[Economics] Warren Buffett and other experts dismantle the false myths about the de-dollarization of the world economy

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Berkshire Hathaway CEO Warren Buffett. Photo: Reuters

That China, Russia and India all want to reduce their dependence on the US dollar is no secret. Recently, the negotiations of these three countries with Brazil and South Africa to create their own currency with which to trade with each other directly and challenge the dominance of the northern currency have been in the news. In addition, the latest figures worldwide reveal that the use of the yuan has doubled in trade between countries. Specifically, it has gone from representing 2% of the entire market last year to 4.5% in 2023, according to Swift. Despite this, the status of the world's reserve currency of the greenback "is not in any danger," says Warren Buffett, as well as other experts, although with certain nuances.

During the Berkshire Hathaway shareholders' meeting held this Saturday, the CEO of the conglomerate has made a statement that de-dollarization -that other countries reduce their dependence on the US dollar- does not represent a risk, since it is the reserve currency and not see "No option for another currency" to occupy that position.

However, at the same time he has announced the dangers facing the US currency due to the monetary policy of the US Government. The billionaire is referring to his response to the beginning of the pandemic, when he receives stimulus checks to American households and financial aid to companies to keep the economy afloat. To do this, the US Federal Reserve (Fed) was dedicated to printing large amounts of money. This, combined with excessive spending, fueled inflation, a phenomenon that the country's central bank has been trying to control for months.

In his opinion, what US citizens need right now is to be able to trust that their savings will maintain their value over time because, otherwise, they will have no reason to keep their money in the bank, among other things. things, according to Business Insider.

De-dollarization is based on misconceptions
Although Elon Musk, the CEO of Tesla and owner of Twitter, believes that the de-dollarization of the economy is a real threat, since China and other countries are taking steps to make it happen, experts consulted by the media agree with Buffett that there is little chance of this happening, mainly because this theory is based on misconceptions.

The first of the false myths on which the de-dollarization hypothesis is based is that central banks are getting rid of the dollar as a reserve currency. Quite the contrary: despite having fallen 2.5 percentage points in one year, the greenback still represented 84.3% of the entire market in February, a figure much higher than that registered by other currencies. While the weight of the yuan stood at 4.5%, the euro represented around 6% of commercial transactions worldwide.

In addition, its use as a means of international payment has remained stable over time. This is because it is the safest, most resistant and least volatile of all the currencies on the market. For all these reasons, it is very difficult to displace the dollar as a reserve currency, says Bob Stark, Kyriba's head of market strategy.

Another of the misconceptions that are used is that the dollar is losing its position as the main currency to trade. It's not true either. According to data from the Bank for International Settlements, the US monetary unit was used in 88% of the 7.5 million currency transactions that took place until April 2022. "In the last 35 years, the proportion of the dollar has not changed," says Jay Zagorsky, a professor of markets at Boston University.

It is true that the Chinese yuan has gained weight as a reserve currency -going from representing less than 1% in 2015 to 2.7% in the fourth quarter of 2022-, and that China has closed with other countries to carry out transactions in its local currency, as well as has sold billions of it to Russia. Even so, the impact of these efforts has not managed to keep it a very low figure when compared to the US dollar, whose global weight is 60%, according to data from the International Monetary Fund (IMF). Another thing is its potential to take over from the yen in Japan, the pound sterling in the United Kingdom or the euro in the European Union, Zagorsky points out.

Also, there has been a lot of talk lately that the dollar could soon have a rival to match. Another myth, given that a process such as the de-dollarization of the economy requires time. According to Stark's calculations, it would take about 24 years for global dollar reserves to drop another 12%, and even then, it would still dominate the market. For Perry Mehrling, professor of economics at Boston University, the growing po[CENSORED]rity of de-dollarization theory responds to latent discontent in other countries that their currencies are "at the bottom of the international money hierarchy."Finally, there is the question of the disaster that would befall the US economy and stocks if the dollar ceased to be the reserve currency. This would not happen either, since the effects of a possible de-dollarization would be felt mainly by foreign banks, which do not have a great connection with the US financial ecosystem. At best, a fall in the greenback could serve as a trigger for foreign institutions to invest in Treasury bills, which would force the country to find new and different sources of financing.

 

Link: https://www.eleconomista.es/mercados-cotizaciones/noticias/12262399/05/23/warren-buffett-y-otros-expertos-desmontan-los-falsos-mitos-sobre-la-desdolarizacion-de-la-economia-mundial.html