With the onset of the COVID-19 crisis, the United States seems to have developed a severe case of what psychologists call dissociative identity disorder: it is simultaneously projecting two distinct personalities.
On the one hand, the US Federal Reserve has responsibly assumed a leadership role in international finance, as it did during the 2008 global financial crisis. In March, the Fed quickly resurrected a network of bilateral currency-swap arrangements with some 14 foreign central banks, and introduced new repurchase (repo) facilities for an even broader array of monetary authorities, thus ensuring an ample supply of US dollars to meet global liquidity needs. America’s central bank has once again become the world’s lender of last resort.
On the other hand, America’s president, Donald Trump, has irresponsibly rejected the idea that international cooperation is needed to combat the impact of COVID-19 on public health and economic activity. He remains beholden to the principle of “America First,” which means that other governments must look elsewhere for any semblance of leadership. When given the opportunity, the Trump administration has made clear that it will act alone and solely in the “national interest,” as defined by the president’s own narrow transactional worldview.
This display of conflicting identities is hardly a sign of American fitness, nor does it augur well for the US dollar, long the world’s dominant currency. The longer America puts two faces forward, the likelier it will be to fall from its long-held position atop the international monetary and financial system. After all, how much longer will international investors and foreign governments trust the money of an increasingly unreliable partner?
To be sure, there is little risk of a mass exodus from the dollar at the moment. The Fed’s latest actions are a response to higher demand for dollars (rather than a safeguard against panic sales). This suggests that, if anything, the COVID-19 crisis has reaffirmed the greenback’s critical role as the ultimate safe haven.
Nonetheless, before the pandemic erupted, it was increasingly evident that investors and central banks were looking for alternatives to the “unloved dollar standard,” owing to the Trump administration’s unpredictable behavior and toxic brand of xenophobic nationalism. Around the world, there is palpable resentment over Trump’s indiscriminate use of financial sanctions to punish countries such as Iran, as well as any country that does business with it, including US allies. By “weaponising” the dollar’s central role in international settlements, Trump has long been inviting others to return fire.
China, in particular, has been increasingly proactive in promoting the renminbi as an alternative to the dollar, not least by gradually opening its $13 trillion domestic bond market (the world’s second-largest) to foreign institutional investors. Likewise, European countries have launched a new mechanism specifically designed to bypass US sanctions on Iranian oil exports.
With the greenback already slowly bleeding out, the pandemic inevitably will open the wound even wider. That, in turn, will have far-reaching implications for America’s influence in the world and, ultimately, for the US-led post-war international order.
The greenback’s contribution to US power is well understood. As the issuer of the world’s dominant currency, America has long enjoyed what Valéry Giscard d’Estaing, then France’s finance minister, famously called an “exorbitant privilege.” As long as foreigners are hungry for dollars, the US can spend whatever it needs to project power around the world, simply by speeding up the printing press. It also can wield influence more directly, such as by making greenbacks available to friends while withholding them from foes.
But now, Trump’s capricious behavior and pursuit of isolationism threaten to erode US geopolitical power significantly. And once US power is widely seen to be on the wane, the greenback will start to lose some of its appeal, setting in motion a vicious circle: a weaker dollar begets a weaker US, which begets a weaker dollar, and so on.
Indeed, the pound sterling followed a similar pattern in the twentieth century. Sterling’s loss of international standing was both a cause and an effect of Britain’s slow-motion decline from an imperial power to a middling island power off the coast of continental Europe. The dollar is not immune to the same kind of progressive degeneration.
The decline of the US and the dollar’s standing would remove one of the key pillars of the post-war liberal order. For many, that order has been synonymous with US geopolitical dominance. But in the absence of US leadership, competing political models are coming to the fore, promoting nationalism, populism, and various stripes of “illiberal democracy.” America’s split personality will affect more than just Americans. Barring a return to form in Washington, DC, the prognosis for the dollar-centric post-war order looks grim.
Benjamin J. Cohen is Professor of International Political Economy at the University of California, Santa Barbara, and is the author is the author, most recently, of Currency Statecraft: Monetary Rivalry and Geopolitical Ambition. Copyright: Project Syndicate, 2019, and published here with permission.
19 Comments
If China/India/Russia were smart, they would get together and form a new currency block. Include SE Asia as well and you have a powerful currency covering most of the worlds population and land area. They could then demand trade only in that currency and Europe and most likely the US would have to start holding reserves. But those countries working together? I don't see it happening.
Almost certainly there shouldn't be a national currency however that is exceptional. Let's be honest though, the only reason this continues is American might - you have the most advanced weapons and nobody wants to mess with you.
In a sensible world, we would have a world currency (which might still happen, SDR's become a real currency?). You would think this would happen in a globalised world. However as we step away from globalisation and the world seemingly becomes less and less sensible, this is highly unlikely.
The Euro currency has proven to be a disaster for the countries in it that run current account deficits as they can no longer fund themselves in their own currencies. Deficit countries will always end up in debt to surplus countries sharing the same currency and they are locked into a fixed exchange rate with them.
As it happens, they are smart, which is why they will pay no attention to your suggestion. Why would 3 reasonably big global heavyweights give up their own monetary policy? Ask Greece how happy they are, 20 years in, with their monetary policy being set in Germany.
SDRs as a global currency is the sort of thing you hear from year 1 university students. SDRs are not a currency and I’m not sure why this idea ever gets any credence other than a basic misunderstanding of what they actually are, or perhaps as a fantasy.
The US dollar has no real rival and will not for a long time.
What would any new currency block be valued in terms of?
And would it be a block like the Euro?
That's valued in terms of ....US$.
So is Sterling, and the Yuan, and the Rouble and the Rupee, and even SRR's ( a US$ basket)
Until there is another medium of valuation, what's the point?
What is the $US be valued in terms of? Especially when it's being printed like there's no tomorrow...
Could they not set their own terms? The point is to avoid exactly what is stated in the article, the US holds a privileged position as all oil (and gold?) transactions
and most international trades are done in US $$. The US knows this, so weaponises it's dollar, then backs this up with it's military (see gulf wars, Libyan intervention). This clearly has important implications for countries who aren't mates with the US.
A new currency with a powerful bloc behind it could mean that Iran can trade it's oil freely and not have to hold US$. I have a suspicion more and more countries would flock to the idea, particularly with the demented orange clown in charge.
Good article. The usd is the global reserve via the Bretton woods agreement. All currencies to be linked to the usd. At that time, the usd was still backed by gold.
Yet between the 1950s and 1970, the usa paid out nearly half it's gold reserve to trading partners, as a result of trade deficits, and countries demanding payment in gold.
1971, Nixon was forced to take the usd off the gold standard. There was a massive uproar internationally at the time, led by France in particular. The usa managed to ensure all transactions for oil were to be carried out in usd, and the Petro-dollar was ensured.
The usa gave assurances that they recognised the massive responsibility that went with being the global reserve, and in no way would they enter into money printing. With the UN, the swift system, and nearly all global organisations under their direct control, they of course got on and did what they wanted.
The swap lines are an important conduit for exporting American inflation, as the usd is still the reserve currency of many nations, and there is an overwhelming amount of global debt denominated in usd.
The Petro-dollar died a few years back, when china and russia agreed to trade in their own currencies.
Now the usa is printing money like mad, and the western world in particular are not in a position to say no.
China appears to be clearing it's trading book, and running credit checks on those nations that have a trade deficit with them. (That's ALL nations by the way). In the west we would simply call this good business practice, clearing out bad creditors).
The usd, as the natural outcome of being printed by a privately owned central bank, will at sometime collapse, as the system is 100% reliant on ever increasing debt, which means it is constantly losing it's purchasing power.
That is, in 1971, 1 oz gold = $35usd,
2020, 1 oz gold = $1700usd.
FIAT CURRENCIES always go to 0, 100% guaranteed.
The basic premise is just nonsense. To backstop the world financial system whilst putting your people health first is not conflicting identities.
Sanctions for Iran are for breaches of agreement and were very predictable. Who wants religious fanatics in charge of nuclear weapons?
The most useful thing I read was, “there is little risk of a mass exodus from the dollar at the moment” because at least that much is true. The greenback won’t lose any appeal until there is a viable alternative.
The article seems largely empty political wind.
Yawn. This one again. The internet commentator’s recurring wet dream.
1. “... escalating US leadership failures will further erode the greenback's global standing” - good lord. Demand for US dollars has practically never been higher than it has been in recent months.
2. The US dollar accounts for well over 60% of worldwide reserves which is actually pretty high by historical standards.
3. Having the global reserve currency is not an ‘exorbitant privilege’ just because some borderline psychotic Frenchman said so decades ago. The fact is that it’s not really worth all that much to America at all - https://krugman.blogs.nytimes.com/2011/04/25/speaking-of-international-…
4. Not directly related but this one is another favourite of the same type of internet commentator that gets moist over the end of the dollar - American government debt is not all held by China. Most American debt is held by various departments of the American government itself, and most of the rest is held by the American public. Foreigners don’t really hold all that much of it.
America isn’t going anywhere, so calm down.
The Petro-dollar was the key to underlining the usd as a reserve currency, and was implemented as a solution to no longer being backed by gold.
In recent years, the Petro-dollar came to the end of it's 100% monopoly position.
There is now an alternative to the swift system, which was integral to the system of imposing sanctions.
The major point is that the federal reserve is privately owned, and the monetary system of issuing debt, by printing money, can only ever end in zero value for the currency concerned. The strength of the usd is a reflection of a lack of faith in investment denominated in usd. It's like a bet each way, if the markets continue to fall, stay in usd, if the markets pick up, dive back in.
Trouble is, the usa, like all fiat currency nations, want a low rate of exchange, for export purposes, which of course is self defeating, a race to the bottom, reflected in the usdollars ever decreasing purchasing power.
Because the central bank is privately owned, it issues money at interest, yet the owners are due 6% annual return. The system continually has to issue debt, and the treasury demands inflation to reduce the real nominal value of the deficit it incurs.
Things have changed massively over the last few decades, and while the usa may not be going anywhere, and while the usd is still a huge proportion of many nations reserves etc etc, the message is about paper currencies being worthless.
Historically when they collapse, it happens quickly, and takes many people by complete surprise.
Everyone knows something about money, it's a prerequisite for participation in the economic part of society. And yet very few people realise that the fed is privately owned, and that fiat currencies are backed by nothing.
EVERYBODY has the right to recieve this info, and understand it. What they do as a result is their business, and like yourself, as you have so much confidence in fiat, can keep calm, and carry on with not a care in the world, and that's great.
Let me ask you one question, do you, am_fek know who owns the federal reserve?
That post is just a word salad. Yes, some aspects of the Federal Reserve system are held privately, oooooh. All of the actual decision makers are appointed by elected officials. Why is it that people who comment on things like this think they are the only ones who know the TRUE SECRET? We all know. It’s just not that big of a deal.
The rest of your post is a garbled mess of unfounded assertions. The dollar reserve system began when the gold window closed because there was and is no alternative. Fiat currencies are not backed by ‘nothing’. The United States has an annual GDP of $20 trillion and 350 million residents that choose to adopt it as their medium of exchange and store of value. No major fiat currency has gone to zero. The world is not going back to the gold standard. The gold standard was an absolute, unmitigated disaster.
You will go to your grave frustrated about sound money and nothing will really have changed, because all of these arguments have already been had and settled. The world will almost certainly remain on the dollar standard and no number of YouTube exposé videos will change that.
am_fek, thanks for your reply. Seems like I'm not alone in creating word salads, glad you could at least join me on that front.
Decision makers Appointed by elected officials, true, and underlines your own faith in the system. You still avoid answering the question of ownership, although you accept that "some aspects" of the federal reserve "system" are privately owned. The "system", is the bank, known as the federal reserve, which is acting as a central bank. Hence a privately owned central bank.
Other than existing fiat currencies, and excusing European currencies that joined the euro, without exception, ALL fiat currencies revert to zero, without exception.
The annual gdp is hardly an asset backing the usd. It's more of a popularity vote, and one that the public have had little choice in.
The gold standard, which there have been a number of versions, including silver standards, are systems bound by a limit on money supply. By nature, they are deflationary, great for the public.
Yet, I am not promoting a return to a gold standard, i dont think a solution is possible until everyone 100% demands a change.
Clearly i have serious doubts about the usd continuing as the global reserve, as it has lost the power of the Petro-dollar.
I am however perfectly happy to accept your point of view, and no desire to rebut your vision of how I will go to my grave, other than to say that I have no debt, I have a freehold house, and I have assets for my future. I trust with your superior knowledge of the global financial system, present and historic, that you are more than adequately catered for.
Ooooops, word salad again. Cheers am_fek, may you live long and prosper.
I recommend you watch the following video, its pretty long but it pretty much outlines the bigger picture of whats going on. Your never going to see any of this in the MSM.
https://www.youtube.com/watch?v=9-rsQT4HScA
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