Why Zoltan Pozsar’s ‘Bretton Woods III’ Won’t Work
A fairy tale.
That's what I called Zoltan Pozsar's Bretton Woods III framework earlier this month.
My critique, which actually spanned a pair of articles, isn't amenable to summary treatment, much as Pozsar's notes often elude attempts at abridgment. In many cases, paraphrasing Pozsar is impossible.
Read more:
Zoltan Pozsar’s Fairy Tale
Zoltan Pozsar Declares Dawn Of ‘New World Monetary Order’
Pressed to describe my take, as expounded across those two linked pieces, I'd simply say th
Sanity is probably best described as accepting what is and understanding it.
Talking Heads and people that walk backwards will be continually trying to make value a finite object.
” … trying to make value a finite object.”
I dreamed about that for a bit, wanted to write a book about it (I do have one person’s attempt on my shelves) but realized it was going to take more time than I had. For what its worth, the first chapter was going to discuss commodity-based exchange value.
I wonder who out there thinks Bretton Woods III is going to happen in the near-term or medium-term? Either way I hope Breton Woods III is forgotten within 12 months. Good piece!
“If we are right, our framework will be the right framework to think about how to trade interest rates in coming years: inflation will be higher; the level of rates will be higher too; demand for commodity reserves will be higher, which will naturally replace demand for FX reserves (Treasuries and other G7 claims); demand for dollars will be lower too as more trade will be done in other currencies; and structurally then, the negative cross-currency basis (the dollar premium) will naturally fade away and potentially become a positive cross-currency basis”
The US is on a road to being a huge energy exporter. While we are net importers or oil, we export LNG and are staring down a materially larger market. We export coal. In the medium term it would not be shocking if we became net exporters of oil as well.
While a stretch, it’s not impossible to imagine our oversees dollars coming back home in the form of energy purchases rather than the form of treasury purchases. The onshoring trend would also need to escalate materially to reduce our trade deficit in order to truly impact foreign demand for us treasuries.
Thank you H. Michael Pettis has a very readable take on this from 4/12/22 and comes to the conclusion that while it would likely be impossible to impose BWIII on the US, at some point the US might choose to move in this direction of its own volition as the cost of absorbing the ROW’s excess savings becomes more problematic.
https://carnegieendowment.org/chinafinancialmarkets/86878
Tying the mental tool of currency (and therefore trade) to commodities (yes it used to be Gold) is a step backwards in abstractions, like saying that computers can only be hardware that operates on numbers but not letters.
Changing to China with it’s opaque and non-laws-based framework to be the foundation of international trade because of the size of their internal currency usage misunderstands how truly deeply entrenched/accepted the dollar is everywhere (which is covered in the article and comments). A “futurist” essay might be on the implications of a “digital dollar” – does this increase US hegemony or does it further make it a common standard that is loosely managed?
The global demand for USD, especially for individuals, currently seems to be greater than the supply.
The majority of $100 bills reside outside the United States and for those who live under corrupt dictatorships with worthless currencies (over 75% of global population)- they absolutely want USD.
Michael Pettis’ points are compelling to me, in addition to the impracticality of holding reserves in commodities (how would one store $100BN of wheat, and for how long?), and finally the absence of a compelling reasons for economically powerful nations other than China and Russia to establish BW3.
BW1 ended because the US wanted it to. https://history.state.gov/milestones/1969-1976/nixon-shock?msclkid=692b296dbe7511ecafd9a59bec65679b BW2 will end when the US wants it to, or when the USD is so degraded that it can not longer support BW2. The former may come before the latter, but both are very remote.