Late spring here in Kotor Bay, Montenegro. A gray and chilly morning. Rain plinks on the ground. Tourist season has not yet arrived, and I am one of only three people who’ve come down to the pool area for breakfast by the bay.
A gaggle of seagulls squawk and caw and mew, severely miffed that none of us have yet lived up to our solemn obligation to toss a few morsels their way. How dare we!
So, I pony up and flick part of a croissant toward one. Several seagulls rapidly descend from their perch on a wooden rail, all fighting for the piece of breakfast pastry.
Toward another, I toss a piece of bacon—curious if seagulls have a taste for fried pork belly.
He does. (She does?)
Suddenly, this has become an impromptu science experiment.
I wonder to myself, “Would a seagull eat a scrambled egg curd?”
Yep.
What about a piece of cantaloupe?
Yep.
Trust me, there’s a point to all this…
Seagulls, it turns out, are your basic trash collectors. They’ll pretty much swallow whatever turns up. Seagulls are nature’s version of an economic principle known as “the substitution effect.”
In the seagull economy it means that if there’s not enough of X, then I’ll eat Y or Z… or A or B or 7 or Green or whatever I can find.
In the human economy, it means that if the price of steak becomes too expensive, then I’ll buy ground beef made from lesser cuts. And if that’s too expensive, I’ll buy chicken or pork.
In the currency world (welcome to the point of today’s dispatch) it means that if a currency becomes not worth holding, well, I’ll just switch to a different currency.
We’ve seen that happen throughout history as currencies from Spain, Portugal, the Netherlands, Britian, and elsewhere rose to global prominence in trade… only to collapse as the substitution effect took hold and folks began shifting to something more useful.
The switch taking place today was written about in a recent opinion piece in the New York Times by Alexander Gabuev, director of the Carnegie Russia Eurasia Center. He explains why the West doesn’t understand the Russian economy. The assumption in the US has long been that by using the dollar as a cudgel, America could respond to Russia’s Crimean and Ukrainian incursions by cutting off access to the dollar economy, and Russia would collapse under the unbearable weight of sanctions.
That, however, has worked about as well as trying to run a diesel engine on Red Bull and spit.
The reason: China.
Let me be clear here that this is not a story about Russia and/or China, per se. This is really about the substitution effect.
The top six car brands sold in Russia today are all Chinese, when they used to be European and American. The smartphone market is now dominated by China’s Xiaomi, not Apple. Appliance sales are now dominated by China’s Techno brand rather than South Korea’s Samsung.
But what I’m most interested in sharing with you is this fact from Gabuev’s Times piece:
The Chinese yuan, not the dollar or the euro, is now the main currency used for trade between the two countries, making it the most traded currency on the Moscow stock exchange and the go-to instrument for savings.
And here’s my point: Commentators in the US continually insist that the dollar will never be replaced. That it’s too important to the world economy.
Russia is a real-time Petrie dish demonstrating that this is provably wrong.
In the right conditions, the dollar is absolutely replaceable. If it wasn’t, then Russia would be bending the knee to King Dollar and angling to rejoin the Western monetary mafia.
Yet, it’s not.
Russia has found a substitute.
Which goes to an even bigger story about the rise of the new BRICS currency, a hard-asset-backed currency that China and Russia have been working on jointly for more than a decade and which they aim to turn into a new global reserve currency.
Again, the commentators largely insist that’s laughable. No country, they smirk, will give up its dollar reserves for reserves backed by Russia and China.
As you likely know from reading Field Notes, that is ossified thinking among a group of ostriches who absolutely do not want to see the reality that’s right in front of them. So, into the sand go their heads.
Numerous countries all over the world are more than willing to trade a debt-addled currency for one backed by assets.
In an inflationary world, it makes perfect sense.
In a world where the Federal Reserve systematically destroys the value of the dollar, it makes perfect sense.
In a world where US debt and interest payments are growing into a big problem, it makes perfect sense.
And in a world where US political discord regularly threatens Uncle Sam’s “full faith and credit,” it makes perfect sense.
So of course the dollar can be replaced.
It would/will happen organically, just as Russia’s adoption of the yuan has happened organically. It’s the substitution effect on full display: A dearth of Option A forces a switch to Option B… and life gets on normally as before.
The impacts to America from Russians moving their savings and purchases into yuan is more of a hiccup than a heart attack.
But if (and when) the world’s governments and consumers and savers begin looking for an alternative to the dollar—and they already are—demand for Uncle Sam’s green paper will diminish, and that will bring about a vast range of nasty knock-on effects in America.
That, however, is a different dispatch for a different day.
For now, I just want to leave you with the image of seagulls in Montenegro gobbling up whatever they find. They’re not picky; they’re just survivalists, happy to get a hold of whatever’s available.
It’s nature’s way of showing that substitutions happen all the time.
And it’s no different when it comes to human economies or currencies.