Start by reading Pozsar’s Bretton Woods III: The Framework [1/2]

Part 1 explains Zoltan Pozsar’s Bretton Woods III framework. This Part 2 uses evidence available by October 26, 2025. It identifies later full-year 2025 figures where they appear.

Bretton Woods III after three years

  1. Dollar reserve diversification is happening, but gradually. US Treasuries are debt securities issued by the federal government. Reserve diversification shifts official holdings across currencies and assets. Foreign central bank Treasury holdings fell from peaks above $7.5 trillion to below $7 trillion. This is steady diversification away from dollar assets, not a dramatic collapse.

  2. Gold performed strongly. It rose from roughly $1'900/oz when Pozsar published his dispatches to peaks above $4'000/oz by the evidence cutoff. That move is consistent with central bank buying and demand for “outside money.” Physical gold is outside money because it is not another institution’s liability.

  3. Alternative payment systems are developing. Several countries continue to build infrastructure for non-dollar trade settlement. Some systems operate in limited roles, but they remain preliminary as full substitutes for dollar correspondent banking. Correspondent banking lets banks make cross-border payments through accounts at other banks. The Society for Worldwide Interbank Financial Telecommunication (SWIFT) is principally a financial-messaging network. Further reserve freezes or financial sanctions could accelerate their development.

  4. The dollar itself remained strong. Perhaps surprisingly, it had its best performance against a basket of major currencies since 2015 in 2024. The US Dollar Index (DXY) tracks a fixed basket of six currencies, with the euro carrying the largest weight. By October 26, it had fallen about 11% year to date, interrupting the decade-long rally.

  5. Commodity collateral is becoming more important. Collateral is an asset that secures financing. Research on commodities as collateral studies investors under capital controls and collateral constraints. Capital controls restrict transfers of money across borders. These investors import commodities and pledge them for financing. Higher collateral demand raises commodity prices and changes the relationship between inventories and convenience yield. Convenience yield is the non-cash benefit of holding physical inventory.

China’s Strategic Options in Bretton Woods III

One of Pozsar’s more provocative arguments concerns China’s strategic options. Foreign exchange reserves are external assets that support a country’s currency and payments. China holds approximately $3 trillion, with a heavy weight in dollars and Treasuries. It therefore faces the same question as any large dollar holder: could another government freeze these assets?

Pozsar described two theoretical paths:

  1. China could sell Treasuries and buy commodities directly, especially discounted Russian commodities. This would convert financial claims into physical resources.

  2. China could print renminbi and buy commodities. This could create a “eurorenminbi” market parallel to the eurodollar system. The eurodollar system is the offshore market for US-dollar deposits and credit.

The first option could help China control inflation by securing physical resources. Treasury sales could also raise yields in the Treasury market. The second option would challenge dollar dominance more directly. It would create an offshore currency market backed by commodity reserves rather than financial reserves.

By October 26, 2025, the evidence showed elements of both. China had substantially increased commodity imports from Russia. Renminbi internationalization had progressed, though more slowly than some expected. China’s capital controls and less-developed financial markets constrained it relative to dollar markets.

Durable Insights from the Bretton Woods III Framework

Several insights look durable even if Bretton Woods III does not emerge exactly as Pozsar described it.

  1. Central banks control the nominal domain, not the real domain. The nominal domain covers money, prices, and financial claims. The real domain covers resources, infrastructure, and production. Monetary policy can influence demand, manage liquidity, and stabilize financial markets. It cannot conjure physical resources, build supply chains, or speed up energy transitions. This distinction matters during supply-driven inflation. Rate increases do little to resolve an underlying commodity shortage.

  2. Physical infrastructure matters for financial markets. Very large crude carriers (VLCCs), Suez Canal capacity, and port efficiency constrain financial flows. The infrastructure behind commodity movements therefore helps explain funding-market dynamics.

  3. Collateralization is changing. Commodity-backed finance, warehouse-receipt systems, and physical collateral reflect better monitoring and verification. They also reflect a strategic move away from pure financial claims. The Financial Stability Board (FSB) noted in 2023 that banks play a vital role in the commodities ecosystem. They provide credit, clearing services, and intermediation between commodity firms and central counterparties. A central counterparty stands between buyers and sellers in a cleared trade.

  4. Geopolitical risk affects monetary arrangements. The weaponization of reserve assets changes every reserve holder’s risk calculation, however justified in a specific case. The changed calculation does not imply immediate de-dollarization. It does imply persistent, gradual reserve diversification.

Practical Implications for Funding Markets and Monetary Policy

What did this imply at the October 26, 2025 cutoff?

  1. Funding-market stress may persist. Funding markets provide the financing that keeps trade and financial positions running. Less efficient trade routes can make commodity traders borrow more and for longer. Banks may also face balance-sheet constraints from regulation or quantitative tightening (QT). Quantitative tightening reduces a central bank’s balance sheet. A term funding premium is the extra cost of borrowing beyond overnight maturities. It may therefore remain high relative to overnight rates.

The forward-rate agreement–overnight indexed swap (FRA-OIS) spread compares an unsecured interbank borrowing rate with a maturity-matched OIS rate. It primarily indicates bank credit and liquidity stress. Its connection to de-dollarization or commodity finance is indirect.

  1. Cross-currency basis swaps signal more than interest-rate differences. These swaps exchange funding cash flows in two currencies. Persistent deviations from covered interest parity can reflect structural forces. Covered interest parity is the condition that forward exchange rates offset interest-rate differences.

Those structural forces include trade reconfiguration, reserve diversification, and a changing geography of dollar demand. They may become persistent features of a new monetary system, not temporary arbitrage opportunities.

  1. Commodity volatility creates an ugly tradeoff. A supply disruption can raise prices without strong demand. Central banks can tighten policy in an effort to control headline inflation, while risking recession. Or they can accommodate the shock and accept higher inflation. Supply-driven commodity inflation does not respond well to rate increases.

  2. Infrastructure bottlenecks matter. Year-end constraints on global systemically important banks (G-SIBs) affect money-market functioning. Shipping limits and logistical bottlenecks also affect commodity prices and inflation. Monitoring the “real plumbing,” including freight rates, port congestion, and pipeline capacity, provides early warning of inflation pressure.

Bretton Woods III as an Analytical Framework

Perhaps Bretton Woods III is most valuable as a framework, not a prediction to validate or refute. It links geopolitics, commodities, and money. It also raises four questions:

  • How do physical constraints on commodity flows affect financial-market plumbing?
  • What reserve-holder risks escape traditional financial-risk measures?
  • Where does central-bank power end and military, diplomatic, or infrastructure power begin?
  • How do the “real” and “nominal” domains interact under stress?

The evidence available by October 26, 2025, contains elements consistent with the framework. These include gradual reserve diversification, persistent commodity volatility, term-financing stress in commodity markets, and an increased focus on supply-chain resilience over pure efficiency.

Other evidence cuts against it. The dollar remained strong through 2024. Alternative payment systems developed slowly, and dollar-based financial infrastructure remained resilient.

Still, several Bretton Woods II assumptions face questions that looked less urgent five years earlier. Dollar reserves may not be nearly risk-free. Global supply chains may not optimize cost above all else. Central banks may not manage every monetary disturbance.

Whether these doubts produce a new monetary order or a modified version of the current one remains to be seen. Pozsar’s framework is useful precisely here. It connects commodity markets, funding markets, and geopolitics into a coherent account of how the global financial system works.

Pozsar’s full Money Notes series is available through his website. Perry Mehrling’s course Economics of Money and Banking provides excellent background on the “money view” behind this analysis.