Demise of the Dollar?

Published in Dawn, 7th Dec 2018 with title: A Lopsided System

SADLY, it is true that ‘money makes the world go round’. But, it is also true that very few people understand how. This article is an attempt at explaining the basics of our global trading system.

A good starting point is the Bretton-Woods conference which took place in 1944, while the Second World War was still raging. The two World Wars had drained the treasuries of the European states, making the gold standard impossible to maintain. An entirely new system had to be created to enable global trade for the post-War era. At the Bretton-Woods conference, the most sensible proposal for the global trading system was created and advocated by John Maynard Keynes. Unfortunately, the political power of the United States enabled it to quash this proposal. Instead, gold was replaced by the dollar standard, with the proviso that dollars could be exchanged for gold.

When the Vietnam War forced the US to print an excessive amount of dollars, president Richard Nixon declared in 1971 that dollars would no longer be backed by gold, creating a brave new world of currencies without any backing. Just like a fixed exchange rate is the natural consequence of pegging currencies to dollar or gold, so too a floating exchange rate system emerges naturally when there are no pegs for any currency

Today, the dollar is at the centre of the global trading system, and is as good as gold once was. Everyone needs dollars as reserves to back up their currencies. To acquire dollars, all countries other than the US, must strive to increase exports — this is how one earns dollars. The US can increase imports just by printing dollars, while the rest of world exports goods and services to earn dollars. Because dollars are the gold of the modern financial system, the US can print money without adverse consequences. For instance, the US printed trillions of dollars to finance the Iraq war, and other trillions to bail out the financial sector from the global financial crisis that was created by it.

If we pause to reflect, the consequences of the dollar-based global trading system are truly breathtaking. Because of mutual dependencies, no one can opt out of the global trading system. Everyone within the system needs dollars, and must strive to increase exports, in order to earn dollars. Net exports cannot increase, and cannot earn dollars, unless the US increases imports. In this financial colonisation of the world, everyone must strive to pay tributes in terms of goods to the US, while the latter country prints dollars to pay for them.

For anyone who falls behind in their payments of tributes, the IMF is there to ‘help out’ by extending a loan, which puts the borrowers deeper in debt enslavement. The results of this system whereby the US prints dollars in return for tributes in real goods provided by the rest of the world are obvious in terms of the immense disparities between American levels of consumption and those of the rest of the world.

A rough measure of how much tribute has been extracted is the current level the US debt, which is $21tr. About $15tr of this total amount has been acquired since 2000. As a benchmark for comparison, note that the world GDP, excluding the US, was around $60tr dollars in 2017. Many more details are required for a more accurate calculation of benefits which accrue to the US due to this dollar-based global trading system, which requires all of us to work hard at increasing exports, while the US printing presses work hard to print dollars to pay for them.

What can be done to replace this immensely lopsided and unjust global trading system, which gives tremendous benefits to the US at the expense of the rest of the world? The first opportunity was lost — rather, suppressed — when Keynes’ proposal for a symmetric trading system was rejected at the Bretton-Woods conference. Keynes’s original proposal continues to be attractive to this day, but many new ideas for how to structure global trading have also emerged over the past few decades.

There are two main concepts at the heart of all such proposals, which differentiate them from the current system. In any fair trading system which treats all countries equally, the target for all countries would be to balance exports and imports. The second concept is to place the burden of adjustment on countries with excess exports as well as those with excess imports. This is more equitable than the current system which places all the burden on the weaker country. With the emergence of China and the European Union as major players, the time is ripe for the demise of the dollar. With multiple centres of economic power, we may hope for a transition to a more equitable global trading system.

POSTSCRIPT: For deeper understanding, see my post on The Vital Importance of Understanding Global Financial Architecture.  This explains the rise and fall of the Gold Standard, leading up to the Bretton Woods Conference, which made the dollar the king.  The continuation, Understanding Global Financial Architecture Part II, goes from Bretton Woods to the Nixon Shock, where the gold-backing of the dollar was removed, and consequences.

  1. Who is it you hope will read this post, and what will the effects or actions taken be of those you hope will read it?

    Those who ‘can’ take actions are probably not going to be visitors to blogs such as these, and those who do read these blogs can’t effect things on any macro scale (and why would anyone want to make macro changes?).

    The situation you have described is nothing more than a macro perspective of one of the most fundamental principles of law, which is the right to individual autonomy.

    Whether you are describing the whole globe or a neighbourhood, and hence whole countries or individuals, everyone has the right to pursue their self-interests, which includes forming legal relations which involve indebtedness. When one becomes good at bonding others (and those debtors continue to borrow without ever questioning the consequences of borrowing – such as people who buy homes, cars, etc) then it is inevitable that financial wealth will accrue to some and debt will mount on others. The US is nothing more than a country which has excelled at the skill of creating claims against others, just like any local neighbourhood business may eventually become a global corporation, or a young child learns quickly how to lend money at interest and eventually becomes a financier.

    Changing the reserve currency, or changing the currency system, or the trading system, or even the political system, will not change this basic factor of our world unless you take away this most fundamental principle of the law, and to be frank, that is not a world I would want to live in (and I say this even as a person who is not naturally endowed with skills to be a good capitalist).

    Further, we are not just ‘traders’; the flow of money around the world is not primarily based on trade, but on the pursuit of yield on capital. For Keynes to focus on trade (exports/imports) is to ignore the fact that most of the money flowing around the world is money trying to make more money (i.e. to hold claims against others), and this includes huge pension funds. If my retirement requires that I have money saved up which has exceeded the rate of inflation, then it is a mathematical requirement that my pension fund indebt others otherwise how else will it earn the passive income to overcome inflation?

    The problem is not the US dollar, nor is the problem the fact that we allow a debt system. The problem is that we all think we have to all use the one means of production (economic model) and because of this belief, we are in a constant and perpetual state of arguing over which model this should be.

    Look at all those people around the world who rely (for their jobs/income) on this constant political conflict; economists, politicians, lawyers, philosophers, not to mention charities, volunteer groups, religions etc who are constantly taking in new people who have become burnt or disenchanted by this mad world. What are all these people going to do when this apparent utopian world many people believe exists will eventually take place? You think these same people will all of sudden want to grow food or make tools or simply trade their time for others goods and services?

    The whole reason people try to make money from money is because they don’t want to spend their whole life trading their time. And I don’t need to prove this – the proof of this fact comes when any individual decides to become honest with themself.

  2. James Beckman said:

    Asad, I think the progression will be that the Euro & then Yuan will join the Dollar as univerisal currencies, based on their economic mass & the trade which flows from it.

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