De-dollarization to become a historical trend in global economy

The performance of the US economy in the year of 2023 exceeded market expectations, particularly with the robust performance of actual economic growth in the third quarter. According to the final revised data released by the US Department of Commerce on December 21, 2023, the country's real gross domestic product (GDP) grew at an annual rate of 4.9% for the quarter, marking a new high in seven quarters and a significant acceleration from the 2.1% growth in the second quarter. The Federal Reserve also raised its annual economic growth forecast to 2.6% after its last monetary policy meeting in 2023.

The better-than-expected growth of the US economy and the unprecedented prosperity recorded in the stock market were largely the result of the government's "hot start," indicating that the Biden administration's series of measures to "boost the economy" in the past year for re-election have gradually taken effect. However, the market may have mistakenly anticipated the expectation of a "soft landing" for the US economy, as the macroeconomic fundamentals and financial market environment in the United States have undergone significant changes against the backdrop of the Federal Reserve's 11 consecutive rate hikes since March 2022. The inertia of monetary oversupply is testing the Fed's ability to adjust. The rise in interest rates has led to a contraction in credit, a slowdown in investment growth, and a slowdown in industrial production, which in turn has suppressed consumer spending, all undeniable facts. If the yield curve of US Treasury bonds frequently remains inverted for a long period, even with the efforts of monetary authorities, it is feared that it will not be able to reverse the trend of the economy entering a recessionary cycle.

Therefore, after the last monetary policy meeting in 2023, the Federal Reserve lowered its economic growth forecast for 2024 to 1.4%, down 0.1 percentage points from the forecast in September of that year, almost matching the forecast of 1.5% given by the International Monetary Fund (IMF) in its World Economic Outlook report released in October 2023. As for another authoritative institution, the Organization for Economic Cooperation and Development (OECD) is also not optimistic about the US economy. The organization has lowered its forecast for US economic growth in 2024 from 2.4% in 2023 to 1.5%, lower than the average level of 3.1% and 2.8% for the Group of Twenty (G20) countries. The reason for the OECD's relatively cautious forecast is that the Federal Reserve's rate hike measures have significantly increased borrowing costs for consumers and businesses. In fact, in the high-interest rate policy environment of the Federal Reserve, the borrowing costs for residents have continued to rise, leading to the US credit card debt balance surpassing $1 trillion for the first time in the third quarter of 2023. The proportion of credit card repayments overdue has risen from 6.5% in the first quarter to 8% in the third quarter, reaching the highest level in over a decade, thereby affecting the prospects for US economic growth.

As a super economy with a scale of $25 trillion, the development of the US economy has always had the "3-3-3" golden standard, that is, if key indicators such as economic growth, unemployment, and inflation can achieve about 3%, it is not only a sign of economic prosperity but also an important observation index for the current president's success in re-election. However, looking at the recent growth of the US economy, the traces led by large enterprises and the government are becoming more and more obvious, mainly relying on the "Three Reliances": relying on super enterprises, relying on consumption, and relying on printing money.

On the first level, the US is a developed economy that relies heavily on technological innovation and financial services. The high-end entity economy system, which is mainly supported by advanced manufacturing companies and technology giants, and the consumption economy system, represented by private consumption, financial services, real estate, wholesale and retail, and trade and logistics, together with exports and the globally distributed multinational production and operation system, constitute the integrated US economy.

On the second level, another important driver of the US economy's better-than-expected growth last year was the rapid recovery of consumption. As consumption accounts for nearly 70% of the US economy, the US government's biggest tool to combat the COVID-19 pandemic in recent years has been to provide massive transfers to residents to stimulate private consumption, thereby making US economic data look particularly good.

On the third level, the US is a typical "robbing Peter to pay Paul" economic model, and to a large extent, "debt is the only pleasure." Especially since the 2008 financial crisis, once the economy malfunctions, businesses face widespread bankruptcy, and the unemployment rate among residents is high, the United States has spared no effort to start the printing press.

As "force + dollar" are the two major cards for the United States' hegemonic status, international "de-dollarization" means shaking the "lifeline" of the United States or even taking away the financial "scepter" for dominating the world, which financial and industrial capital and their agents cannot tolerate. It is expected that the strategic game among major international political players around "de-dollarization" will run through the process of global financial change in the first half of the 21st century. Some even analyze that launching a war (proxy war) may be an extreme means for the United States to prevent the critical point of international "de-dollarization" from arriving.

In the face of the international trend of "de-dollarization" under the great changes of the century, responsible economies including China need to grasp the development pulse of the global currency pattern change, with keen risk intuition, super national wisdom, sufficient power tools, combined with necessary strategic communication and forward-looking establishment of cooperative game mechanisms between major powers, to ensure that this process does not have a significant negative impact on China and the world economy.

(This article is contributed by Zhang Yugui, director of the School of International Finance and Trading at Shanghai International Studies University)