The Impact of De-Dollarization on Brazil's Trade

"...what matters is not the currency in which Brazilian trade is denominated...What matters are the assets in which exporters want to accumulate the proceeds of their exports." -Michael Pettis

EXACTLY! Now, consider this chart below & then Google "Brazil Central Bank buys gold" https://t.co/3T2mwKaQuN pic.twitter.com/pUMjrEtHNn

— Luke Gromen (@LukeGromen) April 14, 2023

2/ Many arguing that "de-dollarization isn't happening" employ a strawman argument like:

"CNY is not freely convertible", or

"China's capital account isn't open", or

"China won't run deficits to generate the debt".

These arguments miss what is happening in plain sight.

— Luke Gromen (@LukeGromen) April 14, 2023

3/ China's capital account (and therefore the CNY) is convertible on a limited basis through gold in Shanghai and HK.

China only runs deficits in two items - commodities & semiconductors. So gold just needs to be "big enough" to settle China's net commodity deficits.

— Luke Gromen (@LukeGromen) April 14, 2023

4/ The PBOC openly noted as early as 2015 that it will use gold to internationalize the CNY, and that "the mark of an international currency is the ability to invoice for critical commodities like oil and gas."

This just means gold needs to get a lot bigger in price.

— Luke Gromen (@LukeGromen) April 14, 2023

5/ The bigger gold gets in price, the more open China's capital account will be through gold. It is a virtuous cycle, with gold at a floating price, using only gold sourced from outside Mainland China (which cannot leave.) I.e., sourced from London or NY.

— Luke Gromen (@LukeGromen) April 14, 2023

6/ Bottom line - those saying "de-dollarization isn't happening" using the lens of the post-1971 framework are missing what is happening - no currency will replace the USD, but gold IS replacing USTs as primary reserve asset, and has been for almost a decade.

— Luke Gromen (@LukeGromen) April 14, 2023

7/ This increasingly results in less foreign demand for USTs & thereby leaves US deficits to either be slashed (unlikely), financed by US banks (happened from 2014-earlier this year), financed by US investors (can work but deflationary/depressionary), or financed by the Fed.

— Luke Gromen (@LukeGromen) April 14, 2023