New Eastern Outlook
by Valery Kulikov
The widening gap between the current state of the US economy and the role of the dollar is nearing a tipping point. As America’s economic power relative to that of other countries and regions is shrinking, this means that the dollar will hold less and less of a privileged position.
Until recently, the dollar had such an unrivaled dominance that more than 60% of all foreign exchange reserves in central banks around the world were held in US dollars. More than a third of the world’s GDP is generated by countries that use the dollar as their official currency (e.g. Ecuador) or as a parallel currency (e.g. Panama). At least half of the world’s cross-border trade invoices are issued in dollars, which is five times America’s share of import trade worldwide and three times the country’s share of global exports.
The United States came out of both World War I and World War II as the world’s leading creditor, but they destroyed the economies of other countries that had fought in them. This pattern repeated itself after the Cold War. Washington has actively exploited this upper hand to strengthen the dollar, including its position as the “world’s reserve currency”, which has been remarkably stable over the past 75 years. This is even despite the constantly growing US federal budget deficit, which has already reached $ 24 trillion, exceeding the country’s annual GDP by 17%. And this national debt is growing at a rate of $ 4 trillion a year. The US has $ 200 trillion in unfunded liabilities, and the Federal Reserve holds nearly $ 7 trillion in increasingly risky and shadier assets. According to many experts, the galloping pace at which the US federal deficit is growing and the uncontrolled printing of US dollars could lead to economic implosion by the end of the year. This will not only deal the US economy a blow, but it will also affect the economies of countries that have invested in US stocks.
In a last-ditch attempt to push back the date of the impending financial apocalypse, the United States has printed massive amounts of money, which the American daily newsletter Bonner & Partners warns will inevitably lead to an economic disaster that will in many ways dwarf the Great Depression of 1929–1946. According to well-known American speculator Doug Casey who is the founder and chairman of Casey Research, Washington’s reckless policies have produced trillions in malinvestment that will inevitably be liquidated.
CEO and chief global strategist of Euro Pacific Capital Inc. Peter Schiff correctly predicted the impending crisis back in 2006, pointing out that the imminent collapse of the dollar will be a doomsday for the entire American economy, which he referred to as a “sinking Titanic”. The very serious economic and financial consequences that await the United States, made even worse due to the coronavirus epidemic, have also been acknowledged by President Trump’s inner circle, and one of them is senior White House economic adviser Kevin Hassett, who has already projected that the United States is in for the “biggest negative shock to the jobs market that we’ve seen since World War II.”
Nevertheless, by maintaining America’s expansionist policy in international trade and using whatever means necessary to keep the dollar from falling, the current White House administration is continuing to use the dollar’s reserve currency status as a weapon to impose sanctions against its enemies, especially by cutting off their access to the global dollar-clearing system. In 2017 for instance, US Secretary of the Treasury Steven Mnuchin warned China that it could be prevented from accessing the dollar clearing system if it does not follow the United Nations sanctions approved on North Korea. In 2018, the US Treasury Department imposed penalties totaling approximately $1.3 billion on French bank Société Générale for violating US trade sanctions against Cuba. In the same year, the US Treasury imposed sanctions on Russian company RUSAL, the world’s second largest aluminum producer, to prevent the aluminum giant from freely using the dollar financial system, which experts say had a devastating effect. On January 10, Washington announced measures aimed at halting support for the Iranian regime according to Treasury Secretary Mnuchin. In the same week, the State Department said that Iraq could have its government accounts at the Federal Reserve Bank of New York shut down, which would limit Iraq’s ability to use oil sale revenue, leading to a cash crunch that could deal the country’s economy a detrimental blow.
There are many other similar examples of threats from Washington and sanctions it has levied against Iran, Russia, China, and even EU countries that refused to toe the line as dictated by the US The United States currently has more than 30 active financial and trade sanctions programs.
It is therefore only natural that a growing number of countries which have recently become aware of the danger of dollar dependence and are either already being targeted by dollar sanctions or could soon be targeted have begun voicing their rejection of this policy, which uses the dollar to discipline, blackmail and dictate them.
The Economist highlights that using the dollar to expand the scope of American law and policy has become President Trump’s mantra in “America first!”. Many countries understandably view this as an abuse of power. These countries not only include China and Russia, but also America’s closest, such as Britain and France. The Economist notes that this could ultimately lead to the dollar being dethroned, as other countries are already looking for an alternative to America’s powerful currency. The new age of international monetary experimentation features the de-dollarization of assets, trade workarounds using local currencies and swaps, and new bank-to-bank payment mechanisms and digital currencies. In June the Chinese and Russian Presidents said they would expand settlement of bilateral trade in their own currencies. More and more countries have joined them recently, trading in local currencies. On the sidelines of a recent summit, leaders from Iran, Malaysia, Turkey and Qatar proposed using cryptocurrencies, national currencies, gold and barter for trade. Director Tom Keatinge of the Centre for Financial Crime and Security Studies at the RUSI think tank rightly notes that all of this would suggest we are nearing a “tipping point”. Countries used to stop at just expressing their dissatisfaction with America’s clout as the predominant financial power, but now they are beginning to go to the lengths to resist it.
Experts note that now not only do America’s geopolitical rivals want to avoid dollar dominance, so do many US allies. In her manifesto for 2019-24, Ursula von der Leyen, the new President of the European Commission, said: “I want to strengthen the international role of the euro.” Her predecessor Jean-Claude Juncker has called the dollar’s dominance in European energy trade an “aberration”. As a result, the European Commission is now working on a new action plan, part of which involves encouraging EU countries to eliminate “undue reference” to the dollar in payments and trade.
Another red flag which could have contributed to an accelerated de-dollarization that many countries have reacted to was outlined in an article published in the Washington Post about US government officials beginning to map out a strategy for seeking retaliatory measures to cancel part of its debt obligations to China. In response, the South China Morning Post warns that China could sell part of the US national debt and thereby trigger a crash in the US dollar.
It follows that the end of the dollar era is drawing closer with each day Washington continues to pursue its failed policy.
Valery Kulikov, expert politologist, exclusively for the online magazine “New Eastern Outlook”.