Ukraine accelerates the Great Reset

Klaus Schwab, the founder of the World Economic Forum, has been dreaming of a “Great Reset” of the global system. He has argued that Covid-19 and the climate crisis showed that no country is an island and that more global coordination in every domain is required.

A Great Reset would enable us to reimagine the global system by developing a human-centric economic system, prioritizing sustainable use of resources, making sure that Industry 4.0 technology serves the common good, and creating a new global financial architecture.

In January, Schwab persuaded Chinese President Xi Jinping to address the annual WEF meeting in Davos, Switzerland, that brings together the world’s financial, political, and cultural elite. Speaking by video link from Beijing, Xi called for more international cooperation to deal with climate change, economic inequality, and other global challenges.

By addressing the meeting, Xi signaled endorsement of the spirit of Schwab’s WEF program. But he also cautioned against confrontation that could have, in his words, “catastrophic consequences.”

A dollar reset

The idea of a “reset” of the global system gained currency after the 2008 financial crisis triggered by the collapse of the investment bank Lehman Brothers. The US government spent trillions of dollars to prevent a meltdown of the financial system.

When the dust settled, a growing number of financial and economic experts warned that the massive US debt fueled by “quantitative easing” (expansion of the money supply) would ultimately cause massive inflation and undermine the role of the dollar as the global reserve currency.

In 2014, Dutch financial journalist Willem Middelkoop published The Big Reset: War on Gold and the Financial Endgame. He argued that the US would try to keep the dollar the dominant currency by engineering a reset of the financial system. He predicted that gold would be one of the anchors of the new financial system. The price of gold could triple to reflect a de facto devaluation of the dollar.

Ukraine upended the conventional “reset” scenarios. The US cutting off the Russian central bank from the dollar system was the proverbial game-changer. The US government has used its control over the dollar system against countries like Venezuela, North Korea, and Iran at will. But when it confiscated Russia’s dollar reserves, the world had a wake-up call.

Countries not directly allied with the US will look to reduce their exposure to the dollar system. China has been piggybacking the dollar system and had no immediate need to challenge the dollar, but with the US increasing its involvement in Taiwan, China has reasons to be concerned. 

The removal of Russia from the dollar system made clear that US financial power could act without legal constraints. China already has so-called currency swap agreements with dozens of countries to bypass the dollar system, but it now could feel the need to develop a yuan-centered payment system for international transactions.

Global debt

Speculation about the demise of the dollar system dates back several decades. The dollar bears argue that America’s persistent trade deficits, budget deficits, and the growing national debt are unsustainable and that there is a limit to how much longer money can be printed to make up the difference.

Theories about the dollar’s demise have become one of the hottest topics among financial experts, economists, and the cryptocurrency community. Well-known investors like Jim Rogers, Marc Faber and Peter Schiff have made careers out of doomsday predictions. Millions of viewers have watched a video made by billionaire investor Ray Dalio on how and why empires decline. The catalyst is always unsustainable debt.

The worst-case doomsday predictions for a dollar crisis go beyond the Great Depression of the 1930s. They foresee bank closures, bail-ins, capital controls, food shortages, power cuts, and rationing of essential goods.

Most agree that a dollar crisis would reverberate around the world. Demand for dollars and US Treasuries would collapse and interest rates would skyrocket. Others see “superinflation” and millions losing their jobs, life savings, and pensions.

Lesson from Asia

An earlier reset is at the heart of the current problems with the dollar. In 1972, US president Richard Nixon shocked the world when he decoupled the dollar from gold. This relieved the US government of the obligation to exchange dollar bills for gold.

The Vietnam War was straining the treasury and by decoupling the dollar from gold, the US could simply print the required dollars. Nixon persuaded Saudi Arabia to sell oil only in dollars in exchange for US military protection. The dollar would be backed by the strength of the US economy and the role of the dollar as the world’s indispensable currency.

By the mid-1970s, Japan tested the strength of the US economy when its hyper-efficient export machine gathered steam. In barely a decade, Japanese electronics makers wiped out virtually the entire American consumer electronics industry.

Japanese carmakers were threatening to do the same and forced the US government to step in and rescue the American automobile industry. In 1985, the US forced Japan to revalue the yen in an attempt to stem the flood of Japanese exports.

The American economy had hardly adjusted to Japan’s “just-in-time” efficiency when China joined the global economy. US companies were drawn to China’s huge market, skilled labor force, and the quality of the infrastructure. They outsourced millions of jobs to China, which further eroded the American industrial base.

Riding the dollar gravy train, China lifted hundreds of millions of people out of poverty. It invested its surpluses in domestic social and public infrastructure and the Belt and Road Initiative, the largest infrastructural project in history.

All the while, millions of Americans saw the American Dream receding behind the horizon. Millions of manufacturing jobs disappeared and the American financial industry was given free rein. In the decades after Nixon, US presidents from both main parties gradually dismantled the financial regulations put in place by Franklin Roosevelt in the 1940s to prevent a recurrence of the excessive financial speculation that led to the Great Depression.

The real reset

At the end of last year, US national debt approached $30 trillion, while global debt reached $300 trillion, most of which is denominated in dollars. How this debt will be serviced when interest rates are raised to prevent rising inflation keeps bankers awake at night.

The conflict in Ukraine has made the problem more acute. Excluding Russia from the dollar system makes a revamp of the global financial system inevitable but will come with a very high cost.

China is heavily invested in the dollar system and will no doubt try to engineer a soft landing for the dollar. But it will develop a parallel yuan-centric payment system as a safety net and reduce its exposure to the dollar system. Virtually all non-Western nations, including oil-producing countries, will plug into the yuan system, as will some European countries with a growing reliance on Chinese trade and investment.  

China is not only the world’s largest importer of oil and countless other raw materials, it is also the world’s largest producer of essential consumer goods, green tech, and Industry 4.0 technologies. The roll-out of the digital yuan enables China to build a new financial architecture from the ground up.

Digital money will be front and center in Industry 4.0. technologies. Klaus Schwab will get at least part of his technocratic Great Reset, if not the kind he envisaged.

With thanks to David Li, Shenzhen Open Innovation Lab.