which is the Americas, Great Britain, South Africa, Australia, and Oceania, combined.
Asia is the Asian bloc – China, Japan, Korea, Mongolia, and India.
Eurasia is the territory of modern Russia, Europe, and Turkey.
So far, the restructurting of the modern world has been characterized by:
- the collapse of the Asian bloc (Japan-China);
- a complete (more likely, partial) withdrawal of the EU from Russia’s influence – the dismantling of the supply chain of cheap energy resources is already underway; and
- the partial disappearance of South American and African countries from the Western bloc.
Essentially, we are witnessing the formation of two major centers of power and struggle: the old world in the form of the United States, strengthened by its satellites the EU, Australia, and Japan, and a new significant rival that has challenged the traditional leading powers, personified by China, buttressed by Russia, Turkey, Saudi Arabia, and African countries.
Whether a third power center will be formed, led by India, or whether India will prefer to join one of the blocs, is still to be determined. Given the considerable militarization of the economy already being carried out by bloc members, in our view, India will not be able to remain completely neutral.
US vs China Military Expenditure
There is an arms race underway. At the same time, countries are reaching a certain parity that will make it impossible to wage total war, and may prohibit them from maintaining absolute sovereignty outside the framework of one of the blocs.
The Stockholm International Peace Research Institute (SIPR) cites a significant increase in nuclear weapons. Last year, the US increased the number of its warheads from 1,744 to 1,770, and Russia from 1,588 to 1,674. China has also been expanding its nuclear capability.
The resulting parity of forces will lead to such changes as future wars withan increase in proxy wars, or “feudal wars,” as some experts have described them. These would be wars carried out by small forces, professional armies, and mediated (semi-private) territories. According to a RAND Corporation study published in June of this year, chronic, low-intensity conflict is the primary type of confrontation.
Waging proxy wars will not prevent bloc countries from trading or agreeing on other non-conflict issues. Relationships between states will become even more multi-layered than they already are. For example: in the 20th century, Henry Ford’s sympathy for Nazi Germany was perceived as something egregious, but in today’s world such boundaries are devalued.
At the time of this writing, against the backdrop of Russia’s ongoing proxy war with the West in Ukraine, the American delegation is becoming the most numerous at the Russian Economic Forum.
Economic parity. Information wars
The process of globalization has made the bloc’s countries much more integrated, making it impossible for them to achieve a complete economic victory over a potential rival. One of the reasons for the stagnation of the world economies is the absence of the expected “opening” of China (the average growth rate of industrial production of the Celestial Empire does not exceed 4%). At the same time, this levels the negative consequences of stagflation by reducing the demand for energy resources and, consequently, the pressure on supply inflation.
It is pretty clear that without a large amount of physical energy resources, the US cannot keep commodity prices at acceptably low levels to ensure sufficient supply deflation, and consequently improve its monetary policy’s effectiveness. Transferring energy trade into a “paper” (derivative) form controlled by the US and its allies, and thus maintaining pricing in the commodity market, should be minimal simply because of the gaining momentum of de-dollarization.
On the other hand, it is also clear that China cannot guarantee a market that will provide stable economic growth in the short term. The United States accounts for 17% of China’s exports. If we add the overtly “unfriendly” countries (US allies), this share will rise to 50%.
China’s Top Exporting Countries
The impossibility of economically destroying a rival, coupled with possible demographic problems, will likely bring the confrontation of artificial intelligence increasingly to the forefront. According to the OECD, global labor productivity reached a plateau in 2021.
Global Labor Productivity
At the same time, the UN predicts that fertility will continue to decline over the next 70-80 years. As a consequence, increasing labor productivity becomes possible only through technological progress.
The active introduction of AI could lead to the intensification of information wars. According to recent studies, the role of Influencing as a reliable source of information in the world is constantly growing. When different AIs join the process, programmed with different values and advocating for different blocs (a la “free world” vs. “modern autocracies”), the role of disinformation in the world will increase manifold.
Digital and cryptocurrencies in the new world
The role of CBDC and cryptocurrencies may also grow considerably against the increasing erosion of the global dollar system. Digital currencies will transform money by adding the new functions of social credit and digital footprint to the classical ones – measure of value, means of accumulation and payment, and means of circulation. Crypto may replace money altogether, which would contribute to the aforementionedlayering where trade agreements with mutual business interests accompany proxy wars on one side.
The transition is likely to be relatively long and painful. The opposing blocs will try to divide the zones of influence in the most profitable way for themselves. The situation with Binance and the bankruptcy of FTX before that are most likely early signs of this already burgeoning process.
The economic consequences of the erosion of the financial system
Any transition stage is accompanied by growing risks, which are difficult to estimate because there is no suitable model, and even if we start looking for it in historical events outside the current macroeconomic system, these patterns are unlikely to be relevant.
According to individual economists, the transition period should finally end in about 30-35 years (the end of the Kondratieff wave), which makes it very difficult to build models with a more or less acceptable degree of error.
Consequently, despite all respect for value investing, speculative approaches to trading have become more attractive.
It is possible to select assets for speculation based on such things as recent market trends (AI hype and others).
To analyze what happened to the share price of Nvidia (NASDAQ:) over the past year, it is plain to see how much the company’s capitalization has grown, despite any fundamental indicators warning about the strong overheating of the market.
Therefore, one should first pay attention to the stocks of companies that could become the flagships of this transition period, with AI-related companies as drivers of productivity growth. In addition to Nvidia, these companies are:
1. AMD
2. Google (NASDAQ:)
3. Microsoft (NASDAQ:)
Further, if the system’s dismantling is painful enough, we can expect an increase in the volatility of RISK-OFF instruments () and energy assets ().
In these conditions, choosing a broker that allows speculation with minimal transaction costs also becomes essential.
Our view is subjective, but FBS does strive to constantly reduce these costs in order to continue to occupy a competitive position in the market. A wide range of instruments and zero fees on some assets make FBS attractive in the fast-changing world. Come and give it a try!
Conclusions
We are witnessing another historical transition period—from the dollar era to a bipolar economic system.
The consequences of this transition may be:
- a transformation of trade relations.
- even more strengthening of the role of small, private, professional armies and proxy wars.
- greater integration of satellite economies.
- agreements on spheres of influence in the energy and cryptocurrency spheres.
- the growing role of AI in increasing productivity and confrontation in the information space.
- increasing choice in favor of speculative approaches in the market, compared to value investing.
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