COMING COLLAPSE OF DOLLAR-LED MONETARY EMPIRE

Earlier this week, Zoltan Pozsar  of the Credit Suisse has  published a research memo titled “Bretton Woods III” in which he has argued that  West’s Russia sanctions would push the world economy into a new world monetary order. Pozsar argues that  Bretton Woods II has collapsed  when the G7 countries seized Russia’s foreign exchange reserves kept with the IMF.

What is Bretton Woods system?  Towards the end of the Second World War, the USA orchestrated weakling European powers at San Francisco and Bretton Woods for new monetary world order.   Dollar became the international reserve and transaction currency on the precondition of dollar-gold convertibility as prescribed by Harry J.White.  John Maynard Keynes’ proposal for an international body to issue bank note, bancor, was turned down.  At this juncture, USA ran a trade surplus and accumulated 60% of world’s central bank gold with its private Federal Reserve System that guaranteed the stability of Bretton Woods system.

Bretton Woods I collapsed when Nixon ended the gold standard on 15 August 1971 when dollars were convertible to gold at a fixed exchange rate of $35 an ounce.

This led to Bretton Woods II, backed by fiat currency,  the dollar, which itself is not linked to gold or any other commodity. In 1973, OPEC countries hiked oil price several times in the wake of Arab – Israel war.   Henry Kissinger entered into secret negotiation with the OPEC leader, Saudi Arabia to denominate oil bills in dollar.  The emergence of oil-dollar axis allowed America to widen its monetary hegemony.

There are very few international supplier of oil.  Most of these supplies are denominated in dollar.  Every oil-importing nation require dollar for its progress in a world where progress is described in terms of high energy consumption.  Dollar can be obtained only in two ways – either as loan from the US and US controlled multilateral bodies or by exporting more and more goods as well as services to the USA.  It is no coincidence that neoliberal philosophy of economic growth emphasizes export led growth.  Economic theories have been manipulated to show currency devaluation as a measure to boost export.  Rest of the world, particularly developing world, enters into competitive devaluation vis-à-vis dollar to increase its market share in the USA.  As a result, the US became the biggest consumer of goods at the cheapest price that brought consumer revolution there. Devaluation of other currencies vis-à-vis dollar maintains a strong dollar, hence, its primacy continues unabated. t is paying merely a fiat currency i.e. dollar in lieu of ‘real physical goods’ as dollar can be printed without any limit after the collapse of dollar – gold convertibility in 1971.  It is how the USA is exporting dollar at no cost to oil-producing countries.  As a result, mere 4% of world population in the US consumes more than 25% of world oil production.

Dollar not only is the reserve currency globally ( almost 65 % of global forex reserve is in dollar), but also is the global  transaction currency  and SWIFT is dollar-backed.

But,  freezing dollar reserve of Russia no longer guarantees safety of money in terms of  dollar .Sanctions on Russia, has showed that reserves accumulated by central banks can simply be taken away.

Pozsar writes,  “We are witnessing the birth of Bretton Woods III – a new world (monetary) order centered around commodity-based currencies in the East that will likely weaken the Eurodollar system and also contribute to inflationary forces in the West.”

 Pozsar is infact wrong in stating the new  emerging system as Bretton Woods III.

This will be a multipolar monetary system with  Russo-Asian Monetary system led by China-Russia-India-Saudi Arabia-UAE on one hand, then a continental European system and a dollarized Americas as the third system.  Africa will slowly gravitate towards Russo-Asian monetary system.

 It has become possible as dollar’s primacy is on brink of cataclysmic collapse.  I am summing up the dimensions leading to this destiny of dollar:

(i) The primacy of dollar depend upon low domestic inflation within US so that the value of currency does not erode fast  causing  dampening of the trust in the  currency.  At present, the US consumer prices has increased to +7.9 % in February, which is at same level  to what was seen during late 1970s. This erodes the confidence in dollar.

(ii) The public debt in US  has  grown exponentially since 2008 financial crisis and stands at more than 30 trillion dollars , with $ 562.4 billion being the interest on the public debt. This further makes the confidence on dollar low, as dollar is the currency of such an indebted nation.

(iii) The disruption in supply of raw materials from continental size economy of Russia will further add to the inflationary pressure. Dollar’s devaluation will further discourage  countries to  hoard dollars in reserves since their value of money automatically will go down without any fault of them.

(iv) The oil exporters have been working on feasibility of the binding trade with gold. This has caused the spike in gold prices in recent months.

(v)   The top 5 exporters of crude oil in 2020 were Saudi Arabia, Russia, Iraq, United States and United Arab Emirates. Combined, those crude oil shippers account for half (50.7%) of exported crude petroleum oil. Three of these nations ( Russia, UAE, Saudi Arabia) are in some kind of secret understanding to dethrone denomination of oil bills in dollar. When Iran, Venezuela also joins this pivot, the whole Oil-dollar axis will collapse dramatically.

(vi) Nations will be wary of hoarding dollar in their forex reserve. China’s Foreign Exchange Reserves was measured at 3,221.6 USD bn in Jan 2022, out of which nearly 1000 billion USD was invested in US Treasury- bonds. The top countries who hoard dollar in their reserves are China, Japan, Switzerland, Russia , India, Saudi Arabia, Taiwan and so on. Majority belong to Russo-Asian zone  and now wary of dollar hoardings after G7’s misadventure. It was the 1997 Asian Financial Crisis that led Asian economies  into accumulating more funds in dollar to shield their currencies from crashes, that has led to the raising of the  official reserves from $2 trillion to a record $14.9 trillion by 2021. But, the SE Asian countries have started using  currency-swaps with China to bypass dollar as transaction currency and avoid hoarding dollar anymore.

(vii) Russia and China  have been already working on dedollarization strategy since at least 2008. During Russia’s crimea adventure, to bypass western sanctions, Russia signed agreement with China in  2014 deepening cooperation on energy and establishing a three-year currency swap deal. Similarly, China started shift from  the dollar in bilateral trade in 2018 following the US imposition of heavy tariffs on Chinese goods and started working closely with Russia in dedollarization scheme. Russia are India are no longer using U.S. dollars in arms deals payments. There is further negotiation going on for rupee-rouble  trade system.

(viii)   In 2019, Russia and China signed agreement to replace the dollar with national currencies in international settlements between them. Russia reduce its reliance on the dollar  in trade. While 80% of Russia’s total exports were denominated in US dollars in 2013, it has come down to less than 50 % as of now.

(x)  In 2012, China decided to establish its own international payment system , and Crossborder International Payment system(CIPS) began its operations in 2015  In 2019, Russia announced plans to establish a new international payments system with China that would operate as an alternative to the US-dominated SWIFT. The Russian System is “Sisteme Peredachi Finansovykh Soobshchenii” (SPFS).  CIPS has picked up the pace in last few months. CIPS is also kickstarting the development of the country’s digital currency, the e-CNY. CIPS processed around $12.68 trillion in 2021, a 75% increase from a 2020.

(xi) Digital currencies have further put pressure on role of dollar in international transaction.

 I foresee the collapse of dollar’s role as international transaction and reserve currency by the end of this year. The benefit of seigniorage will no longer be available with the US. Fissiparous tendencies have already grown in the US. With inflationary pressure at the time when trust in holding dollar reserve has dissipated is not going to ease. In fact, the addition of  trillion dollar  debt(1.9 trillion USD) for boosting post-Covid economy in the US by Biden  administration will add to inflation as the likelihood of the pumping out of excess of money supply has dwindled with the recent action against Russia’s forex reserve kept with  multilateral institutions. My essay written sometimes in 2005 on the current predicament of dollar elaborates upon the intricate financial architecture that sustained American hegemony.