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Sunday, May 7, 2023

No One Wants to Play With Bullies: How US Politicians Are Destroying the Dollar’s Global Primacy

American leaders have taken their fortunate position for granted for too long.

Image Credit: iStock

In the United States, popular culture has created the impression that having a bank account in a foreign country is bad because it must mean that you are hiding something from the authorities. The reality of the situation is pretty much the opposite. First of all, all Americans are legally required to declare their foreign bank accounts with their balances every year on their tax returns. Second of all, foreign banks have to share all of their information about their American customers with the US government as well. These surveillance regulations only apply to the citizens from “the land of the free” and they create a regulatory headache that’s often not worth the value of the business the American customer will bring.

Of course, the alternative to this could be that a bank in Europe or Africa could tell the American government that they are in a sovereign country and they don’t need to obey laws from a country on another continent, but the flipside to not complying is being frozen out of the United States banking system which could be catastrophic because the US dollar is the world’s reserve currency. But as the United States Federal government becomes more hawkish under the Biden presidency to use their financial power to bend the will of foreign nations, there are other countries looking for ways to be less dependent on the dollar.

Reserve Currency

The Bretton-Woods Conference in 1944 established that the dollar would be the world’s reserve currency and its value would be directly pegged to gold with one ounce costing $35. World history has always demonstrated that a reserve currency is needed for international trade and that it needs to be recognized as sound and valuable.

The United States remained on the gold standard until 1971 when government spending started to spiral out of control thanks to butter and guns policies. Once the dollar was freed of its gold pegging, politicians could then ramp up the printing presses to create money out of nothing and inflation soon became a major problem.

The United States remained the world’s reserve currency because it still had a solid reputation, all international oil contracts were done in dollars, and there wasn’t a strong rival. But in the 21st century, inflation is once again a huge problem and the American government’s debts have more than tripled. The dollar’s reputation is declining and countries like Saudi Arabia are now seriously considering selling their oil to the Chinese using their yuan currency.

US Sanctions

Sanctions are an economic weapon that restricts US citizens, companies, or institutions from doing business with a country or entity that is considered to be under sanction by the US government. This could be an entire country like Iran, Cuba, or Russia as of 2022, or it could be individuals such as government officials in Zimbabwe. Sanctions were not considered to be an effective policy for the United States until the aftermath of World War II when the dollar became the world’s reserve currency.

Since 1990, two-thirds of the world’s government-imposed sanctions have come from the United States. The policy was wielded against smaller countries like Iran and North Korea and it was generally praised as a means to enforce the United States’ will without the need of military threat or action.

But in 2022, the US might have gone too far when broad sanctions were imposed on Russia following its invasion of Ukraine. Russia is the world’s 11th largest economy and it is the largest exporter of energy to Europe. Many European countries are faced with the choice of higher energy prices versus upsetting American relations.

Another consequence of American sanctions on Russia is that the price of energy has risen worldwide because the supply of energy to countries respecting the US sanctions is now greatly limited. This has been a negative consequence for the ordinary American and a boon to citizens of countries still doing business with Russia like China.

Likewise, approximately $300 billion of assets that Russia had in banks worldwide has been frozen and this includes US dollars. This money has essentially been seized in an effort to cripple the Russian economy but that effort appears to have failed. At the same time, other countries are looking at the United States and are worried that any assets they might have in our banks are not secure and can be confiscated on a whim.

China and Russia

In early April, Chinese Communist Party Chairman Xi Jinping visited Moscow to encourage improved relations between the two large nations. Part of those improvements is that both countries will now trade with each other using China’s currency, the yuan, instead of the traditional dollar because of United States sanctions. This move is one of the few options that Russia has since they have been frozen out of the US dollar, and it’s a win for China as a rising global superpower that seeks to rival the United States.

The BRICS alliance (Brazil, Russia, India, China, and South Africa) are all actively looking for an alternative to the US dollar and if they agree to one, then it could help accelerate the world’s dedollarization. Sanctions against Russia have made other nations wary about depending on the dollar and how the United States uses its currency to bend the will of other nations.

These five nations are all economically very powerful and could rival the G7 for global dominance. While the dollar might not be dethroned overnight, it could and would be a very gradual process.

Can We Reverse the Course?

Historically, no currency has been the global reserve currency forever. Before the dollar there was the British pound and before that there was the Spanish dollar. The US dollar’s status as the world’s reserve currency has been largely positive for the world as it has fostered globalization and capitalism and that has driven down the worldwide rate of poverty.

But American leaders have taken their fortunate position for granted for too long. They have lowered the value of the currency by spending too much, they impose restrictions on their own citizens that hurt their ease of doing business in the global market, and they use their position of power to bully other countries into obeying their will.

If things do not change then eventually no one will want to play with the bully. Americans will find themselves isolated from the rest of the world, holding onto dollars that don’t buy what they used to.

  • Daniel Kowalski is an American businessman with interests in the USA and developing markets of Africa.