With the rise of globalization and advancements in technology, political decisions made by one country can have ripple effects across the globe affecting economies, security, and social stability. Today, the U.S. economy faces an ever-evolving landscape of geopolitical risks, from the ongoing conflict in Ukraine to escalating tensions with China.
The Israeli-Hamas War
One of the most pressing and volatile issues in recent months has been the Israeli-Hamas war. This long-standing conflict between Israel and the Palestinian militant group Hamas has flared up once again, causing widespread destruction on both sides and threatening to escalate into a larger regional conflict. Perhaps the most concerning aspect of this conflict is its potential to escalate further and draw in major global powers. With tensions between the United States and Russia already high, and China becoming increasingly involved in Middle Eastern affairs, the Israeli-Hamas war has the potential to become a proxy for larger geopolitical struggles. While some experts argue that the likelihood of a direct conflict between major powers is low, others warn that the current state of global affairs, coupled with the unpredictability of regional politics, makes it impossible to rule out such a scenario. Given the escalating tensions in the region and the increasing involvement of external actors, billionaire hedge fund manager Ray Dalio has warned that we are now as likely to see a “World War III” scenario as we are not.
The On-Going Conflict in Ukraine
Additionally, the conflict between Ukraine and Russia that began in February 2022 continues to have major implications for global financial markets and the broader international political landscape. Analysts also point to elevated levels of systemic risk, as the ongoing conflict in Ukraine raises concerns about the stability and resilience of global financial systems. The Composite Indicator of Systemic Stress (CISS), developed by the European Central Bank, measures the level of financial stress across different markets and countries. Recent data suggests that although the index has fallen since news of the conflict first broke, it remains well above pre-crisis levels and is indicative of a still-fragile financial system. According to McKinsey, “risks will remain, at least as long as the war continues.”
With both sides having the capacity and motivation to escalate the conflict, any miscalculation could lead to a dangerous spiral of events, according to experts. For market participants, this means heightened geopolitical risk and the potential for increased volatility in asset prices, particularly in emerging markets that are closely tied to Russia’s economy. Given geopolitical tensions tend to have a spillover effect on other areas like international trade and the movement of global capital, the situation in Ukraine remains a source of concern for financial markets. As the conflict continues to unfold, advisors like Tom Hainlin from U.S. Bank, are urging investors to “maintain a more defensive approach as they position their portfolios.”
De-dollarization and the BRICS Bloc
Aside from these direct conflicts, the US also faces risks from ongoing geopolitical trends, such as de-dollarization – the gradual shift away from the U.S. dollar as the world’s leading reserve currency. The BRICS Bloc, consisting of Brazil, Russia, India, China, and South Africa, has been at the forefront of this trend, with each country implementing various initiatives to promote the use of their own currencies in trade and investment. With the agreement to admit six new members during the 2023 BRICS summit, the bloc now represents over 40% of the world’s population and over a quarter of global GDP. As their economic influence continues to grow, analysts are warning that the dollar’s declining share of global currency reserves could have significant consequences for the U.S. economy and its position on the world stage.
The cumulative actions of the BRICS bloc paint a picture of a shift away from U.S. dollar hegemony and towards a more multipolar financial system – one where the U.S. dollar is not the sole reserve currency and where countries have greater autonomy over their economic policies. While the impact of de-dollarization on the global economy remains to be seen, the collective efforts of these emerging economies are difficult to ignore. Already, the New Development Bank (NDB), otherwise known as the BRICS bank, has become a major provider of infrastructure loans, challenging the hegemony of traditional lenders such as the World Bank and IMF. With talks of a BRICS common currency and increased cooperation in areas such as trade, energy, and technology, the bloc’s efforts towards de-dollarization have the potential to reshape the global economic landscape. And given the slew of applications for BRICS membership, the group’s influence is only expected to grow in the coming years.
While analysts may debate the speed and extent of de-dollarization, one thing is clear: the BRICS countries are sending a strong message that they are no longer content with being economically dominated by Western powers. Even marginal progress towards reducing their dependence on the U.S. dollar could have significant geopolitical implications according to analysts. For the U.S. government, lower demand for U.S. dollars could make it more difficult to finance its large trade and budget deficits and weaken the country’s ability to impose economic sanctions on adversaries. Servicing its massive debt and maintaining its global influence may also prove to be increasingly challenging without the dollar’s monopoly on international trade. For businesses, de-dollarization could mean increased risks and cost of doing business in emerging economies, as well as a need to diversify currency holdings. And for everyday consumers, the weakening of the U.S. dollar could lead to higher inflation and a decrease in purchasing power as import costs rise.
Navigating Uncharted Waters
The dollar’s eight-decade reign as the undisputed reserve currency may be facing its biggest challenge yet as calls for a return to sound monetary policy and a more diverse global financial system grow louder. With global central banks purchasing gold at levels not seen in decades, and the BRICS bloc increasing their efforts towards de-dollarization, analysts warn that the U.S. government could find itself in uncharted waters in the coming years. As the dollar’s share of foreign exchange reserves continues its two-decade descent, some economists believe that the world may be on the brink of a new era in international finance.
