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Page added on October 16, 2013
The sun is setting on dollar supremacy, and with it, American power
All great empires – from the Greek, to the Roman, the Spanish and the British – have at their heart a dominant means of exchange which is very much part of their political and social hegemony. Once upon a time, it was Roman coinage which was the world’s pre-eminent currency. In more recent times it was the British pound. Today, it’s the US dollar to which international investors flock as a safe haven for their money. Highly liquid and apparently reliable – until recently at least – nothing else comes even remotely close to the greenback’s dominant position in the international monetary system.
That this position – what Giscard d’Estaing referred to as America’s “exorbitant privilege” – could so casually be put at risk by politicians on Capitol Hill is an extraordinary spectacle that may be indicative of a great power already seriously on the wane.
With the pound, the fall from grace was swift. Britain emerged from the devastation of the First World War an irreparably damaged economic and military power, with crushing debts and a deeply impaired manufacturing sector.
The dollar was able quickly to usurp the pound’s position. Final defeat for sterling came with Britain’s decision to leave the gold standard in 1931 – an economically sensible decision but a psychological turning point for sterling from which it never recovered.
Lack of any credible alternative means it won’t happen so quickly with the dollar. For all the progress of the last 30 years, China for now remains a much smaller economy than the US and in any case is nowhere near ready financially to assume such a role. As for the euro, the dollar needn’t trouble itself much about this one-time pretender to the throne.
Yet rarely before has international dissatisfaction with the dollar’s role as reserve currency to the world been as great as it is now. The most visible anger comes from China, with more than $3 trillion of dollar foreign exchange reserves, $1.3 trillion of them held in US Treasuries. For ordinary Chinese, it has come as a revelation to discover they own so much American debt. That they own it in a country which because of political brinkmanship may actually default has provoked understandable fury.
“It is perhaps a good time for the befuddled world to start considering building a de-Americanised world”, China’s official government news agency has said.
A steady erosion of trust which began with the financial crisis five years ago has reached apparent breaking point with the pantomime antics on Capitol Hill. The search for long-term alternatives to the dollar is on as never before. Regrettably, there aren’t any, or not for the time being in any case. Everyone can only look on in horror as the US commits apparent economic suicide.
Such is the dollar’s dominance that, to begin with at least, investors might simply have to take default on the chin. More than 60pc of global foreign exchange reserves are held in US dollars, which also account for more than 80 per cent of global foreign exchange trading.
So important is dollar liquidity in global trade that if, for instance, you wanted to sell Singapore dollars and buy South African rand, your forex dealer would first typically buy US dollars with your Singapore dollars and then use them to buy the South African rand. The dollar is the middle currency in the vast bulk of international transactions.
By the same token, US Treasuries are the very backbone of the global financial system. They are the supposed “risk-free asset” against which everything else is benchmarked, and as such are the collateral of choice in a huge array of financial market transactions. The dollar is also the currency used to price most commodities, from oil to gold.
The dollar’s hegemony is all pervasive. This has given the greenback a degree of leverage unmatched by any other reserve currency in history. If China starts to sell dollar assets, it will only weaken the dollar, undermining Chinese exports and reducing the value of its remaining portfolio of dollar assets.
I’d been part of the received wisdom that any act of US default would set off a devastating chain reaction of bankruptcies that would provoke a second global financial crisis. But David Bloom, chief currency strategist at HSBC, has convinced me that dollar hegemony might perversely act in the opposite way, at least initially.
Unlike a generalised credit event, where all instruments default at the same time, the US would initially engage in a series of little, self contained defaults, or “selective defaults”, whose individual impact would probably not be that great.
Each bond has a life and coupon of its own. The missed coupon payment might therefore be regarded as not so bad – especially as this is a case of “won’t pay”, rather than “can’t pay”.
Markets see such defaults differently, with missed payments expected to be made up eventually once a political resolution is found. It’s also very likely that the Federal Reserve would attempt to counter the damage in financial markets with more QE, buying up the Treasuries that investors dumped.
Furthermore, the financial uncertainty created by default would likely drive investors towards past safe havens of choice – in particular, US dollar assets. Alternative safe havens, such as Japan and Switzerland, have been rendered defunct by central bank money printing. Ironically, emerging markets are likely be more damaged by default than the US itself, with further capital flight.
Such is the degree of “exorbitant privilege” enjoyed by the dollar that it might therefore be the first currency in history to see an asset price rally on the back of a default. However, if there were repeated selective defaults, a second, less benign phase would eventually set in. Spooked markets would begin to sell off the dollar.
The consequent stronger euro and pound would have powerfully deflationary consequences for Europe. Internal demand in the US would also collapse as a result of the wrenching fiscal squeeze that would result from federal government attempts to match expenditures with tax revenues.
Dollar hegemony has long been a destabilising force at the centre of the international monetary system; it’s a major part of the sharp build-up in global current account imbalances and cross border capital flows that have been at the heart of so many of the problems in the world economy. The unprecedented accumulation of dollar foreign exchange reserves has in turn caused new challenges for the US, making it more difficult to maintain fiscal and financial stability within its own borders.
Policies that may or may not be good for the US are in all probability bad for everyone else. Loose monetary policy in the US since the crisis began has induced unwanted demand and asset bubbles elsewhere in the world.
Serious alternatives to the dollar, such as a global reserve currency, are still a long way off, but the latest shenanigans on Capitol Hill have given the search for them renewed and added momentum. The US is recklessly throwing away its future.
24 Comments on "The sun is setting on dollar supremacy, and with it, American power"
BillT on Wed, 16th Oct 2013 1:56 am
A mouthpiece for the City? Sounds like it. “… Serious alternatives to the dollar, such as a global reserve currency, are still a long way off,…” Wishful thinking.
It could be pulled of in less than a year if China wanted to. After all, they could take the 3 trillion hit and walk away a bit sore but whole. Their rival, the US would be mortally wounded and not likely to survive. The EU would be crippled for a very long time and Japan, would go back to a medieval society.
China knows that they are going to lose the 3 trillion one way or another and that it may be at a time of the US choosing. They could decide to pull the trigger first, and walk away with the most. That is my guess.
Or, we could have a nuclear war … which China also knows is possible. Maybe it is better to decapitate the monster (US) before it has a chance to strike? A hit to the Chinese economy would be better for the Chinese people than a nuclear hit on Beijing, Hong Kong, etc. Russia may agree and it’s game-over for the dollar.
PrestonSturges on Wed, 16th Oct 2013 5:21 am
People who babble about “respect” are often nutty as fruitcakes, and the Tea Party talks about making the world “respect” America even as they destroy the government and our currency.
J-Gav on Wed, 16th Oct 2013 10:27 am
Yes, the dollar still far-and-away occupies the top spot in international transactions. But that position is being eroding year by year as other major players get more and more pissed-off with American mismanagement and grand-standing. Hard to tell if the loss of dollar hegemon status will be a drawn-out affair or happen in a relatively sudden burst but it seems clear that it’s on the way.
Arthur on Wed, 16th Oct 2013 11:08 am
It is no longer Ron Paul, the libertarians , Buchanan, PCR, Alex Jones and what ‘internet conspiracy kooks’ have you, saying this, now it is the Telegraph and Forbes as well:
http://www.forbes.com/sites/eamonnfingleton/2013/07/15/apocalypse-soon-the-u-s-dollars-grim-future-and-how-to-prepare-for-it/
And read the comments of the British ‘hoi polloi’. Nobody is questioning the message.
“As for the euro, the dollar needn’t trouble itself much about this one-time pretender to the throne.”
Haha, more proof that Britain is not a European country. For the record, I would resent to see the euro becoming the next reserve currency, because you introduce globalism via the back door with it, where isolationism would be preferable if you want to protect European civilization against becoming overrun by the third world and that’s what the overwhelming majority of the EU population wants. And a total new situation regarding self-destroying liberalism arises if AIPAC-Washington bites the dust. The European grand strategy must be to persuade a devoluted America and Russia into a Very Greater ‘European’ alliance (the North) and next have talks with Beijing about a slightly other New World Order: multi-polar world, but dominated by the North and China. 800 million aging whiteys are more than enough to contain 1300 million aging Chinese.
Basic patterns:
– adoption of international law
– replacing free trade with regulated trade based on trade balances in equilibrium, emphasis on autark economies and local production.
– international cooperation in the energy sphere
– end of destabilizing mass migration
– grand scale disarmament, abolishing of navies (the US can’t afford to keep it’s current navy anyway). Only the North and China can have nukes, not Pakistan, Korea, Israel.
– if societies in Africa and elsewhere break down, (re)colonization by Europe and China as an alternative to mass immigration. Hope this won’t be necessary to avoid massive die-off.
steveo on Wed, 16th Oct 2013 12:58 pm
“It could be pulled of in less than a year if China wanted to. After all, they could take the 3 trillion hit and walk away a bit sore but whole.”
Maybe, but without the US to dump China’s excess manufactured goods into, the people who have migrated to the cities to work in the factories will be jobless. This could cause the uprising the Chinese government has been trying to put off since Tiananmen Square.
BillT on Wed, 16th Oct 2013 1:00 pm
Got news for you, Arthur, those with nukes are going to keep them and those who don’t have them are going to get them. Be patient. you are dreaming again. Free trade is about over also. The stuff to trade is running our fast. The means to trade over distances is also disappearing even faster.
Usually the last gasp of an Empire is war. This one will likely be nuclear. The last Empire to die was Britain and it started WW2 to accomplish it. This time the baton will be passed to the East and not the north.
The north is going to be conquered by Mother Nature soon. All that keeps northern Europe from being part of the Arctic is the Gulf Stream and it is already changing course. Again, be patient.
BillT on Wed, 16th Oct 2013 1:05 pm
BTW: Did you know that Hitler offered 8 times to sign a peace treaty with the UK, BEFORE they got into the war? And, that the US (Capitalists) were arming and providing military support to BOTH Russia and the UK while pretending to be ‘neutral’? And that the West’s division of Germany after the 1st World War led to the 2nd?. Nice when you can get both sides of the story on the internet. You won’t read it in any Western history books.
mike on Wed, 16th Oct 2013 1:49 pm
BillT: “You won’t read it in any of the history books”. No, you won’t read it in any of the history books – because it did not happen like you claim. Course, you might read it in some imaginative fiction by Velikofsky or somesuch.
Arthur on Wed, 16th Oct 2013 1:53 pm
“The last Empire to die was Britain and it started WW2 to accomplish it.”
Britain started WW2 indeed, because of the half-American Churchill, not because of real Brit Chamberlain, who understood very well that the empire would not survive a war.
“BTW: Did you know that Hitler offered 8 times to sign a peace treaty with the UK, BEFORE they got into the war?”
You’re telling me?! Germany was raped by Poland, France, Churchill, Stalin and Roosevelt as a deliberate act of choice. Between end September 1939 (after the fall of Poland) and June 22, 1941 (beginning of Barbarossa), the British Foreign Office counted 16 German attempts to achieve peace with Britain, but the British war party lead by Churchill and paid for by the youknowwhos was not interested. The Stalin-Roosevelt-Churchill alliance was already in place behind the scene before the desperate flight of Hess to Scotland. The only problem was how to get the US into war, because of an unwilling Congress. Finally Roosevelt managed to provoke the Japanese into an attack and the rest is history.
And now it is all going to be reversed, muhahaha. Say ‘cheese’, Bor.lol
“Nice when you can get both sides of the story on the internet. You won’t read it in any Western history books.”
It is much worse than even you think. Here are the latest insights from the Finnish Mannerheim archives:
http://juliusmilaitis.blogspot.nl/2011/05/finland-in-eye-of-storm-erkki.html
bobinget on Wed, 16th Oct 2013 2:14 pm
Try to envision a proportional ‘currency basket’ which would also include USD.
PrestonSturges on Wed, 16th Oct 2013 2:26 pm
Are either of you guys also Holocaust deniers?
GregT on Wed, 16th Oct 2013 2:58 pm
History is written by the victors, and is very seldomly the truth.
And, the first thing to be lost in war, is the truth.
Arthur on Wed, 16th Oct 2013 3:14 pm
Here is the document by the British Foreign Office, declassified in I believe 2004. Contains references to 16 German peace offers, all kept secret:
http://discovery.nationalarchives.gov.uk/SearchUI/details/redirect/?CATLN=6&CATID=3534807#summary
But, but, but… Germany wanted to conquer ze wurld! Roosevelt even showed the world a forged ‘German map’ of South-America, ‘proving’ that the Germans wanted to conquer that continent as well.
tinyurl . com/ps75r26
Uranium yellow cake, any one? 9/11?
“Are either of you guys also Holocaust deniers?”
Of course not, that would be an.ti.se.mi.tic.
Besides, anything the Soviets ever said is true. Everything. Take Katyn Forest.
J-Gav on Wed, 16th Oct 2013 3:46 pm
What’s all this about Churchill starting WWII? I’m no great fan of Winnie but Hitler invaded Poland on Sept. 1, 1939, not Britain …
I know Pat Buchanan and Justin Raimondo have defended this view but frankly my historical references are not limited to those two. It could just as easily be said that the Treaty of Versailles in 1919 made WWII practically inevitable.
baptised on Wed, 16th Oct 2013 4:08 pm
I work for a library system in Tennessee USA. The books about WW1&2,especially the children’s area are awful lies awful.
Arthur on Wed, 16th Oct 2013 7:20 pm
J-Gav, that what happened on September 1, 1939 was a pure local conflict between Germany and Poland over the 97% German city of Danzig, that wanted to return to Germany and should have, based on the right of self-determination.
The local conflict morphed into a world war when Britain and France declared war on Germany 2 days later, something that Germany had hoped to prevent by accepting the Soviet offer for a non-aggression agreement. Britain and France were pushed in the war guarantee months earlier by the Americans, notably the ambassador to Paris, William Bullitt, with the aim of bringing Britain and France into war with Germany. Stalin wanted exactly the same, in order to achieve what did indeed materialize, the carving up of Europe between the US and USSR.
Once this framework was in place, all what the allies needed to do was encouraging the Poles to not give in to reasonable demands of the Germans (Danzig + corridor to Pussia).
At the end of the war the Poles carried out what was already looming in 1939: the ethnic cleansing of all Germans from Versailles-Poland. The Poles mobilized before the Germans did. they shot at planes and harassed trains that wanted to travel from Germany proper to Prussia. The Poles thought they were backed by the allies, but they were merely the useful idiots to get the war kicked off and gladly handed over to the loving care of Stalin after the war. So, Polish independence was never the real issue for the allies. The real issue was the destruction of Europe, take it’s place and prepare for globalism, the end of which we are witnessing today.
Here is German news footage from a few days before the start of the war that illustrates that things in Poland had arrived at boiling point:
http://www.youtube.com/watch?v=oNEQbdXzZrw
Some 100,000 refugees had already fled Poland. The refugee crisis was the real reason why the invasion could no longer be postponed.
But after the war the allies cynically lied that Germany intended to conquer non-German territories (the entire world no less), where in reality the only ones who were keen on conquering territory (entire Europe) were the US and USSR.
The Germans were devastated on September 3, when the war declarations came in, which they had hoped to avoid by accepting the invitation by their arch-enemy USSR. What they did not realize was that Churchill had an understanding both with Roosevelt and Stalin (all behind PM Chamberlain’s back) that war against Germany (and thus continental Europe) was the mutual aim. And Churchill was in the pay by a group called the Focus, mainly of British and American Jews, who had made Churchill head of the war party in Britain, in opposition to Chamberlain, with the explicit aim to bring Britain into war with Germany, since 1936 or so. All speeches Churchill spoke before he became PM were written, not by Churchill, by but a Waley Cohen, chairman of Shell.
Germany wanted the German town of Danzig.
Stalin and Roosevelt wanted Europe.
They got it and gracefully brought us the two varieties of globalism: Bolshevism and multiculturalism resp.
And now that nightmare is nearly over.
Mind the step on your way out, valiant liberator! 😉
PrestonSturges on Wed, 16th Oct 2013 7:29 pm
If you are going to browse web sites about Hitler the peacemaker, Hitler the lamb, Hitler was bullied into WW2, then you will be one mouse click from web sites for white supremacists, actual Nazis, and Holocaust deniers. And many of the people pushing these theories are closet Nazis who are members of neofascist groups.
Arthur on Wed, 16th Oct 2013 9:41 pm
I am sorry, but I get my information from books at amazon.com/.de and frequent sites like lewrockwell.com, antiwar.com or, I am not kidding you, peakoil.com. I am sorry if I do not fit in your stereotype. But would you not agree that it is a bit of a stretch to celebrate the victory of a political entity that before WW2 began in 1939 killed tens of millions of it’s own citizens? Does not that make you a ‘closet communist’ and Gulag denier? Are you a member of a neo-bolshevik organization? And are you able to discover a flaw in my rather elaborate story above?
J-Gav on Wed, 16th Oct 2013 10:32 pm
I guess you’ve never read Mein Kampf, Arthur. There are so many holes in your arguments it’s not funny – remember the Molotov-Ribbentropf agreement? That let the Bolsheviks comfortably move into eastern Poland for a not-quite-perfect carve-up job.
Well, this is not the place for such developments but do you ever look at a map? Danzig? Give me a break. It’s on the Baltic Sea. Germany’s claims might have made sense during their empire but WWI was already over, remember? Kaiser Wilhelm gone, remember? Seems a Hitler victory would have been far preferable in your opinion …
Feemer on Wed, 16th Oct 2013 10:58 pm
It is true that how mainly France, but also the UK, US, and Russia treated Germany after WW1 (forcing them to pay for a war that was NOT their fault, and punishing them for fighting “savagely”,and restricting their military and causing a depression in Germany) caused WW2. The war was not about killing jews, it was about Germany reclaiming land, rebuilding its economy, and showing the world it can’t be pushed around. Obviously later the nazis started killing, but that doesn’t have to do about how the war started or why it started.
PrestonSturges on Wed, 16th Oct 2013 11:27 pm
Doesn’t change the fact that if you’re on sites about “Hitler the peacemaker” you will be seeing banner ads for stuff like “The Holocaust Hoax” book.
mike on Thu, 17th Oct 2013 8:03 am
Deutschland unter alles! September 1 1939, start of campaign against Polish hegemony. Preceded by liberation of Sudetenland by wicked Czecks. Auschwitz, Belsen, Dachau, Sachsenhausen,final solution to domination of world economic system by bankers who have dominated world since publication of Protocols of Elders of Zion. Guernica – victory against the republican menace. Ethiopia/Abbysinia – extension of western civilisation into darkest Africa. Greece, Denmark, Norway, Netherlands, Poland, Ukraine, Byelorussia, Yugoslavia, all liberated from – er – something or other by heroic armies of the thousand year reich. Invasion of Soviet Union to ensure victory against – er capitalism? Lebensraum – doctrine of the just expansion into empty lands filled with gypsies, Slavs, non Aryans, by the hithertoo downtrodden downtrodden Teutonic knights.
luap on Thu, 17th Oct 2013 8:19 am
Business as usual I see…its easy..raise dept ceiling …print more money ..how much longer 10 years 20, 50
Arthur on Thu, 17th Oct 2013 8:20 am
Yes, mike shows he has absorbed all the ‘knowledge’ the US/western education system + Hollywood wanted him to ‘know’.
Look, I have done these, often vicious, battles before on US forums, writing hundreds of pages, taking months of time, but this forum is not the proper environment to repeat that discussion.
Just to put things back into perspective of the topic of this thread… the point is that if dollar supremacy will fade away, as it will, and with it American political and military power, what also will vanish is the allied power to impose a self-serving version of history interpretation onto the world. The Dutch saying ‘een ongeluk komt nooit alleen’ translates into something like ‘misfortunes never come singly’ and perfectly applies to this situation.
As Bill correctly says: ‘Nice when you can get both sides of the story on the internet.’ The internet is going to make all the difference in helping bring a new interpretation about.
And that’s what the Chinese mean when they talk about ‘de-Americanization’ of the world. It is just that you know what is coming.