Archive for April, 2022

Dedollarisation and Reducing Dollar Hegemony Following the Russian Military Operation in Ukraine

We’ve been writing about dedollarisation here for some time.

Russia and much of the world have been seeking to dedollarise for a while. In the wake of the Russian military operation in Ukraine, one of the outcomes of countersanctions by Russia against the US and the rest of the west is them being forced to use the Russian Rouble to buy oil and gas.

This does something Russia has wanted to do for a while: reduce US dollar hegemony.

When it comes to what we often call dollar hegemony one can get all technical (and often wrong) or we can make things much more simple.

I prefer simple.

So, here’s what dollar hegemony means in simple (and accurate within limits) terms.

Some necessary assumptions:

1) Inflation is a general increase in prices within an economy. Economists differ in the following, but my training is that inflation is a decrease in the value of a currency.

2) If there is no increase in the amount of currency in circulation within an economy and there is no increase in productivity then there can be no inflation. Inflation is based on the supply of money within an economy.

3) If productivity increases (output of the economy per unit labour) at the same rate as the supply of money then there will be no inflation.

As we know, the money supply in the United States has been growing, and the rate of growth has been accelerating hugely in recent years, but even 20 years ago we could see that the money supply was growing faster than productivity was rising. (Increase money supply by 10%  per year and productivity by 7% per year and the result will be 3% inflation.)

The US in various forms recognised the issue. It was why the US came off the gold standard and closed the gold window.


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