Bhuvan— Global Economic Shifts: Dollar Dominance, US-China Decoupling, and Protectionism's Perils
The Dollar's Enduring Supremacy
There has been considerable anxiety lately about the US dollar's status, particularly the breakdown of the correlation between US bonds and the dollar. Typically, these move together, but this correlation has fractured in the aftermath of what some call "liberation day" - the April 2nd tariffs imposed by President Trump.
Predictably, this has led to a chorus of voices proclaiming the decline of dollar supremacy. But what most commentators miss is that the dollar remains the only game in town. No other currency comes close to challenging its position.
The Euro stands as a distant second, but Europe's economic challenges are well-documented. Many point to the Chinese renminbi as a potential successor, but it's a managed currency without full capital account convertibility. It's not even clear that China desires the responsibility of issuing the global reserve asset. China's markets also lack the transparency and freedom necessary for such a role.
Other currencies—the Japanese yen, Korean won, Australian dollar, Swiss franc—aren't remotely capable of absorbing the volume of transactions the US dollar-based financial system handles daily. You might not like the dollar, but it remains the cleanest shirt in a closet full of dirty laundry.
But—and there's always a but—Barry Eichengreen, probably one of the preeminent experts on currencies, wrote a brilliant piece in the Financial Times recently titled "Can the dollar remain king of currencies?" In it, he made an elegant point: while it's easy to look at the numbers and shares of dollar in global trade, foreign exchange reserves, and the size of financial markets, one has to remember that it is people who made the dollar what it is.
Issing names two singular individuals who are responsible for cementing the dollar's dominance more than anybody else. The first was Paul Warburg, who played a key role in establishing the Federal Reserve, which acts as the ultimate backstop for the dollar-based financial system. The second was Harry Dexter White, who went head-to-head with John Maynard Keynes at the Bretton Woods Conference and played a crucial role in cementing the dollar's status as the global reserve currency.
He also points out that the United States helping Europe with the Marshall Plan to reconstruct the continent in the aftermath of World War II, along with the establishment of NATO, helped cement the acceptance of the dollar as a reserve currency. Relationships play a key role in the dollar being the dollar.
And just as people made the dollar what it is today, it could be people who lead to its undoing. Donald Trump's capricious actions and shambolic tariff policies have raised questions about the dollar's stability. If America becomes isolationist, reneges on its alliance commitments, or decides to go it alone, will there be willing takers who continue to choose the dollar as their currency of choice, even if there are no clear alternatives?
I think of finance as water—it always flows downstream. If the history of finance is any guide, solutions always arise one way or another. They might be good solutions, bad solutions, or even chimeric subpar solutions, but they always emerge. What might replace the dollar is a question on everyone's mind. Of course, nobody knows the answer, but it's not hard to foresee some sort of synthetic solution or bilateral trading instruments taking some share from the dollar. The dollar is dominant, but its dominance is by no means set in stone.
As Akash Prakash recently pointed out, a fall in the dollar's value doesn't equate to a decline in dollar dominance—these are distinct phenomena that shouldn't be confused. Zooming out on the dollar's historical chart reveals long periods of ups and downs. Currently, many macro commentators believe we're entering a phase of declining dollar value.
It's worth noting that predictions of the dollar's demise are nothing new. I recently read an interview in Engelsberg Ideas with the renowned historian Paul Kennedy, author of "The Rise and Fall of Great Powers." He mentioned that even 20 years ago, he worried about countries conspiring to trade heavily against the dollar, potentially driving down its value and breaking its dominance. Yet these scenarios never materialized.
Despite the periodic crises of the 1970s and even the 2008 financial crisis—which many predicted would be the death knell of the dollar-based financial system—the dollar has consistently gone from strength to strength. The economist Perry Mehrling has documented this enduring dominance in great detail, and I highly recommend checking out his work for those interested in the resilience of the dollar-based system.
This decline stems largely from the unprecedented policy uncertainty Donald Trump has introduced into the US economy. The divergence between US 10-year bonds and the dollar can be partially explained by investors relocating away from the United States—selling dollars and moving to other jurisdictions like Japan and Europe. This represents a temporary pause in the attractiveness of US dollar-based assets.
Simultaneously, fiscal spending in Europe and attractive valuations in Japan have made these markets appealing alternatives. Whether this continues remains uncertain. Markets are cyclical by nature—the US has been virtually the only game in town since the 2008 financial crisis, but this dominance had to end sometime. It appears the tariffs may have been the proverbial straw that broke the camel's back.
US-China Decoupling: Accelerating Beyond Expectations
I recently read a Reuters article reporting that China has apparently instructed Korean manufacturers to stop exporting power equipment—transformers, batteries, and other electronic equipment containing Chinese rare earth metals—to the United States.
This move is unprecedented, reminiscent of secondary sanctions in dollar-based financial measures. In primary sanctions, the US directly bans dealings with sanctioned entities. Secondary sanctions extend this power: even third-party countries that have no connection to the US must comply or risk being cut off from the dollar-based financial system. China appears to be adopting a similar approach by pressuring Korean manufacturers - essentially saying "if you want to do business with us, you can't export certain components to the US." This represents a significant escalation in economic countermeasures.
Many analysts have discussed the potential decoupling of the United States and China, but typically in hushed tones—uncertain whether two of the world's largest trading partners could truly separate their economies. The pace of this decoupling now appears to be accelerating dramatically.
This doesn't mean trade between the US and China will cease entirely—that's impossible given the scale and interdependence of their economies. Judging by recent statements from Vice President Pence and President Trump, they seem to be attempting to save face by cutting a deal with China.
Nevertheless, something fundamental has broken. The Chinese will likely never again feel comfortable trusting the United States as a reliable partner. This conflict will continue to escalate, with little chance of these superpowers pulling back from the brink.
The Perils of Protectionism: Lessons from History
A recent Foreign Affairs article examined the historical pattern of protectionism, particularly focusing on Latin American countries that embraced import substitution regimes after the 1920s. These experiments predictably ended in disaster.
While manufacturing sectors initially grew as these countries reduced imports, the quality of domestically produced goods was subpar. The economic model led to widespread corruption and crony capitalism. Instead of competing in the marketplace, companies competed in back rooms, leading to a system defined by deal-cutting rather than innovation or efficiency.
This approach stunted the development of free markets while failing to produce a viable alternative. The import substitution system didn't generate manufacturing output that could be exported due to poor quality. The economic failures eventually triggered political crises, leading to military coups and the establishment of brutal dictatorships in several countries: Chile (1973 under Augusto Pinochet), Brazil (1964 under Humberto Castelo Branco), Argentina (1976 under Jorge Rafael Videla), and others like Uruguay (1973) and Bolivia (multiple coups in the 1960s-70s). These authoritarian regimes were a direct consequence of the economic instability created by failed protectionist policies.
Latin American economies continue to feel the aftereffects of these disastrous protectionist policies decades later. India represents another notable case of failed import substitution strategies.
These historical examples illustrate that pure protectionism never really works. At the same time, completely unfettered free trade also creates problems. There's a delicate balance to be found, and countries must be thoughtful in seeking that equilibrium between openness and protecting strategic industries.
Prerana - Wake up to the smell of the 3T's
Today’s deep dive started the way most of my mornings do: with coffee. I am a sucker for fancy coffee but the problem is fancy coffee everyday is expensive. And it has too much sugar in it. So much like I started making my own kombucha, I decided to learn how to brew my own coffee.
I always knew there were different methods – espresso, French press, drip, cold brew – but I never realized that, underneath all those gadgets and rituals, there are really just three basic ways to brew coffee: Heat, Pressure, and Time. This is also called the 3T's - Time, Temperature and Turbulence.
[1] Heat
This is the method most people use without thinking – boiling water poured over coffee grounds. The idea is simple: hot water extracts flavor from the ground beans. The hotter the water, the faster it pulls out the oils, acids, and caffeine. But too hot, and you’ll get over-extraction (think harsh bitterness). Too cold, and it’s under-extracted (flat, sour coffee).
[2] Pressure
This method is all about speed and intensity. Instead of letting gravity or time slowly draw flavor from the grounds, pressure-based brewing forces hot water through tightly packed, finely ground coffee. Espresso machines are the poster child here. They use around 9 bars of pressure (that’s 9 times the atmospheric pressure at sea level!) to shoot hot water through a compact puck of coffee in about 25–30 seconds. It’s intense, and it extracts a whole spectrum of flavors very quickly. This also creates that pattern we see at the top , the golden, foamy layer that’s full of aromatic oils and tiny gas bubbles.
[3] Time
This one surprised me. You don’t have to use heat or pressure to brew coffee. Sometimes, you just let water and ground coffee hang out for a while, and time does the rest. This method is all about slow extraction and letting the flavours seep out gradually. It’s especially popular for cold brew, where you use cold or room-temperature water and steep the grounds for hours. Without heat, the extraction process slows way down. But that’s not a bad thing, it just pulls out different compounds. You’ll get less acidity and bitterness, and more of the smoother, chocolatey, mellow notes - almost sweet.
The advantage of knowing how these methods work is that you can course correct your coffee anytime. Want more strength in your French press? Steep it longer. Want a smoother espresso? Try lowering the water temp a bit. Want a lighter cold brew? Shorten the steep time.
This is all if you want to brew your own coffee. But what about instant coffee? instant coffee is still built on the same three principles.
(Heat) Instant coffee starts with hot water extraction. Big machines brew enormous vats of coffee using heat to pull out all the flavour.
(Pressure) Pressure becomes important during the drying process, especially with the fancy version: freeze-drying. Even in spray-drying (the faster, cheaper method), pressure and airflow are used to evaporate the coffee droplets mid-air, with super-hot wind rushing past them.
(Time) Time plays a different role in instant coffee. Spray-drying skips this aspect, but that speed can roast out some of the subtlety. During freeze-drying, time is the hero. It takes hours to gently extract moisture without ruining the flavor.
It was interesting to go into a deep dive into coffee and the science behind it. Hopefully, my coffee comes out well!
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