The anti-dollar awakening could be ruder and sooner than most economists predict

[FAH1223]

The anti-dollar awakening could be ruder and sooner than most economists predict
Gal Luft; co-director of the Institute for the Analysis of Global Security

Published 3:14 AM ET Mon, 27 Aug 2018 Updated 5:56 AM ET Tue, 28 Aug 2018
CNBC.com

The United States is currently waging economic warfare against one tenth of the world's countries with cumulative population of nearly 2 billion people and combined gross domestic product (GDP) of more than $15 trillion.

These include Russia, Iran, Venezuela, Cuba, Sudan, Zimbabwe, Myanmar, the Democratic Republic of Congo, North Korea and others on which Washington has imposed sanctions over the years, but also countries like China, Pakistan and Turkey which are not under full sanctions but rather targets of other punitive economic measures.


Nicolas Asfouri | AFP | Getty Images

In addition, thousands of individuals from scores of countries are included in the Treasury Department's list of Specially Designated Nationals who are effectively blocked from the U.S.-dominated global financial system. Many of those designated are either part of or closely linked to their countries' leadership.

From a U.S. perspective, each one of the economic entities is targeted for a good reason be it human rights violations, terrorism, crime, nuclear trade, corruption or in the case of China, unfair trade practices and intellectual property theft.

But in recent months it seems that America's unwavering commitment to fight all of the world's scourges has brought all those governments and the wealthy individuals who support them to a critical mass, joining forces to create a parallel financial system which would be out of reach of America's long arm. Should they succeed, the impact on America's global posture would be transformational.

America's global supremacy has been made possible not only thanks to its military power and its alliance system but also due to its control over the plumbing of global finance and particularly the broad acceptance of the dollar as the world's reserve currency. The unique status of the U.S. currency has anchored the global financial system since World War II.

Any transaction done in U.S. dollars or using a U.S. bank automatically brings the trading parties under American legal jurisdiction. When the U.S. decides to impose unilateral sanctions, as in the case of Iran, it essentially tells the world's governments, corporations and individuals they must choose between halting business with the sanctioned country or be shut off from the world's number one economy. This is a powerful stick.

Not many companies or banks can afford to give up on the U.S. market or be denied access to U.S. financial institutions.

Revisionist countries that wish to challenge the U.S.-led system see this as an affront to their economic sovereignty. Which is why both Russia and China have developed their own versions of the Society for Worldwide Interbank Financial Telecommunication (SWIFT), the global network that allows cross-border financial transactions among thousands of banks. Both countries are also urging their trading partners to ditch the dollar in their bilateral trade in favor of indigenous currencies.

This month Russia was quick to recruit Turkey into the anti-dollar bloc, announcing it would back non-dollar trade with it, after a financial feud between Ankara and Washington broke out. China for its part is using its trillion-dollar Belt and Road Initiative as a tool to compel countries to transact in yuan terms instead of dollars. Pakistan, the number one recipient of Belt and Road money, and Iran have already announced their intention to do just that. Last month's BRICS (Brazil, Russia, India, China, South Africa) summit in Johannesburg was a call to arms against the dollar hegemony with countries like Turkey, Jamaica, Indonesia, Argentina and Egypt invited to join in what is known as "BRICS plus" with the goal of creating a de-dollarized economy.

The main front where the future of the dollar will be decided is the global commodity market, especially the $1.7 trillion oil market. Ever since 1973, when President Richard Nixon unilaterally severed the U.S. dollar from the gold standard and convinced the Saudis and the rest of the OPEC countries to sell their oil only in dollars, the global oil trade has been linked to the American currency. This paved the way for the rest of the commodities to be traded in dollars as well. The arrangement served America well. It created an ever growing demand for the greenback, which in turn enabled consecutive U.S. governments to freely run their growing deficits.

Not anymore. Because so many of the members of the anti-dollar alliance are exporters of commodities they no longer feel that their products should be either priced by a dollar-denominated benchmark like WTI and Brent or be traded in a currency they no longer crave.

For example, when China buys oil from Angola, gas from Russia, coal from Mongolia or soybeans from Brazil it prefers to do so in its own currency and thereby avoid unwanted exchange rate fees on both sides of the transaction. This is already beginning to happen.

Russia and China have agreed to transact some of their traded energy in yuan. China is pushing its main oil suppliers Saudi Arabia, Angola and Iran to receive yuans for their oil. And last year China introduced gold-backed futures contracts, dubbed "petro-yuan" in the Shanghai International Energy Exchange - the first non-dollar crude benchmark in Asia.

The gradual acceptance of digital currencies, backed by blockchain technology offers another way for the revisionists to ditch the dollar in their trading. The Russian central bank indicated that it was considering launching a national cryptocurrency called "cryptoruble" and in the interim it helped Venezuela's launch of its own cryptocurrency, the "petro," which is backed by the country's vast oil reserves. Now BRICS members are discussing a BRICS-backed cryptocurrency.

All of those actions and others point to one direction: In the coming years the dollar will be facing a barrage of attacks with the goal of eroding its hegemony and the energy trading market will be one of the main battlefields where the future of America's economic dominance will be decided. Any successful attempt to delink commodity trading from the dollar will have a cascading impact not only on the global economic system as we know it but also on America's posture abroad.

With the overall positive state of the U.S. economy and the remarkable strength of the dollar compared to the currencies of the dollar-busters including the Russian ruble, the yuan, the Turkish lira and the Iranian rial it may be easy to sink into complacency and dismiss the actions of the revisionists as mere pinpricks.

But ignoring the growing anti-dollar coalition would be to America's detriment. Bull markets eventually come to an end and with a national debt of $21 trillion and growing at a rate of a trillion dollars a year, the awakening could be ruder and sooner than most economists predict.

In the midst of America's economic euphoria it is worth remembering that one of every four people on the planet lives today in a country whose government is committed to end the dollar hegemony. Thwarting their effort should be Washington's top national priority.

Gal Luft is co-director of the Institute for the Analysis of Global Security and senior advisor to the United States Energy Security Council.

 

[DrBanneker]

Good article and very true but the problem is that though central bank currency swaps and cross-border commodity trade could be moved to local currency, the deal is that to buy many things you are still going to have to eventually convert that currency to USD or Euros unless you have a significant demand for trade in goods from the counterparty country that just paid you. If you have a huge trade with China, this could work out but if you don't trade with Russia besides energy, being paid in roubles isn't that much freedom unless you really are chomping to buy Russian bonds.

 

[Secure Da Bag]

Africa better get that unified currency up and running. Them or Akon with his crypto-currency:

https://pagesix.com/2018/06/19/akon-set-to-launch-cryptocurrency-called-akoin/
Singer Akon Announces Cryptocurrency and Plans for Real-Life 'Wakanda' - CoinDesk
Singer Akon to Launch Cryptocurrency: Akoin

 

[ORDER_66]

Wage war against people you claim come from shyt hole countries, tell the black muslims to fukk off, piss of the germans, piss of the chinese and the canadians and half the entire world.... AND EXPECT NO BACKLASH IN THE FUTURE TO AMERICA BREHS...

 

[Geek Nasty]

Trump making us look like clowns. Trying to strong arm a mob and now they're swinginb back

 

[Json]

Good article and very true but the problem is that though central bank currency swaps and cross-border commodity trade could be moved to local currency, the deal is that to buy many things you are still going to have to eventually convert that currency to USD or Euros unless you have a significant demand for trade in goods from the counterparty country that just paid you. If you have a huge trade with China, this could work out but if you don't trade with Russia besides energy, being paid in roubles isn't that much freedom unless you really are chomping to buy Russian bonds.

Do you think the goal is to get everything back to the gold backed system at least? America being able to run deficits is part of it’s military power. If we have to start “watching our weight” then you decrease its influences.

 

[DrBanneker]

Do you think the goal is to get everything back to the gold backed system at least? America being able to run deficits is part of it’s military power. If we have to start “watching are weight” then you decrease its influences.

I mean, long term that would probably be a more stable monetary system. The problem is even most gold bugs admit a rapid transition back to the gold standard would cause massive deflation given the limited stocks of gold available and the massive amount of currency, liabilities, etc. outstanding.

I think the only real options in the next 20 years are IMF Special Drawing Rights (SDR), which I honestly need to read more about, more people using diverse baskets of currencies to peg their own, or general monetary chaos until somebody wins out. It is hard to predict since the Euro ain't shyt that people thought it would be 20 years ago.

 

[FAH1223]

The inept and corrupt presidency of Donald Trump has unwittingly triggered the fatal blow to the American empire—the abandonment of the dollar as the world’s principal reserve currency. Nations around the globe, especially in Europe, have lost confidence in the United States to act rationally, much less lead, in issues of international finance, trade, diplomacy and war. These nations are quietly dismantling the seven-decade-old alliance with the United States and building alternative systems of bilateral trade. This reconfiguring of the world’s financial system will be fatal to the American empire, as the historian Alfred McCoy and the economist Michael Hudsonhave long pointed out. It will trigger an economic death spiral, including high inflation, which will necessitate a massive military contraction overseas and plunge the United States into a prolonged depression. Trump, rather than make America great again, has turned out, unwittingly, to be the empire’s most aggressive gravedigger.

The Trump administration has capriciously sabotaged the global institutions, including NATO, the European Union, the United Nations, the World Bank and the IMF, which provide cover and lend legitimacy to American imperialism and global economic hegemony. The American empire, as McCoy points out, was always a hybrid of past empires. It developed, he writes, “a distinctive form of global governance that incorporated aspects of antecedent empires, ancient and modern. This unique U.S. imperium was Athenian in its ability to forge coalitions among allies; Roman in its reliance on legions that occupied military bases across most of the known world; and British in its aspiration to merge culture, commerce, and alliances into a comprehensive system that covered the globe.”

When George W. Bush unilaterally invaded Iraq, defying with his doctrine of preemptive war international law and dismissing protests from traditional allies, he began the rupture. But Trump has deepened the fissures. The Trump administration’s withdrawal from the 2015 Iranian nuclear agreement, although Iran had abided by the agreement, and demand that European nations also withdraw or endure U.S. sanctions saw European nations defect and establish an alternative monetary exchange system that excludes the United States. Iran no longer accepts the dollar for oil on international markets and has replaced it with the euro, not a small factor in Washington’s deep animus to Teheran. Turkey is also abandoning the dollar. The U.S. demand that Germany and other European states halt the importation of Russian gas likewise saw the Europeans ignore Washington. China and Russia, traditionally antagonistic, are now working in tandem to free themselves from the dollar. Moscow has transferred $100 billion of its reserves into Chinese yuan, Japanese yen and euros. And, as ominously, foreign governments since 2014 are no longer storing their gold reserves in the United States or, as with Germany, removing them from the Federal Reserve. Germany has repatriated its 300 tons of gold ingots. The Netherlands repatriated its 100 tons.

The U.S. intervention in Venezuela, the potential trade war with China, the withdrawal from international climate accords, leaving the Intermediate-Range Nuclear Forces (INF) Treaty, the paralysis in Washington and disruptive government shutdown and increased hostilities with Iran bode ill for America. American foreign and financial policy is hostage to the bizarre whims of stunted ideologues such as Mike Pompeo, John Bolton and Elliott Abrams. This ensures more global chaos as well as increased efforts by nations around the globe to free themselves from the economic stranglehold the United States effectively set in place following World War II. It is only a question of when not if the dollar will be sidelined. That it was Trump, along with his fellow ideologues of the extreme right, who destroyed the international structures put in place by global capitalists, rather than socialists these capitalists invested tremendous resources to crush, is grimly ironic.

The historian Ronald Robinson argued that British imperial rule died “when colonial rulers had run out of indigenous collaborators.” The result, he noted, was that the “inversion of collaboration into noncooperation largely determined the timing of the decolonization.” This process of alienating traditional U.S. allies and collaborators will have the same effect. As McCoy points out, “all modern empires have relied on dependable surrogates to translate their global power into local control—and for most of them, the moment when those elites began to stir, talk back, and assert their own agendas was also the moment when you knew that imperial collapse was in the cards.”

The dollar, because of astronomical government debt now at $21 trillion, a debt that will be augmented by Trump’s tax cuts costing the U.S. Treasury $1.5 trillion over the next decade, is becoming less and less trustworthy. The debt-to-GDP ratio is now more than 100 percent, a flashing red light for economists. Our massive trade deficit depends on selling treasury bonds abroad. Once those bonds decline in value and are no longer considered a stable investment, the dollar will suffer a huge devaluation. There are signs this process is underway. Central-bank reserves hold fewer dollars than they did in 2004. There are fewer SWIFT payments–the exchange for interbank fund transfers–in dollars than in 2015. Half of international trade is invoiced in dollars, although the U.S. share of international trade is only 10 percent.

“Ultimately, we will have reserve currencies other than the U.S. dollar,” the Bank of England Gov. Mark Carney announced last month.

Sixty-one percent of foreign currency reserves are in dollars. As these dollar currency reserves are replaced by other currencies, the retreat from the dollar will accelerate. The recklessness of America’s financial policies will only exacerbate the crisis. “If unlimited borrowing, financed by printing money, were a path to prosperity,” Irwin M. Stelzer of the Hudson Institute said recently, “then Venezuela and Zimbabwe would be top of the growth tables.”

McCoy explains what a world financial order untethered from the dollar would look like:

For the majority of Americans, the 2020s will likely be remembered as a demoralizing decade of rising prices, stagnant wages, and fading international competitiveness. After years of swelling deficits fed by incessant warfare in distant lands, in 2030 the U.S. dollar eventually loses its special status as the world’s dominant reserve currency.

Suddenly, there are punitive price increases for American imports ranging from clothing to computers. And the costs for all overseas activity surges as well, making travel for both tourists and troops prohibitive. Unable to pay for swelling deficits by selling now-devalued Treasury notes abroad, Washington is finally forced to slash its bloated military budget. Under pressure at home and abroad, its forces begin to pull back from hundreds of overseas bases to a continental perimeter. Such a desperate move, however, comes too late.

Faced with a fading superpower incapable of paying its bills, China, India, Iran, Russia, and other powers provocatively challenge U.S. dominion over the oceans, space, and cyberspace.

The collapse of the dollar will mean, McCoy writes, “soaring prices, ever-rising unemployment, and a continuing decline in real wages throughout the 2020s, domestic divisions widen into violent clashes and divisive debates, often over symbolic, insubstantial issues.” The deep disillusionment and widespread rage will give an opening to Trump, or a Trump-like demagogue, to lash out, perhaps by inciting violence, against scapegoats at home and abroad. But by then the U.S. empire will be so diminished its threats will be, at least to those outside its borders, largely meaningless.

It is impossible to predict when this flight from the dollar will take place. By the second half of the 19th century, the U.S. economy had overtaken Britain, but it was not until the middle of the 20th century that the dollar replaced the pound sterling to become the dominant currency in international trade. The pound sterling’s share of currency reserves among international central banks fell from around 60 percent in the early 1950s to less than 5 percent by the 1970s. Its value declined from more than 4 dollars per pound at the end of WWII to near-parity with the dollar. The British economy went into a tailspin. And that economic jolt marked for the British, as it will for us, the end of an empire.