Zakaria identifies key part of Putin-Xi meeting you may have missed

First, here's my take. The most interesting outcome of the three-day summit between Vladimir Putin and Xi Jinping got limited media attention. Describing their talks, Putin said, We are in favor of using the Chinese Yuan for settlements between Russia and the countries of Asia, Africa and Latin America. So the world's second largest economy and its largest energy exporter are together actively trying to dent the dollar's dominance as the anchor of the international financial system. Will they succeed? The dollar is America's last surviving superpower. It gives Washington unrivaled economic and political muscle. It can slap sanctions on countries unilaterally, which freeze that country out of large parts of the world economy.

And Washington can spend freely, certain that its debt will be bought up by the rest of the world. The war against Ukraine, combined with Washington's increasingly confrontational approach to China, have created a perfect strong in which both Russia and China are accelerating efforts to diversify away from the dollar. Their central banks are keeping less of their reserves in dollars, and most trade between them is being settled in the Yuan. They are also making efforts to get other countries to follow suit. The Biden administration has handled the economic war against Russia extremely effectively by building a coalition of almost all the world's advanced economies. That makes it hard to escape from the dollar into other highly valued stable currencies like the euro or the pound or the Canadian dollar, because those countries are also warring with Russia. What might have been a sharper turning point for the dollar's role was Donald Trump's decision in May 2018 to pull out of the Iran nuclear deal.

The European Union was strenuously opposed to this move, but it watched as the dollar's dominance meant that Iran was immediately excluded from the world economy. Jean-Claude Juncker, then president of the European Commission, proposed enhancing the euro's role internationally to shield the continent from what he called selfish unilateralism. The Commission outlined a path to achieve this. It hasn't happened. There remain too many fundamental doubts about the future of the euro itself. Dollar dominance is firmly entrenched for many good reasons. A globalized economy needs a single currency for ease and efficiency.

The dollar is stable. You can buy and sell it anytime, and it's governed largely by the market and not the whims of a government. That's why China's efforts to expand the yuan's role internationally have not worked. Ironically, if Xi Jinping wanted to cause the greatest pain to America, he would liberalize his financial sector and make the yuan a true competitor to the dollar. But that would take him in the direction of markets and openness that is the opposite of his current domestic goals. All that said, Washington's weaponizing of the dollar over the last decade has led many important countries to search for ways to make sure that they do not become the next Russia. The numbers are revealing.

The share of dollars in global central bank reserves has dropped from roughly 70% 20 years ago to less than 60% today and falling steadily. The Europeans and the Chinese are trying to build international payment systems outside the dollar-dominated swift. Saudi Arabia has floated with the idea of pricing its oil in yuan. India is settling most of its oil purchases from Russia in non-dollar currencies. Digital currencies might be another alternative, and in fact China's central bank has created one. All of these alternatives add costs. But the last few years should have taught us that increasingly nations are willing to pay a price when they want political goals to trump economic ones.

We keep searching for the single replacement for the dollar, and there will not be one. But could the currency suffer weakness by a thousand cuts? That seems a more likely scenario. The author and investor, Ruchir Sharma, points out, right now for the first time in my memory we have an international financial crisis in which the dollar has been weakening rather than strengthening. I wonder if this is a sign of things to come. If it is, Americans should worry. I spoke last week about the bad geopolitical habits Washington has developed because of its unrivaled unipolar status. It's even more true economically.

America's politicians have gotten very used to spending seemingly without any concern about deficits. Public debt in America has risen almost fivefold from roughly $6.5 trillion 20 years ago to $31.5 trillion today. The Fed has solved a series of financial crises by massively expanding its balance sheet almost 12-fold from around $730 billion 20 years ago to about $8.7 trillion today. All of this only works because of the dollar's unique status.

If that were to wane, America will face a reckoning like none before.

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