The greenback heads south

Ensuring Socio-economic Justice

Zafar Bangash

Rajab 02, 1435 2014-05-01


by Zafar Bangash (Editorials, Crescent International Vol. 43, No. 3, Rajab, 1435)

The US dollar is losing its shine as rivals emerge to stake a claim. It is not only the euro but also the Chinese currency, the yuan that are challenging dollar’s supremacy in global finance.

There is a close link between the strength of a country’s currency and its political clout in the world. Between the First and Second World Wars, the British pound gradually lost influence as the US dollar rose to prominence. This reflected the relative position of the two — Britain and the US — in world affairs. This was a civilized affair as the monetary baton was passed from nephew Charlie to Uncle Sam.

What is currently underway between the US and Russia in Ukraine on the one hand and between the US and China in the South China Sea on the other will not be such a civilized affair. The American elite are itching for another war and have revived cold-war rhetoric against Russia even though Pentagon officials have warned them to eschew a desire for more adventures. The US military has been badly mauled in Iraq and Afghanistan and the generals, even though normally supportive of wars to display their macho image are not so sure. The two wars have cost the US $4 to $6 trillion, according to economist Linda Bilmes.

The privilege of being the world’s “reserve currency” is predicated on two factors: military power and control of the global economic system. This is what the US has done since the Second World War. To maintain dollar hegemony, it has waged wars against those that try to move away from it. Both Saddam Hussein of Iraq and Muammar Qaddafi of Libya were the victims of this policy (there were other factors as well but these were important considerations). Such wars have been waged using money belonging to other countries because the dollar is a global reserve currency.

With the dollar in decline and countries looking for alternative currencies to keep their reserves in, the US and its allies have resorted to using the International Monetary Fund (IMF) to not lose control. The idea of Special Drawing Rights (SDR) has been revived whereby member states can use it to convert it into any other currencies. The SDR consists of a basket of currencies — the US dollar, British pound, Japanese yen and the euro — again all Western (the yen is semi-meaningless without a huge US market for Japanese products).

As China takes giant economic strides becoming a global power, prompting America’s Asia pivot to contain it, Beijing is looking for ways to strengthen its own currency, the yuan, but it wants to do so in a measured way in order not to create a run on the dollar. The Chinese hold more than 2 trillion American dollars in reserves and would lose if the dollar were to have a precipitous fall. They are, however, diversifying their reserves and buying gold in large quantities, as well as creating their own local consumption market, which is expected to be huge in the coming decades.

In recent weeks, there has been a significant fall in the value of the dollar vis-à-vis other currencies. Interestingly, the US itself does not have much faith in the greenback; it maintains 76.6% of its reserves in gold — a massive 8,133.5 tons of it, according to the World Gold Council report of 2011.

By reviving cold-war rhetoric and imposing sanctions on certain Russian state entities as well as individuals, the US has forced Moscow to retaliate by selling Gazprom bonds in Chinese yuan rather than the US dollar. Gazprom is the world’s biggest natural-gas producer and will certainly spur others to follow suit. There is already talk among BRICS member-states — Brazil, Russia, India, China and South Africa — to think of creating their own reserve currency. Islamic Iran has been a victim of US sanctions for decades. It too is looking for ways to bypass the dollar for trade. Bilateral agreements are being considered, all leading to only one consequence: further decline in the value of the dollar, and with it loss of US hegemonic power in the world.

The IMF’s recent report revealed that at least 23 countries are holding Chinese yuan as official reserves; 12 more have done so quietly, all pointing to the slow demise of the dollar. Another indicator is that in 2000, 55% of all reserves were in US dollars; today it has declined to 33% — and still falling. According to economists, below the 50% threshold, a currency ceases its reserve currency status.

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