Crack on US dollar hegemony is growing

The ambitious infrastructure plan of the US President Joe Biden was downsized, from the original $2.3 trillion to $1.7 trillion, which apparently is still not enough to gather support from the Republicans. Many American economists criticize that the Federal Reserve has run out of options after pouring money in the market and inflation hitting very high levels.

Meanwhile there are numerous data that suggest that the status of the US dollar as a reserve currency around the world is being weakened by the euro, Japan’s yen and China’s yuan. The deadly COVID-19 pandemic also intensified the decline of US dollar hegemony.

As indicated by the IMF, the share of euro reserves held by global central banks stood at 21 percent in the fourth quarter of 2020, the same level as six years before; while the share of US dollar dropped to 59 percent, the lowest level in 25 years.

International financial institutions are voting with their feet, alleging that the US is deceiving the world with its dollar and living a “rich and rich alone” life by devaluing its currency and borrowing without limit.

The unrestrained borrowing from the US government, together with Federal Reserve’s unlimited quantitative easing measures, have directly caused the irrational soaring prices of international commodities, especially copper, aluminum and iron ore among other commodities for which China has been the biggest buyer. However, the economic common sense tells us that the global economy has been hit by the coronavirus for over a year and the fundamentals simply do not support a cyclical commodity price boom.

The increasing cost of raw materials will only mount more pressure on the living standards of the low to middle-income classes in the world.

The rising price of commodities is a financial phenomenon caused by the excessive dollar stimulus but the impact on the real economy has already been evidenced in increasing manufacturing costs around the world.

On the other hand, the pandemic has caused a reduction on people’s income. With a slow recovery in consumption, manufacturers have lost bargaining advantages down the supply chain. Instead of shifting the cost pressure of rising commodity prices to consumers, they might have to bear the loss.

As the real economy is undermined by the hegemony of the US dollar, insightful politicians and businessmen from all over the world have started to discuss how to crack the hegemony of the US dollar.

China’s yuan has been a major “driving currency” that has boosted the growth of global economy over three decades. However, its share as a foreign exchange reserve in the world has just exceeded 2 percent. Cracking the monopoly of the US dollar cannot depend mainly on the Chinese yuan but its potential cannot be underestimated as it recorded the highest strategic growth in foreign exchange reserves in the 21st century, in addition to the Special Drawing Rights (SDR) from the IMF.

World economies are looking forward to a new global monetary order that is impartial and reflects supply and demand in the real economy. Only the US is still expecting to benefit from a currency war in the 21st century while the rest of the world is looking to make money a neutral instrument for trade, rather than relying on monetary signals to guide or dominate the economy.

The pandemic has accelerated this trend. The IMF decided to issue $650 billion SDR in April, to aid developing countries during financial crisis. The world is entering the post-COVID era with a high probability that certain countries may suffer currency crises similar to those in 1997 and 2011. This requires central banks around the world to fully support the IMF through monetary policy coordination to help stabilize global economic recovery.

The US will never give up the hegemonic system of the dollar easily and will block financial cooperation among countries through various means. World economies should firmly promote mutually beneficial opening-up of financial markets and enhance currency swap agreements between central banks. Through economic globalization, the dollar hegemony can be broken.

The article was compiled based on a commentary written by Xu Weihong, Chief Economist at Yongxing Securities. bizopinion@globaltimes.com.cn

The US dollar’s hegemony is looking fragile

The modernisation of China’s exchange-rate system could deal the currency a painful blow

The mighty US dollar continues to reign supreme in global markets. But the greenback’s dominance may well be more fragile than it appears, because expected future changes in China’s exchange-rate regime are likely to trigger a significant shift in the international monetary order.

For many reasons, the Chinese authorities will probably someday stop pegging the renminbi to a basket of currencies, and shift to a modern inflation-targeting regime under which they allow the exchange rate to fluctuate much more freely, especially against the dollar. When that happens, expect most of Asia to follow China. In due time, the dollar, currently the anchor currency for roughly two-thirds of world GDP, could lose nearly half its weight.

Considering how much the United States relies on the dollar’s special status – or what then-French Finance Minister Valéry Giscard d’Estaing famously called America’s “exorbitant privilege” – to fund massive public and private borrowing, the impact of such a shift could be significant. Given that the US has been aggressively using deficit financing to combat the economic ravages of COVID-19, the sustainability of its debt might be called into question.

The long-standing argument for a more flexible Chinese currency is that China is simply too big to let its economy dance to the US Federal Reserve’s tune, even if Chinese capital controls provide some measure of insulation. China’s GDP (measured at international prices) surpassed that of the US back in 2014 and is still growing far faster than the US and Europe, making the case for greater exchange-rate flexibility increasingly compelling.

A more recent argument is that the dollar’s centrality gives the US government too much access to global transactions information. This is also a major concern in Europe. In principle, dollar transactions could be cleared anywhere in the world, but US banks and clearing houses have a significant natural advantage, because they can be implicitly (or explicitly) backed by the Fed, which has unlimited capacity to issue currency in a crisis. In comparison, any dollar clearing house outside the US will always be more subject to crises of confidence – a problem with which even the eurozone has struggled.

Moreover, former US President Donald Trump’s policies to check China’s trade dominance are not going away anytime soon. This is one of the few issues on which Democrats and Republicans broadly agree, and there is little question that trade deglobalization undermines the dollar.

Chinese policymakers face many obstacles in trying to break away from the current renminbi peg. But, in characteristic style, they have slowly been laying the groundwork on many fronts. China has been gradually allowing foreign institutional investors to buy renminbi bonds, and in 2016, the International Monetary Fund added the renminbi to the basket of major currencies that determines the value of Special Drawing Rights (the IMF’s global reserve asset).

In addition, the People’s Bank of China is far ahead of other major central banks in developing a central-bank digital currency. Although currently purely for domestic use, the PBOC’s digital currency ultimately will facilitate the renminbi’s international use, especially in countries that gravitate toward China’s eventual currency bloc. This will give the Chinese government a window into digital renminbi users’ transactions, just as the current system gives the US a great deal of similar information.

Will other Asian countries indeed follow China? The US will certainly push hard to keep as many economies as possible orbiting around the dollar, but it will be an uphill battle. Just as the US eclipsed Britain at the end of the nineteenth century as the world’s largest trading country, China long ago surpassed America by the same measure.

True, Japan and India may go their own way. But if China makes the renminbi more flexible, they will likely at the very least give the currency a weight comparable to that of the dollar in their foreign-exchange reserves.

There are striking parallels between Asia’s close alignment with the dollar today and the situation in Europe in the 1960s and early 1970s. But that era ended with high inflation and the collapse of the post-war Bretton Woods system of fixed exchange rates. Most of Europe then recognized that intra-European trade was more important than trade with the US. This led to the emergence of a Deutsche Mark bloc that decades later morphed into the single currency, the euro.

This does not mean that the Chinese renminbi will become the global currency overnight. Transitions from one dominant currency to another can take a long time. During the two decades between World Wars I and II, for example, the new entrant, the dollar, had roughly the same weight in central-bank reserves as the British pound, which had been the dominant global currency for more than a century following the Napoleonic Wars in the early 1800s.

So, what is wrong with three world currencies – the euro, the renminbi, and the dollar – sharing the spotlight? Nothing, except that neither markets nor policymakers seem remotely prepared for such a transition. US government borrowing rates would almost certainly be affected, though the really big impact might fall on corporate borrowers, especially small and medium-size firms.

Today, it seems to be an article of faith among US policymakers and many economists that the world’s appetite for dollar debt is virtually insatiable. But a modernization of China’s exchange-rate arrangements could deal the dollar’s status a painful blow.

 Kenneth Rogoff is professor of economics and public policy at Harvard University. He was the chief economist of the International Monetary Fund from 2001 to 2003.

Michael Hudson – De-Dollarization–Toward the End of the U.S. Monetary Hegemony?

On 20 November 2019, Professor Michael Hudson delivered a lecture on “De-Dollarization–Toward the End of the U.S. Monetary Hegemony?” in Lingnan University, Hong Kong, China. The moderator was Professor Peter Beattie (The Chinese University of Hong Kong).

Michael Hudson is President of The Institute for the Study of Long-Term Economic Trends (ISLET), Distinguished Research Professor of Economics at the University of Missouri, Kansas City and author of …And Forgive Them Their Debts (2018), J is for Junk Economics (2017), Killing the Host (2015), The Bubble and Beyond (2012), America’s Protectionist Takeoff, 1818-1914 (2010), Super-Imperialism: The Economic Strategy of American Empire (1968 & 2003), and Trade, Development and Foreign Debt (1992 & 2009), amongst many others. He acts as an economic advisor to governments worldwide including Iceland, Latvia and China on finance and tax law.

De-Dollarization – Toward the End of the U.S. Monetary Hegemony?
Since the end of World War II, the United States has been the world’s hegemonic power. In economic, military, and cultural spheres, the U.S. has enjoyed nearly unrivaled supremacy. However, unlike past hegemons, which have been net creditors to the rest of the world, the United States is a net debtor; but this is a strength, not a weakness. U.S. debt is an integral feature of its economic dominance, through which the United States receives goods and services from the rest of the world in exchange for dollars it can print and keystroke into existence. Yet cracks are showing in the foundations of dollar hegemony, as countries look to find ways to escape from U.S. economic dominance. In this talk, Professor Hudson discussed the prospects and challenges of global de-dollarization, and how countries like China might forge a way toward a different monetary system free of U.S. control.