The Dollar in Future

Can/will the US dollar be displaced as the international currency? This is the question that the book, De-dollarization, explores. The biggest grievance many countries have with the dollar hegemony is that it allows the US to impose unilateral sanctions against any country, even militarily powerful countries like Russia and Iran, as my previous blog explained.

 

The US has even targeted individuals in governments or countries with their sanctions. Unilaterally. Sometimes the people caught in this dragnet are just doing their job – executing their country’s policies. Over time, the extent to which this power has been used and misused has created a large “axis of resentment”.

 

Before we proceed further, let me clarify something. There is no contender to the US dollar today. The Euro? Too wobbly, as the EU itself looks increasing shaky. Japanese yen? With Japan not growing since the 90’s, one can’t see the global share of the yen increasing. The Swiss franc and British pound? Way too small to replace the dollar.

 

How about the Chinese yuan? Nope, since the Chinese government doesn’t allow the yuan’s exchange rate to be determined by the free market; nor do they allow free movement of money in and out of the country.

 

If there’s no alternative then, is the world stuck with the dollar? The book’s answer is no, not entirely. What is likely is that the dollar will still be top dog, but many other currencies will increase their share of the pie. And since it’s a zero-sum game, if all those other currencies increase their share, by definition, the dollar’s share will fall. And with that US dominance - economic, military and political - will reduce.

 

With that clarified, let’s look at the steps that are reducing the dollar’s share. In 2018, Russia started to “de-dollarize”, i.e., they sold all their US government bonds. And switched to gold instead. China has slowed the pace at which it buys American bonds and instead funnels its surpluses into the Belt and Road.

 

Such moves have slow and long term consequences. How? The US government operates on massive debt. Who lends to them? China is the biggest lender. But, if China will lend less in future, and the Russians won’t lend at all, the US will need to tighten its belt. That will have painful consequences for the US -  as economic growth slows, there is lesser money to pay pensions, and military budget shrinks. That can set off a vicious cycle – a slowing US would be less attractive to lenders, who’d either lend less or demand higher rates of interest, both of which would slow US growth further.

 

Then there’s America’s relationship with China. They feel threatened by China’s growing power, and yet need China to keep lending to them (by buying US bonds). Every time the US cuts off access to certain critical technologies like semiconductor chips due to the threat reason, it pushes China further down the road of formulating long term strategies that will de-couple it from the West more and more. Eventually, a gigantic economy like China that relies less on the West would result in a decreased role for the dollar in global trade.

 

Asian countries, from China to India to Central and South-East Asia, are increasing the amount of bilateral trade they do in local currencies. China’s trade with Africa is increasingly in its currency, the yuan. Such barter deals are getting bigger with time, little by little. Then there’s India’s UPI, whose reach is expanding into Bhutan, Nepal, UAE with Singapore next.

 

What makes the dollar indispensable today is… yes, oil. The Saudis accept only dollars. But the Iranians and Russians have shown increasing signs of being willing to trade oil in Euros, or even yuan and rupees. Which is why the US ferociously attacks any moves to trade oil in anything other than dollars. But how long can they prevent such moves? Especially when the countries involved are not tiny powerless ones but giants like Russia, China and India?

 

While Asian countries like Japan, South Korea, China and India don’t see eye to eye on many things, they agree on one thing: if Asian collective oil consumption is and will continue to grow, why should oil prices be set in dollars? The Asian buyers, they feel, should have greater say in the currency of transaction.

 

Growing economy groups like BRICS (Brazil, Russia, India, China, South Africa) don’t move cohesively. But they are clear on one thing – Western countries are not welcome. So as and when they are able to collectively create alternative financial systems, well, the dollar will part of the collateral damage.

 

And lastly, there’s the ridiculously high debt levels of the US government. And it’s only increasing. How long can things stay that way? At some point, the US’s crazy high debt level will be viewed as too risky by other countries. And as that trust erodes, it will reflect in the value and role of the dollar.

 

The authors’ point, therefore, isn’t that some other currency can replace the dollar. Rather, they feel the role of the dollar can reduce significantly to a first among many currencies, and stop being the dominant currency it is today. Collectively and over time then, all the different moves listed above will lead to the infamous death by a thousand cuts…