Foreign Affairs (USA): time to abandon the dollar hegemony

In the 1960-ies, the French Finance Minister valéry Giscard d’estaing complained that the dominance of the us dollar gives the United States a “huge advantage”, because this country can take the rest of the world to borrow money cheaply and live beyond their means. Since then, and the allies, and opponents of the United States are often echoed the French Minister. However, a huge advantage entails an enormous burden that affects trade US competitiveness and employment. This burden will certainly increase, destabilizing the United States decreasing their share in the world economy. Benefits from the supremacy of the dollar are mainly financial institutions and big business, and the costs are mainly workers. For this reason, the preservation of dollar hegemony is threatened by growing inequality and political polarization in the United States.

The hegemony of the dollar is not something predetermined. Analysts have for many years warned that China and other major countries to abandon the dollar and diversify their foreign exchange reserves for economic or strategic reasons. Yes, today there is no compelling reason to believe that the global demand for the dollar falls. But the United States have the option to lose its status of the Issuer of the dominant world reserve currency by peaceful means. They can voluntarily give up the dollar hegemony, because domestic economic and political costs of the previous financial order become prohibitively large.

When President Donald trump, the US was moving away from its multilateral commitments in the security sphere and in other areas, forcing the experts on international relations to engage in a debate about how does this country from the hegemony in a broader strategic sense. Similarly, America may abandon its dollar hegemony. Even if a significant part of the countries want to preserve the us dollar as a reserve currency (as a significant part of the country wants the US to continue to provide security throughout the world), Washington may conclude that it can no longer afford. Such a prospect is, surprisingly, rarely discussed in political circles. Many see it as only bad, but actually it can benefit US, and ultimately the whole world.

The price of dollar dominance

The dominance of the dollar is demand for it worldwide. Foreign capital is flowing river in the USA, because there you can safely store and invest money. And also because alternatives America in the field of such investments is not enough. This inflow of capital greatly exceeds the amount of funds required to Finance trade, creating in the United States large current account deficit. In other words, the United States primarily carry excess foreign capital, and only secondarily are living beyond their means.

The hegemony of the dollar also has implications for domestic distribution. In the US there are winners and losers. Benefit most banks, acting as intermediaries and recipient of incoming capital, as well as having undue influence on American economic policy. The losers are businesses and their workers. Demand for the dollar increases its value, which is more expensive U.S. exports, and the demand for it falls abroad. And this leads to loss of income and to reductions in the manufacturing sector.

Disproportionate costs are fluctuating States in regions like the industrial Midwest of the United States. This, in turn, reinforces the socio-economic contradictions and contributes to political polarization. Jobs in manufacturing, once played a Central role in the economy of these regions moved abroad, causing increased poverty and dissatisfaction. There is nothing surprising in the fact that the most affected States in 2016 voted for trump.

Internal costs of placing large amounts of capital are likely to grow, and this in the long term threatens US even greater destabilization. The economy of China and other emerging markets continues to grow, while the share of USA in the global economy has been steadily declining. Thus, the capital inflow to America will increase in proportion to the size of its economy. It is fraught with tangible consequences for the hegemony of the dollar. While the American financial intermediaries will receive more profits to the detriment of the industrial base of the United States. Because of this situation in American politics will become even more intense.

In the face of such economic and political significance, the US will find it increasingly difficult to provide balanced and equitable growth, while remaining a center of attraction for the excess of global capital from the periphery countries with overvalued currency, and deindustrialization. At some point the US will have no choice and will have to restrict the import of capital in the interests of its economy — even if it would mean voluntary renunciation global dominance of the dollar as a reserve currency.

The British precedent

The United States will not be the first country to renounce monetary hegemony. Since the mid-19th century until the First world war the United Kingdom was a major world creditor, and the pound sterling was the chief means of financing international trade. During this period, the value of money depended on gold, and there was a so-called gold standard. Britain was the world’s largest gold reserves, and other countries have established their reserves in gold or in pounds.

In the first half of the 20th century has seen the decline of the British economy, and its exports became less competitive. But since the United Kingdom adhered to the gold standard, the trade deficit has caused the flow of gold abroad, and this reduced the amount of money in circulation and led to lower prices domestically. The United Kingdom abandoned the gold standard during the First world war together with a number of other countries. But by the end of the war, it was already a debtor nation, and the United States, have accumulated vast reserves of gold, replaced Britain as the world’s main creditor.

In 1925, the London returned to the gold standard, but did so at the prewar exchange rate, because of what the pound was extremely overrated. And gold reserves had left little. Continued to affect British exports, and remained in the country’s gold reserves decreased, which she had to reduce wages and lower prices. The competitiveness of British industry declined and unemployment rose sharply, which led to unrest in society. In 1931 the United Kingdom permanently parted with the gold standard, which essentially meant the rejection of the hegemony of the pound sterling.

In 1902 Joseph Chamberlain, the then Minister for the colonies, gave his famous description of Britain, calling it the “weary Titan”. Today the term is more suitable to the United States, the economic power which compared to other powers, especially China, are gradually weakening. Experts on international relations and foreign policy debate about what the degree and scope of American decline. Experts are already beginning to build predictions about a “post-American” world.

Some argue that if trump United States specifically rejected the project of “liberal hegemony”, giving rise, among other things, doubts regarding the obligations of the United States in the security sphere. Other experts say that the refusal of American hegemony is part of a long-term process of structural rearrangement. In any of these scenarios, it is possible that the United States followed British precedent and voluntarily give up the dollar hegemony. Surprisingly, very few experts are debating whether this will happen. And it is very seldom discuss the question of how it will happen.

The arguments in favor of a tax on speculative capital

At the moment the dollar seems as strong as ever and leading. Although the American economy collapsed, and the country has lost millions of jobs, the demand for dollars increased after the financial crisis of 2008 year. In March, foreigners sold a large amount of us Treasury bonds, but sold them for dollars. The Federal reserve has poured into the global economy trillions of dollars to prevent the seizure of international financial markets competitors of the United States, and expanded the system swaps with other Central banks, which he used in 2008. Although inept administration trump the pandemic reinforced the impression of the US as weakening the power of the fed and investors from around the world showed that the dollar still occupies a Central place in the global economy.

However, this should not reassure the United States. Capital inflows will continue to harm American manufacturers, and the pandemic downturn will only increase the suffering of workers. To ease the growing economic and political pressure in regions such as the industrial Midwest, the United States should take steps to limit the import of capital. One possible option is to give less dollars to the world economy. It will raise the value of the currency to a level that foreigners will refuse to purchase it. But such a move will make American manufacturing less competitive and will reduce the already low inflation.

On the other hand, the United States can show as idle character criticism from China and the European Union, which call for reducing the global role of the dollar. Now there is no clear successor the United States is able to give the world dominant reserve currency. For example, to capital could freely come to China and left from it, will require fundamental and difficult from a political point of view, the restructuring of its economy. The Eurozone also can not take the reins into their own hands, as it strongly depends on growth based on exports and the corresponding capital exports. So, the EU and China, US criticize, but to replace the dollar in the “arena of currencies” can’t. But the lack of a clear successor is unlikely to prevent the United States to abandon dollar hegemony.

The United States can impose tax or fee on short-term speculative foreign investment, freeing him from long-term investments. These measures will be able to get to the root causes of trade imbalances, reducing the inflow of capital (trade barriers hit the symptoms and not the cause). It will also help to reduce the present negative reaction to free trade and to reduce unproductive profit financial institutions.

In the optimistic scenario, three centers of world economy — China, the US and the EU agree on the creation of a currency basket in the image and likeness of special drawing rights of the IMF. They either give the IMF the power to regulate this basket, or create a new international financial institution to perform this task. Pessimistic, but the more likely result is that because of this tension (especially between the US and China) cooperation will be impossible, and the chances of conflict between them on economic issues will increase.

Even if you cannot agree to cooperate, the United States still makes sense to unilaterally give up the dollar hegemony. In this case, China and the Eurozone will be forced to use their excess savings at home, and for this they will have to make major changes to their economic model to provide a more balanced and equitable growth. It would also put excessive profits of us financial intermediaries and will benefit workers in the US because the dollar will fall and U.S. exports will become more competitive. In short, the rejection of the hegemony of the dollar will help make U.S. and global economy more sustainable and equitable.