Who's ditching the dollar, and the real reason food is so expensive | The Dip Podcast

Key Concepts

• Climate Change and Food Prices: The direct correlation between extreme weather events caused by climate change and rising food prices due to supply chain disruptions.
• Monetary vs. Fiscal Policy: The distinction between how central banks manage money supply (monetary policy) and how governments manage spending and taxation (fiscal policy), and how this differs across regions.
• EU's Fiscal Fragmentation: The challenges faced by the European Union in implementing cohesive fiscal policies due to its multi-country structure and differing national fiscal stances.
• Dollar Dominance and Reserve Currencies: The ongoing, gradual decline of the US dollar's share in global foreign exchange reserves and the search for alternatives.
• Gold as a Reserve Alternative: The increasing interest in gold as a popular alternative to the US dollar for central banks, particularly in emerging economies.
• Human Rights and Trade Policy: The complex ethical and economic trade-offs the EU faces when balancing its commitment to human rights and environmental standards with its need for trade and resources.
• Corporate Sustainability Due Diligence Directive: An EU regulation requiring companies to monitor their supply chains for human rights abuses and environmental harm.
• Deforestation Legislation: EU regulations aimed at curbing deforestation, which can impact trade relations with countries like Indonesia.
• New York City Tax Policy: Proposed tax increases in New York City, including corporate tax rates and a tax on millionaires, and their potential economic impact.

Climate Change and Rising Food Prices

A listener, Gaming Tonight 1526, raised the critical point that food prices will continue to rise as long as the climate crisis is not addressed. DW environment reporter Charlie Shield confirmed this, explaining that global warming exacerbates extreme weather events such as floods, heat waves, and droughts. These events directly impact agricultural production, leading to supply shortages and consequently driving up food prices.

Specific Examples:

• Ghana and Ivory Coast (2024): A heat wave caused global cocoa prices to surge by 280%.
• Australia (2022): Extreme flooding led to a 300% spike in lettuce prices.
• Brazil (2023): A drought resulted in a 55% increase in global coffee prices.

Shield concluded that as long as fossil fuels are burned, this trend of rising food prices will persist.

EU's Monetary and Fiscal Position vs. US and China

A question from LF9233 highlighted a potential difference between the EU, US, and China concerning their monetary regimes and solidarity, suggesting that the EU's enforced austerity measures during crises, contrasted with the expansive monetary policies of the US and China, led to market liquidity and greater risk acceptance in the latter two.

DW business colleague Matis Rishman clarified that while the EU's monetary policy has been accommodating, the key differentiator lies in their fiscal position. He noted that the EU's fragmentation, with numerous different banking jurisdictions and laws governing state-bank interactions, makes cohesive fiscal expansion challenging. Germany's reluctance to incur debt and its influence on other member states further contributed to this fiscal conservatism. Rishman acknowledged that this fiscal approach is a significant reason for Europe lagging behind the US and China but emphasized the difficulty in changing this structural issue.

Asian Governments and Reserve Withdrawals

Abdul Razak Razak 6222 suggested that Asian governments are withdrawing reserves from Western nations following the freezing of Russian assets. Daniel McDow, author of "Bucking the Buck," stated that while there isn't a "mass shift" away from the dollar in global aggregate data, there has been a continuation of a gradual decline in the dollar's share of global reserves over the past 20 years.

Specific Country Examples:

• Russia (2018): A notable example of a dramatic strategic move out of the dollar.
• Turkey (around the same time): Saw a significant drop in Treasury holdings.

McDow noted that China has not shown evidence of a dramatic shift out of Treasuries. However, he observed growing interest among central banks in emerging countries, particularly those with strained relations with the US, in dollar alternatives.

Gold as a Dollar Alternative:

Gold has emerged as a popular dollar alternative in the last decade. Countries like China and India have been buying significant amounts of gold. Shifting reserves into gold means not buying other assets, likely dollar assets, which could have a downward effect on overall dollar holdings. McDow concluded that there are no current "mass shifts" out of the dollar in a conspiratorial manner.

EU's Human Rights and Trade Dilemmas

A comment from Alex Kaylor questioned the EU's commitment to human rights and workers' rights, given its trade deficits with countries that do not uphold these standards. Daniel Winter discussed the inherent trade-offs the EU faces.

Case Study: Qatar and the Corporate Sustainability Due Diligence Directive

The Qatari energy minister threatened to stop selling liquefied natural gas (LNG) to the EU if the EU did not remove or water down its Corporate Sustainability Due Diligence Directive. This directive requires companies doing business with the EU to monitor their supply chains for human rights abuses and environmental harm. The dilemma for the EU is whether to prioritize its human rights agenda, potentially leading to energy shortages for its citizens during winter, or to compromise on its standards to secure essential resources.

Case Study: Indonesia and Deforestation Legislation

The EU desires lithium and other metals from Indonesia to reduce its dependence on China. However, the EU's deforestation legislation, aimed at clamping down on palm oil, has put significant pressure on Indonesia. The Indonesian ambassador to Germany indicated that a trade deal would be difficult if the EU insisted on its deforestation legislation. The EU faces a choice: sacrifice its independence in securing critical minerals by remaining dependent on China, or risk alienating Indonesia and potentially not achieving its environmental goals if production simply shifts to China, as it did with palm oil exports.

Winter argued that legislating morality into commerce is complex. While influencing others to improve is important, an overly moralistic approach could lead to fewer friends, less leverage, and no tangible improvement in global conditions, while burdening the EU with compliance paperwork.

New York City Tax Policy

A question from Peter Lem questioned the extremity of proposed tax increases in New York City under the new mayor-elect, Eric Adams. Specifically, a 2% corporate tax increase to match New Jersey's rate and a 2% income tax on millionaires.

Cameron Fen, an economist at State Street, commented on these proposals:

• Corporate Tax Rate: Fen acknowledged that an 11.5% corporate tax rate (from 7.25% to 11.5%) would be "fairly high." However, he believes people will not leave New York in droves due to this rate, citing New York's appeal as a place to live and a hub for talent acquisition for corporations.
• Tax on Millionaires: He described the 2% tax on millionaires as "not insignificant" but a "small price to pay" for living in a desirable city. He contrasted this with higher tax rates in Scandinavian countries, which he noted seem to be doing well.

Fen expressed more concern about the corporate tax rate being high compared to the individual tax on millionaires but deemed both manageable.

Conclusion

The podcast episode "The Dip" addressed listener questions on several key economic and geopolitical issues. It highlighted the tangible impact of climate change on food prices, the structural fiscal challenges facing the EU compared to the US and China, the gradual but ongoing shift in global reserve currencies away from the dollar with gold emerging as an alternative, and the complex ethical and economic trade-offs the EU navigates in its pursuit of human rights and environmental standards through trade policy. Finally, it examined the manageability of proposed tax increases in New York City. The overarching theme is the interconnectedness of global issues and the intricate balancing acts required in policy-making.