HOW REAL IS THE DECLINE OF THE U.S. DOLLAR by RUBIN ROTHLER LL. B, LL. M
The incumbent global reserve currency seldom changes guard. If the historical record is surveyed, it has recurrently taken major political chaos (often involving catastrophic war) for imploding a global reserve currency.
During the Middle Ages Venice emerged as the initial actual international financial center. A culmination of the Ottoman-Venetian wars, plague and the ascendant Portuguese trade rival spelled Venice's decline by the 16th century. Amsterdam took up the mantle as the world's leading financial center during the Dutch Golden Age of the 17th century, comprising a global trading system. A stock exchange was formed, and the Bank of Amsterdam provided comprehensive services - enacting a reserve bank. A series of wars with England and France diminished Amsterdam's standing. At the beginning of the nineteenth century London superseded Amsterdam as the world's wealthiest city. With a flourishing empire, Britannia ruled the waves. It took the ravages of World War Two to demote sterling in favor of the dollar as the reserve currency. The U.S dollar was formally rendered the world’s reserve currency during the Bretton Woods Agreement in 1944.
The foundation of a reserve currency rests on the guarantor state being politically and economically stable. It must furnish secure capital to foreign investors. The US has neatly fit this role for more than a century, with impervious Treasurys being supplied at times of severe global impasse. However, there is a consensus that the greatest peril in amity to the position of a reserve currency is financial miscalculation. With Biden's economic strategy of "going big" there is apprehension that inflation is impairing the dollar. This caution has been robustly articulated by former Treasury secretary Larry Summers, who has stated that the Biden government is following “the least responsible fiscal macroeconomic policy we’ve had for the last 40 years”. In an interview with the Financial Times he said that “when it’s explained that the Fed has an entirely new paradigm . . . it’s a bit hard to understand why expectations should remain anchored.” He added: “We’re seeing an episode that I think differs both quantitatively and qualitatively from anything since Paul Volcker’s days at the Fed, and it stands to reason that would lead to significant changes in expectations.”
The US currency has so far kept its commanding position due to comparable strengths. This remained true even following Richard Nixon's de facto default on the dollar in terminating currency exchange for precious metals. The obvious question becomes "which strategic power can possibly fill the vacuum" if a decimated dollar leaves a gap of Breton Woods magnitude ? The only allegedly viable contender is China. Beijing is dedicated to confronting the dollar and has earnestly roused adoption of its currency in respective commercial dealings in the Belt and Road enterprise. Although China initially bounced back quicker than its global competitors from the Covid plague, it has recently encountered massive reversals with perhaps 40% of its population under lockdown. Supply chain problems are worse in China than in the West. Chinese public debt is more than 300% of its GDP. Indeed China has a debt crisis, a corporate debt crisis, and an insolvency crisis worse than the West. It can only flex its muscle by saber rattling Taiwan. China, like Japan, has reached its demographic apex, with its population aging as has happened in Japan and has a diminished birth rate, exacerbated by its long time single parent policy. India will overtake China in terms of population and due to immigration (much of it illegal) the US does not face the same kind of demographic time bomb. India's economy remains only 20% the size of China's, despite having more scientists and engineers per capita than any other country, with the added benefit of being English speaking. India is still a long way from eclipsing China as the economic dynamo of Asia, the way China overtook Japan. India's internal divisions between Hindus , Moslems and Sikhs are as tumultuous as China's with the Uyghurs and Tibetans.
Another aspect to consider is that the US is no longer the world's leading manufacturing industrial producer. As the US manufacturing prowess declined, China's manufacturing output has rocketed and surpassed the US to to take the place of the greatest manufacturing producer in 2010. Now more countries have China as their primary trading partner. Global trading correlates with industrial turnout. Consequently China and the Eurasian Economic Union of Armenia, Belarus, Kazakhstan, Kyrgyzstan and Russia are teetering towards forming a different monetary organization. Furthermore, oil (the largest traded commodity) being priced in dollars has recently been brought into question. Saudi Arabia is proposing to render its oil transactions with China in renminbi. “The dynamics have dramatically changed. The U.S. relationship with the Saudis has changed, China is the world’s biggest crude importer and they are offering many lucrative incentives to the kingdom,” said a Saudi official familiar with the talks. Biden's foreign policy of pandering to an increasingly militant Iran, has alienated much of Sunni Saudi Arabia and the Gulf Emirates. There is renewed Obamaesque boot licking of their Shia Iranian nemesis on the opposite shore of the Persian Gulf. This is impacting the future position of the Petro dollar and indirectly the Euro dollar. Block chain currencies, Putin's pricing of oil and natural gas import in Roubles (made possible largely as a result of Biden's war against domestic energy independence in the USA) , and China's acquisition of gold bullion (of which Russia is a major producer) are further anti dollar factors.
In line with the usual Keynesian cycle, the Federal Reserve will raise interest rates with a consequent recession. In light of the Biden mega deficits however, this may in the short term be more of a bandage than a tourniquet to control the haemorrhaging of the value of the dollar. Yet, the even worse debt to GDP ratios in China (and in Asia generally), the state of post Brexit EU, and depressed grain production in the Ukrainian Steppes with its ramifications, still presents viability issues for the renminbi and the euro. Moreover, the US was the first economy to shift to high tech from manufacturing, leaving labor intensive industries to China and low wage economies. China's wage scale however is no longer as low as it was, and Tik Tok has a very long way to catch up with Silicon valley and Seattle despite intellectual property theft and industrial espionage. Meanwhile, China's shadow banking system and real estate bubble remain ticking time bombs. Currency traders, commodity futures markets, institutional investors and central bankers, are all acutely aware of this even although the general public commonly is not.
However, for the time being by mere default, the American colossus will likely remain what it has been since the early 20th century. As Bloomberg concludes: "Of course, nothing is forever, but it can sure seem like it in the foreign-exchange market. Before the dollar, the British pound was the world’s dominant currency, having held the crown throughout the 1800s until World War II. By that measure, the dollar has a long way to go before being toppled. The simple fact is, there is no current alternative on the visible horizon."
