End Of Empire - The 'De-Dollarization' Chart That China And Russia Are Banking On

Tyler Durden's picture

History did not end with the Cold War and, as Mark Twain put it, whilst history doesn’t repeat it often rhymes. As Alexander, Rome and Britain fell from their positions of absolute global dominance, so too has the US begun to slip. America’s global economic dominance has been declining since 1998, well before the Global Financial Crisis. A large part of this decline has actually had little to do with the actions of the US but rather with the unraveling of a century’s long economic anomaly. China has begun to return to the position in the global economy it occupied for millenia before the industrial revolution. Just as the dollar emerged to global reserve currency status as its economic might grew, so the chart below suggests the increasing push for de-dollarization across the 'rest of the isolated world' may be a smart bet...



As Deutsche Bank's Jim Reid explains,

In 1950 China’s share of the world’s population was 29%, its share of world economic output (on a PPP basis) was about 5% (Figure 98). By contrast the US was almost the reverse, with 8% of the world’s population the US commanded 28% of its economic output.


By 2008, China’s huge, centuries-long economic underperformance was well down the path of being overcome (Figure 97).


Based on current trends China’s economy will overtake America’s in purchasing power terms within the next few years. The US is now no longer the world’s sole economic superpower and indeed its share of world output (on a PPP basis) has slipped below the 20% level which we have seen was a useful sign historically of a single dominant economic superpower. In economic terms we already live in a bipolar world. Between them the US and China today control over a third of world output (on a PPP basis).

However as we have already highlighted, the relative size of a nation’s economy is not the only determinant of superpower status. There is a “geopolitical” multiplier that must be accounted for which can allow nations to outperform or underperform their economic power on the global geopolitical stage. We have discussed already how first the unwillingness of the US to engage with the rest of the world before WWII meant that on the world stage the US was not a superpower inspite of its huge economic advantage, and second how the ability and willingness of the USSR to sacrifice other goals in an effort to secure its superpower status allowed it to compete with the US for geopolitical power despite its much smaller economy. Looking at the world today it could be argued that the US continues to enjoy an outsized influence compared to the relative size of its economy, whilst geopolitically China underperforms its economy. To use the term we have developed through this piece, the US has a geopolitical multiplier greater then 1, whilst China’s is less than 1. Why?

On the US side, almost a century of economic dominance and half a century of superpower status has left its impression on the world. Power leaves a legacy. First the USA’s “soft power” remains largely unrivalled - US culture is ubiquitous (think McDonald’s, Hollywood and Ivy League universities), the biggest US businesses are global giants and America’s list of allies is unparalleled. Second the US President continues to carry the title of “leader of the free world” and America has remained committed to defending this world. Although more recently questions have begun to be asked (more later), the US has remained the only nation willing to lead intervention in an effort to support this “free world” order and its levels of military spending continues to dwarf that of the rest of the world. US military spending accounts for over 35% of the world total and her Allies make up another 25%.

In terms of Chinese geopolitical underperformance there are a number of plausible reasons why China continues to underperform its economy on the global stage. First and foremost is its list of priorities. China remains committed to domestic growth above all other concerns as, despite its recent progress, millions of China’s citizens continue to live in poverty. Thus so far it has been unwilling to sacrifice economic growth on the altar of global power. This is probably best reflected in the relative size of its military budget which in dollar terms is less than a third the size of Americas. Second China has not got the same level of soft power that the US wields. Chinese-style communism has not had the seductive draw that Soviet communism had and to date the rise of China has generally scared its neighbors rather then made allies of them. These factors probably help explain why in a geopolitical sense the US has by and large appeared to remain the world’s sole superpower and so, using the model of superpower dominance we have discussed, helps explain why global geopolitical tensions had remained relatively low, at least before the global financial crisis.

However there is a case to be made that this situation has changed in the past five or so years. Not only has China’s economy continued to grow far faster than America’s, perhaps more importantly it can be argued that the USA’s geopolitical multiplier has begun to fall, reducing the dominance of the US on the world stage and moving the world towards the type of balanced division of geopolitical power it has not seen since the end of the Cold War. If this is the case then it could be that the world is in the midst of a structural, not temporary, increase in geopolitical tensions.

Why do we suggest that the USA’s geopolitical multiplier, its ability to turn relative economic strength into geopolitical power, might be falling? Whilst there are many reasons why this might be the case, three stand out. First, since the GFC the US (and the West in general) has lost confidence. The apparent failure of laissez faire economics that the GFC represented combined with the USA’s weak economic recovery has left America less sure then it has been in at least a generation of its free market, democratic national model. As this uncertainty has grown, so America’s willingness to argue that the rest of the world should follow America’s model has waned. Second the Afghanistan and in particular the Iraq War have left the US far less willing to intervene across the world. One of the major lessons that the US seems to have taken away from the Iraq war is that it cannot solve all of the world’s problems and in fact will often make them worse. Third, the rise of intractable partisan politics in the US has left the American people with ever less faith in their government.

The net result of these changes in sentiment of the US people and its government has been the diminishment of its global geopolitical dominance. The events of the past 5+ years have underlined this. Looking at the four major geopolitical issues of this period we raised earlier – the outcome of the Arab Spring (most notably in Syria), the rise of the Islamic State, Russia’s actions in Ukraine and China’s regional maritime muscle flexing – the US has to a large extent been shown to be ineffective. President Obama walked away from his “red line” over the Syrian government’s use of chemical weapons. The US has ruled out significant intervention in Northern Iraq against the Islamic State.

America has been unable to restrain Pro-Russian action in Ukraine and took a long time (and the impetus of a tragic civilian airplane disaster) to persuade her allies to bring in what would generally be considered a “first response” to such a situation - economic sanctions. And so far the US has had no strategic response to China’s actions in the East and South China seas. Importantly these policy choices don’t necessarily just reflect the choice of the current Administration but rather they reflect the mood of the US people. In Pew’s 2013 poll on America’s Place in the World, a majority (52%) agreed that “the US should mind its own business internationally and let other countries get along the best they can on their own”. This percentage compares to a read of 20% in 1964, 41% in 1995 and 30% in 2002.

The geopolitical consequences of the diminishment of US global dominance

Each of these events has shown America’s unwillingness to take strong foreign policy action and certainly underlined its unwillingness to use force. America’s allies and enemies have looked on and taken note. America’s geopolitical multiplier has declined even as its relative economic strength has waned and the US has slipped backwards towards the rest of the pack of major world powers in terms of relative geopolitical power.

Throughout this piece we have looked to see what we can learn from history in trying to understand changes in the level of structural geopolitical tension in the world. We have in general argued that the broad sweep of world history suggests that the major driver of significant structural change in global levels of geopolitical tension has been the relative rise and fall of the world’s leading power. We have also suggested a number of important caveats to this view – chiefly that a dominant superpower only provides for structurally lower geopolitical tensions when it is itself internally stable. We have also sought to distinguish between a nation being an “economic” superpower (which we can broadly measure directly) and being a genuine “geopolitical” superpower (which we can’t). On this subject we have hypothesised that the level of a nations geopolitical power can roughly be estimated multiplying its relative economic power by a “geopolitical multiplier” which reflects that nations ability to amass and project force, its willingness to intervene in the affairs of the world and the extent of its “soft power”.

Given this analysis it strikes us that today we are in the midst of an extremely rare historical event – the relative decline of a world superpower. US global geopolitical dominance is on the wane – driven on the one hand by the historic rise of China from its disproportionate lows and on the other to a host of internal US issues, from a crisis of American confidence in the core of the US economic model to general war weariness. This is not to say that America’s position in the global system is on the brink of collapse. Far from it. The US will remain the greater of just two great powers for the foreseeable future as its “geopolitical multiplier”, boosted by its deeply embedded soft power and continuing commitment to the “free world” order, allows it to outperform its relative economic power. As America’s current Defence Secretary, Chuck Hagel, said earlier this year, “We (the USA) do not engage in the world because we are a great nation. Rather, we are a great nation because we engage in the world.” Nevertheless the US is losing its place as the sole dominant geopolitical superpower and history suggests that during such shifts geopolitical tensions structurally increase. If this analysis is correct then the rise in the past five years, and most notably in the past year, of global geopolitical tensions may well prove not temporary but structural to the current world system and the world may continue to experience more frequent, longer lasting and more far reaching geopolitical stresses than it has in at least two decades. If this is indeed the case then markets might have to price in a higher degree of geopolitical risk in the years ahead.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
freak of nature's picture

Take a globe, spin, then throw dart. Question is, what is good for?

Xibalba's picture

USA manufactures financial derivatives and weapons of war.  China makes everything else. 

InjectTheVenom's picture

You didn't de-dollarize that !

X.inf.capt's picture


they're probably going to pull it off

knocking out the USD as a reserve currecy...

i guess its time to go long on can goods and.....{gremlins}

Harlequin001's picture

Well I got as far as this...

'Second the US President continues to carry the title of “leader of the free world” and America has remained committed to defending this world. Although more recently questions have begun to be asked (more later), the US has remained the only nation willing to lead intervention in an effort to support this “free world” order...

What total, complete and utter fucking drivel...


Some cocksuckerz can't go near a cliff without jumping off.

SafelyGraze's picture

looks promising for yuan

for ruble, not so much


hobopants's picture

I wonder what these charts will look like after their economy takes a dump? Population is a liability these days not an asset (just look at the US) there was a reason (besides british opium) that China fell from their top dog status after the industrial rev. Machines replaced people, and machines will continue to do so into the future. As far as their miraculous growth goes it was all malinvestment and we all know what Mises has to say about that.

"There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved."

Almost a cliche at this point but still very true, the whole worlds in a toliet and that very much includes China as much as it does the US and Europe.

Mr.Sono's picture

It's not there century. One day it will, once the drunk generation will pass

MalteseFalcon's picture

Don't bother with the dart.  It's the whole globe.

disabledvet's picture

And Mars too.

"This is America. We think big." This world ain't big enough for another...so we take an entire Planet too just to prove our point.

Plus the Moon "for shits and giggles."

DOGGONE's picture

IF you are concerned about (more) war breaking out, you should
inform people that they have their heads up their asses,
"The Public Be Suckered"
and that their judgement may well be faulty.

DOGGONE's picture

IF you are concerned about (more) war breaking out, you should ...
... inform people that they have their heads up their asses,
"The Public Be Suckered"
and that their judgement may well be faulty.

lester1's picture

Notice how China's big rise started when Reagan took office? Do you think that might have something to do with Reagan's de-industrialization of the USA?

Thats why I really hate Ronald Reagan!

messymerry's picture

**** OFF TOPIC ****

I know this is off topic, but I felt you all need to be aware of this:

The CBC is warning Canadians about a U.S. program where America law enforcement officers — from federal agents to state troopers right down to sheriffs in one-street backwaters — are operating a vast, co-ordinated scheme to grab as much of the public's cash as they can through seizure laws.


Protect yourselves and respond accordingly...

NoDebt's picture

They work for the government (on various levels).  Governments at all levels are out of money.  They will take yours, if given the slightest chance.

Kirk2NCC1701's picture

Saw the same thing on the CBC site.

It's not your parents' America any more.  Turning into a Banana Republic Par Excellence.  Sorry to say.


401K of Dooom's picture

Oh ha ha ha ha ha ha ha ha ha ha ha ha, is this the same CBC that cheers on the Liberal party of Canada?  I used to watch CBC and couldn't believe how the Canucks were brainwashed!  When the 1989 free trade agreement was signed, CBC proclaimed that America would take away all of Canada's jobs!  I saw and heard the whole thing on the show "Midday".  Yep the same show with Valerie Pringle, Brent Bambury and Ralph Ben Merguie.  At least canada knows how to create interesting names and put them on T.V.

messymerry's picture

I'm not endorsing CBC here. I'm merely pointing out that our highway patrolmen have morphed into highwaymen. Nothing more.

I'm sick of the justice department getting a pass.

matrix2012's picture

American shakedown: Police won't charge you, but they'll grab your money - World - CBC News



edit: oops sorry, Kirk posted it already ;)

BaghdadBob's picture

In terms of gold ownership/procurement (if legends of it's understated collection/holdings are true) then China already is (Technically) the world's largest economy. On that scale alone, I would suggest that the US is far from second place. It would be well down the list...

Ghostdog's picture

I just dont see China as a sustainable domestic economy until 2025+ and that is if EVERYTHING goes perfect. A meltdown here (which is assured at some point) will inflict much more pain on them and when you have a trillion of unhappy people... I think they can easily fall back to their tribal roots and implode and then see the bloodshed. Time will tell

himaroid's picture

The dollar will swoop up much faster than china did on that chart. This is the internet age. Liftoff about now.


P.S. Don't be angry. Precious will be cheaper. 

himaroid's picture

Deflation first. THEN hyper inflation.


MKD's picture

If coke and hookers stay the same price then bring on hyperinflation

ekm1's picture

Last sentence of the article:

"If this is indeed the case then markets might have to price in a higher degree of geopolitical risk in the years ahead."


Now, a question to the writer:

In what currency are the markets going to be priced at as unit of account if USD is no longer world currency?

philipat's picture

Gold....In other words, according to JPM, real money.

ekm1's picture

So, you are saying that in case of trade imbalance China will ship gold to ...let's say.........Ethiopia to setlle?

sleigher's picture

Would they have to ship physical gold?  What about this gold exchange?  Will countries like Ethopia that already look to China for increased trade and growth not be willing to use an exchange like that to settle trade deficits?  Maybe I don't know what I am talking about.  I am just asking.  Global trade is not something I know much about.

ekm1's picture

everybody will pull a Nixon. Nobody wil ship gold

sleigher's picture

I kinda meant if they deposit some there already and they can use it between them to settle things.  But yeah, Nixon, people don't like to spend money when they have it.  Only when they don't...

Kirk2NCC1701's picture

Don't be obtuse.  Gold is what is and will be used to index a country's currency to their gold supply or supply of Precious Assets (Carbon Fuels).  They will settle in paper money (IOUs) or in Precious Assets or other Assets.

orez65's picture

Nations exchange goods and services. Trade deficits are settled in gold. In a real world.

Harbanger's picture

I think the oligarchs will be replacing the dollar with SDRs. Or Gold backed Yuan or both.

ekm1's picture

That assumes a world government.


That is absolutely ultra impossible. Humans do not get along that well to create a world government

Not gonna happen

Harbanger's picture

Yeah but the global banking cabal gets along just fine.  I think Markets and trade will force countries to go along with the plan, IMHO.

ekm1's picture

No they don't get along at all

Putin killed or threated to death or expropriated all russian oligarchs. Now he owns all of them.


It is unusual that humans get along for long time, particularly ultra elite

disabledvet's picture

I'm assuming "inter planetary government" actually.

Anusocracy's picture

There isn't a suitable outgroup threat that will cause the majority of the world's population to coalesce into one ingroup.

Now that Anthropogenic Global Warming has run out steam.

I have thought a lot about this subject. There is a practical way of forming a World Government in a fairly short period of time.

froze25's picture

That's pRobably what it would take. 

Anusocracy's picture

Not likely.

My thinking involves earthbound activities only and doesn't include war.

Totentänzerlied's picture

"That assumes a world government."

No it doesn't, unless by world government you mean IMF+BIS+World Bank, which already exist, and of which Russia and China are enthusiastic members who have both expressed approval of the SDR system*.

*Because it is the best currently possible way of replacing the dollar as WRC.

Also, adoption of the SDR system does not mean all trade will immediately start to be settled in SDR units, or even priced in SDR units.