Sense on the Dollar
Sense on the Dollar
UPDATE: The unipolar dominance of the American Empire has allowed it to command an outsized share of the world’s resources in exchange for green pieces of paper. That dominance, and the dollar’s hegemony, nears its end.
The third goal is to preclude any hostile power from dominating a region critical to our [US] interests, and also thereby to strengthen the barriers against the reemergence of a global threat to the interests of the U.S. and our allies. These regions include Europe, East Asia, the Middle East/Persian Gulf, and Latin America.Consolidated, nondemocratic control of the resources of such a critical region could generate a significant threat to our security.
The architects of the current global governance system have failed the world. Not only didn’t they redeem the sins of their ancestors, but we now have the leaders of the richest club in the world convening every year preaching to the rest of the planet about the rules-based order, while the rules are treated like tissues from a Kleenex box, usable at times but discarded when inconvenient.
The White House sent an urgent message to delay trade negotiators in San Francisco who were racing to reach an agreement on part of President Biden's Indo-Pacific Economic Framework (IPEF) trade plan with 13 Pacific Rim nations.
The Coming Displacement of the Dollar
By Robert P. Murphy (amended)
The unipolar dominance of the American Empire has allowed it to command an outsized share of the world’s resources in exchange for green pieces of paper. That dominance, and the dollar’s hegemony, nears its end.
Since the end of World War II, the United States dollar has enjoyed the special status of global reserve currency. Coupled with the economic might of the American system—with its relative respect for property rights and admiration for the entrepreneur—the United States government was a giant on the global stage, not even having a close rival after the fall of the Soviet Union in 1991.
After World War II, the Allies adopted the so-called Bretton Woods system. This is best described as a gold exchange standard, where the United States still maintained large stockpiles of physical gold. Other countries, however, were encouraged to hold their own reserves in the form of U.S. dollars (or official claims to U.S. dollars, such as Treasury securities). Because the U.S. government pledged to redeem these dollar liabilities in gold upon request (at the rate of $35/ounce), the system still had the veneer of the old gold standard. Even here, however, a crucial difference was that in the Bretton Woods era, only central banks could redeem their dollars for gold; mere citizens or businesses had no such rights.
Eventually the temptations of running the printing press to finance various federal spending programs—including actual wars in Asia and metaphorical wars on poverty at home—proved too much, and the U.S. government gradually lost the ability to cajole its weaker peers to continually bolster their dollar reserves, rather than redeeming in hard gold. Richard Nixon famously threw in the towel when he announced on Aug. 15, 1971 that the U.S. would no longer honor its commitment to redeem dollars in gold.
Ever since Nixon’s closure of the gold window, various analysts have warned that the U.S. government and Federal Reserve’s foolhardy policies were paving the way for a collapse of the currency. Since that apocalypse has never occurred, many Americans have embraced a relieved complacency. Even though on paper it certainly seems like the authorities in charge of maintaining the value of the currency have thrown caution to the winds, things appear all right to those with short attention spans. The U.S. dollar is still king, with no major shifts in years.
Yet if we pull back and look at a longer stretch of history, we realize the full extent of the dollar’s erosion. For our purposes, I will present three main lines of evidence.
First, since we are assessing the dollar’s role as “global reserve currency,” let’s consider its share in official foreign exchange reserves, as reported by various countries to the International Monetary Fund. In a recent article making the case that the dollar is still the world’s undisputed, leading currency, staffers at the Federal Reserve pointed out that in 2022, the U.S. dollar accounted for 58 percent of total global foreign exchange reserves, while the second-place euro was less than half of that, with a 21 percent share.
Yet this very statistic shows just how rapid the dollar’s decline has been, because back in 2000, the dollar was a whopping 71 percent of global foreign exchange reserves, compared to only 18 percent for the second-place euro. In other words, in the span of just two decades, the dollar has shed 13 percentage points of its share of global foreign exchange reserves, or about one-fifth of its starting share. If this gentle but steady decline continues, the dollar will fall below the 50 percent threshold before 2040.
The second item for consideration is the distribution of U.S. Treasury debt among domestic versus foreign buyers, which is a measure of the willingness of the world to hold dollar-denominated assets. The chart above, generated online with the St. Louis Fed’s FRED data tool, shows three items: U.S. federal debt held by the public (the middle line, which spikes upward in the 2020s), U.S. federal debt held by foreign and international investors (the bottom line), and finally the ratio of the two series (the top line, until the end of the chart).
As the chart indicates, foreign holdings of Treasury securities grew relatively faster than domestic holdings from the mid-1990s until the eve of the 2008 financial crisis. Specifically, foreign holdings grew from 20 percent in early 1995 to a peak of 49 percent in the second quarter of 2008.
In the immediate aftermath of the financial crisis, both domestic and foreign holdings of Treasuries rose rapidly, but the split between the two was roughly constant. Yet starting around 2013, it seemed foreign holders threw in the towel. They were finished adding to their stockpiles of Uncle Sam’s debt, as indicated by the relatively flat (bottom)line from 2013 onward.
Yet Uncle Sam certainly wasn’t finished issuing more debt, as shown by the rapidly rising (middle) line during the Obama years and then especially during Trump’s term when the coronavirus struck. It was strictly American buyers (including the Federal Reserve, which is counted as being part of the “public” in these statistics) who were loading up on this new debt. As the plunging (top) line reveals, the proportion of foreign holdings fell to 30 percent by the end of 2022.
The rapid ascent in U.S. interest rates may make Treasury securities relatively more attractive to foreign investors, but this increase in yield is counterbalanced by the escalation in the total debt accrued by the Treasury. According to the Congressional Budget Office, federal debt held by the public was a mere 39 percent of gross domestic product as recently as 2008; this year it is estimated at 98 percent of GDP and is expected to hit 119 percent by 2033.
And to be clear, this projected tripling of federal debt as a share of the economy over a 25-year period (from 2008 through 2033) doesn’t rely on any assumed recessions or financial crises going forward. It merely reflects CBO’s middle-of-the-road extrapolations of existing trends in demographics and the budget structure. Unlike the record level of debt held at the end of World War II, which gently faded as the economy recovered and the public returned to peacetime spending habits, our current fiscal mismatch isn’t due to a one-off emergency. It would take drastic and painful changes—including tax hikes and cuts to Social Security—to rein in our deficits and at least stop adding to the debt load. Yet precisely because such changes would be so painful, they likely won’t happen anytime soon. Foreign investors know this, meaning we probably won’t see a surge in demand to hold Treasuries on their part.
The third and final metric of the dollar’s status as a reserve currency we’ll consider is the amount of gold held in reserve by the world’s central banks. When contrasting the dollar against other fiat currencies, its slippage in prestige is partially masked by the fact that every other central bank has mismanaged its unbacked money as well. Looking at the stockpiles of physical gold held by various central banks can shed additional light on the subject.
The table above shows official gold holdings in central bank reserves by various countries, as reported by the IMF and compiled by the World Gold Council.
In the top half of the above table, we can see that the U.S. and some of its economically strongest allies have either held steady or even reduced their physical gold reserves over the last two decades.
On the other hand, looking at the bottom half listing the so-called BRICS nations (Brazil, Russia, India, China, and South Africa), we see that all except South Africa have sharply increased their gold reserves. Keep in mind that the above table measures gold in physical weight; the market value of these reserves surged by a larger amount, even accounting for the general increase in prices since 2000.
In sum, if we look at gold holdings, it’s clear that a large share of the global economy is distancing itself from reliance on the dollar. Specifically, if we use the Purchasing Power Parity (PPP) method of comparing different currencies, then as of 2022 the BRIC block constituted a total of 31 percent of the global economy. The individual breakdowns were Brazil with 2.3 percent of global GDP, Russia with 2.9 percent, India with 7.3 percent, and China with 18.5 percent. For comparison, in 2022 the U.S. economy only produced 15.6 percent of global GDP.
A brief digression may clarify for those surprised at the above figures: There are two popular methods for comparing economic values that are measured in different currencies. The one typically favored by economists doing cross-country comparisons is to use the ratio that gives a unit of each currency the same ability to purchase a basket of consumer goods and services in each region. According to this PPP method, China became the world’s largest economy back in 2016, and as of 2022 had a GDP that was 18 percent larger than that of the United States. On the other hand, if we use official exchange rates to compare currencies, then as of 2022, U.S. economic output was still 41 percent bigger than China’s. Yet patriotic Americans should be wary of relying on these latter calculations, especially if they believe the Chinese government is artificially devaluing its own currency in order to promote exports.
As the above evidence confirms, we can confidently conclude that at least a third of the global economy is shifting away from the dollar. The motivations range from the purely fundamental analysis of debt burdens and fiscal sustainability, to more strategic concerns for political leaders who have seen the U.S. and its allies use dollar hegemony to punish their enemies through outright sanctions and more subtle financial measures.
In short, the dethroning of the U.S. dollar will knock down the status of the U.S. government from a seemingly godlike entity, immune from the laws of scarcity and accounting that mere corporations, let alone households, must obey. In reality, of course, the U.S. government has been subject to the laws of economics all along, but the dollar’s special status has managed to defer and camouflage the full impact of its decisions.
Every other empire in world history has risen and fallen, and the U.S. roller coaster has clearly gone over the hill and is now accelerating downward. Governments, companies, and households in the United States will need to realign their expectations and adopt more modest budgets going forward, but in the big picture this painful adjustment will be a needed return to reality.
Read more here.
The Rise of BRICS — Valdai Club
By John Gong
The architects of the current global governance system have failed the world. Not only didn’t they redeem the sins of their ancestors, but we now have the leaders of the richest club in the world convening every year preaching to the rest of the planet about the rules-based order, while the rules are treated like tissues from a Kleenex box, usable at times but discarded when inconvenient, John Gong writes.
There is a reason why six new members were tapped to be added to BRICS in Johannesburg. There is a reason why more than 20 countries so far have applied to join BRICS. These national aspirations resonate with a theme of the creation of another world system. I will go back to one of the most important founding principles of BRICS to address the nature of this pending new world system, which is, I quote, “the shared commitment to restructure the global political, economic, and financial architecture to be fair, balanced and representative, resting on the important pillars of multilateralism and international law.”
In other words, the current incumbent world system is unfair, unbalanced, and is definitely unrepresentative. The unfairness, the lack of balance and the dearth of representation in the current system is not just a recent creation; it can be traced back hundreds of years. Four out of the five original BRICS members were victims of European colonialism for the better part of the past three hundred years. The period starting with the Age of Exploration in the 16th century and culminating with the end of the Second World War in the 20th century can be said to be one of the darkest, most grossly unjust chapters of human history, with the proliferation of sugar plantations, coffee plantations and slave trade at the hands of European colonists, even amidst the tremendous progress in science and technology, arguably also steered and led by the West.
The end of the Second World War didn’t change that status quo in substance, although the victors could have worked towards this. Even the subsequent establishment of the international institutions by the US-led coalition, including the United Nations, the WTO, the IMF, the World Bank and many others, not only did not correct a grotesque historic wrong, but on the contrary continues and perpetuates that historic wrong, albeit not via naked force and violence, at least not ostensibly. The so-called international rules-based order has failed spectacularly the hopes of the victims of colonialism, and it begs a fundamental question: whose rules, whose order, are we talking about here?
Yes, we have a United Nations and its charter. But count how many times regime changes in foreign lands have been orchestrated by the United States without UN approval. Yes, we have a WTO. But count how many times the WTO dispute settlement panel decisions are outright rejected and ignored by the United States, and to the extent that the appointment of that panel’s succeeding members could even be blocked. Yes, we have an IMF. But count how many times the IMF rescue packages were acting as a political choke tool to encroach upon a sovereign nation’s political establishment because of some ideological penchant of some countries. Yes, we have a World Bank. But count how many real ports, bridges, railways and highways the World Bank helped build vis-à-vis the so-called capacity building it is so fond of indulging in.
The architects of the current global governance system have failed the world. Not only didn’t they redeem the sins of their ancestors, but we now have the leaders of the richest club in the world convening every year preaching to the rest of the planet about the rules-based order, while the rules are treated like tissues from a Kleenex box, usable at times but discarded when inconvenient. We are left with a compromised, negotiated division of power among a few Western capitals in the northern hemisphere. The vast majority, the Global South, the offspring of the victims of the colonial era, continue to be side-lined and marginalized in a global system that is working fundamentally at odds with their economic and political interests. A large number of developing countries in the South continue to struggle economically and politically as they did in the colonial era.
The root cause of the failings of the current system has everything to do with the unipolar world, or the almost-unipolar world after the Cold War. Unipolarity brews hegemony, and hegemony promises neither peace nor prosperity. The revered US statesman Henry Kissinger has this equilibrium theory for international politics. Those well-versed in game theory understand that there would be no equilibrium with a dominant player with a dominant strategy, which means he can act in his interest with no regard to other parties’ interests.
The rise of the BRICS and this year’s BRICS Plus expansion signify a new era coming, in which unipolarity no longer holds anymore, and in which the Global South calls for the end of the current, broken system. The endeavour of BRICS Plus to restructure the global political, economic, and financial architecture rests on the pillars of multilateralism and international law. BRICS Plus and the Global South in general do not seek a wholesale overhaul of the current system. It does not pursue a confrontational or revolutionary approach against the West to reach its goals. It recognizes and respects many of the international rules and laws developed over the last seven decades. It prefers a multilateral framework to work and cooperate with the West to gradually modify the shortcomings of the current system, in order to pursue a new system in which there is multipolarity, there are checks and balances, and hopefully there is a peaceful equilibrium.
In that sense, as scholars from the BRICS world, we call upon the leaders of the West to view the rise of the BRICS not through an antagonistic, geopolitical lens, but as an equal partner that deserves understanding and respect. The world has changed. No longer will the Global South accept the West’s pompous, condescending lectures. Today, BRICS Plus already represents nearly fifty percent of the world’s population and 36% of the world’s GDP. It is time to reflect on the true state of the world we are living in and act accordingly.
Let’s point to some concrete ways in which BRICS is developing, mostly from an economics perspective, as part of achieving the BRICS goal of achieving a new global order. First, economic development underlies everything. In addition to making BRICS a political platform for advocating the Global South’s interests in dealing with the West, the NDB, which is the BRICS’ World Bank, needs to continue to make project loans, especially in infrastructure projects, at a relentless pace under its own set of loan standards.
Second, it must continue to support China’s Belt and Road initiative and other countries’ initiatives that provide infrastructure connectivity, connectivity in other soft infrastructure, and cultural, societal, and people-to-people exchanges. Needless to say, infrastructure provides the basis for economic development, which provides for economic and political power in international relations.
Third, find ways to facilitate trade and investment flows within the BRICS and with the Global South in general. Current global trade is undergoing a structural re-orientation, due to the conflict in Ukraine, America’s big power competition with China and other reasons. Sino-Russian trade is a very good example; it has been increasing by 70% year-over-year so far this year. This kind of intra-BRICS trade and investment flows strength BRICS’ economic base, which in turn translates into a political base.
Last but not least, the world’s financial system is in desperate need of some reform. We have seen enough of countries, companies and individuals that are subject to arbitrary sanctions due to one country’s unique role in the global financial system. There must be some initial developments within BRICS to circumvent that power, in terms of trade currency, currency transfers, settlement mechanisms, etc.
In short, the West’ dominance in world politics over the last few hundred years is fundamentally based on economic and technological dominance. For BRICS to truly be a force to be reckoned with in world politics, it needs to step up in these areas as well.
Read more here.
Indo-Pacific trade deal (IPEF) now in the basement
By Hans Nichols
The White House sent an urgent message last week to trade negotiators in San Francisco who were racing to reach an agreement on part of President Biden's trade plan with 13 Pacific Rim nations: Slow down.
Why it matters: The new order has thrown into question the president's commitment to a key section of his signature trade effort, the Indo-Pacific Economic Framework for Prosperity (IPEF), according to three people familiar with the issue.
Biden unveiled the IPEF as a new approach to trade — not a traditional deal to lower tariffs and boost market access for all countries, but a deal to use common standards on everything from clean energy to digital transactions. The goal is to counter China's influence in the region.
Yes, but: Biden's trade plan is getting fresh pushback from other Democrats, who see it as a potential liability in the 2024 elections.
Many Democrats, including National Security Adviser Jake Sullivan, are still scarred by how Donald Trump rode his opposition to former President Obama's signature trade deal — the Trans Pacific Partnership — to win the White House in 2016.
Immediately after he took office, Trump — who called the TPP harmful to American workers and industry — withdrew from the partnership.
Driving the news: Last week, Sen. Sherrod Brown (D-Ohio), who's among the most vulnerable Democratic senators seeking re-election in 2024, called Sullivan to voice deep concerns with Biden's plans to announce major progress on the IPEF at the Asia-Pacific Economic Cooperation (APEC) summit this week, according to two U.S. officials.
Senate Majority Leader Chuck Schumer (D-N.Y) also reached out to the White House to warn the administration about the potentially dicey politics of such a trade deal less than a year before the election.
"I've made it very clear that the trade portion of the Indo-Pacific Economic Framework is unacceptable," Brown said in a statement.
"And I'm glad to hear the administration has decided not to move forward on an agreement that lacks enforceable labor standards," Brown added, referring to a section of the proposed arrangement known as "Pillar I," which focuses on trade.
What we're hearing: After the private Democratic pressure, the White House ordered negotiators in San Francisco to essentially slow-walk conversations over the trade section of the framework.
That directive left negotiators stunned — and confused — over what they were supposed to do.
Just two weeks ago, U.S. Trade Representative Katherine Tai was promising major news at the APEC summit. "We are looking to announce a number of deliverables across the pillars of IPEF, which we will be very excited to share with everyone," she said on CNBC.
On Sunday, U.S. negotiators indicated to their counterparts at APEC that a preliminary agreement on parts of Pillar I — which includes sections on digital trade, labor protections and the environment — would not be achieved.
What they're saying: The White House is insisting that the negotiations haven't been derailed.
"Throughout the IPEF negotiations, we have focused on promoting workers' rights and raising standards," said a spokesperson for the National Security Council. "We are on track to achieve meaningful progress and lay the foundation for a new framework for regional economic cooperation."
A spokesperson for Tai declined to comment.
Zoom out: The Biden administration has made it a priority to deepen economic and military ties with countries in the Indo-Pacific as a way to counter Chinese influence across the region.
In May, Biden announced that 13 countries were joining IPEF and that Tai would lead the U.S. team in negotiating the trade section of the proposal.
The other three pillars of IPEF would be deals on supply chains, clean energy and anti-corruption standards.
They are being negotiated by the Commerce Department; Biden officials expect to announce progress on all three at APEC.
Read more here.