De-dollarization the path to global financial freedom

The right thing in the right place…

US weaponization of dollar is backfiring as BRICS and wider developing world accelerate away from dollar-based trade and holdings, writes ‘The Asia Times’.

Economic and financial sanctions often backfire. The most notable example is the weaponization of the dollar against Russia. The measure has sparked a global movement to de-dollarize, the opposite of the punitive move’s strategic intent.

The historic miscalculation didn’t stop US Senator Marco Rubio of Florida from introducing a bill in Congress to punish countries that de-dollarize. The bill seeks to ban financial institutions facilitating de-dollarization from the global dollar system.

Rubio’s bill, ominously called the Sanctions Evasion Prevention and Mitigation Act, would require US presidents to sanction financial institutions using China’s CIPS payment system, Russia’s financial messaging service SPFS and other alternatives to the dollar-centric SWIFT system.

Rubio is not alone in targeting countries bidding to de-dollarize. Economic advisors to presidential candidate Donald Trump are discussing ways to punish nations that are actively shifting away from the dollar.

The Trump team has proposed “to sanction both allies and adversaries who seek active ways to engage in bilateral trade in currencies other than the dollar.” Violators would be subjected to export restrictions, tariffs and “currency manipulation charges.”

US policymakers and pundits in the financial media were initially dismissive of de-dollarization. They argued the dollar is used in some 80% of all global financial transactions. No other currency even comes close.

But financial sanctions against Russia became a turning point. The trend to de-dollarize expanded rapidly and has now arguably become irreversible.

In May this year, the Association of Southeast Asian Nations (ASEAN) announced plans to de-dollarize their cross-border trade and use local currencies instead. The announcement made few global headlines but ASEAN is a huge trading bloc comprised of ten countries with a combined population of 600 million people.

Other agreements to bypass the dollar system include barter deals. Iran and Thailand are trading food for oil while Pakistan has authorized barter trade with Iran, Afghanistan and Russia. China is building a state-of-the-art airport in Iran, to be paid for in oil.

Cryptocurrencies are also being used to bypass the dollar system and avoid scrutiny from the long arm of American law. Cryptos like Bitcoin enable individuals to send and receive funds from anywhere in the world anonymously, outside the legacy banking system.

De-dollarization is high on the agenda of BRICS, which is rapidly becoming the world’s largest economic bloc.

Until 2022, BRICS had few clearly defined goals apart from a shared desire to develop a counterweight to the G7. But the weaponization of the dollar system and the freezing of US$300 billion in Russian reserves held in Western banks gave the group sharp new focus and purpose.

BRICS is economically driven and has no ideological program. It is primarily focused on economic development and cooperation. Its ethos is based on consensus and reciprocity.

US control over the global financial system can be traced to 1974 when the American government convinced Saudi Arabia to sell its oil only in dollars. The agreement followed the US decision in 1971 to default on the gold standard. President Richard Nixon closed the so-called gold window where dollars could be exchanged for physical gold.

The US was fighting two wars at the same time – the war in Vietnam and the war on poverty – and the government issued more dollars and debt than could be backed by gold. The petrodollar assured continued global demand global for dollars.

The agreement required all oil-importing countries to maintain dollar reserves. Oil-exporting countries invested their dollar surpluses in US bonds and treasuries, providing continuous financing for the US national debt.

Pricing oil in dollars tied the global economy to the dollar system. Oil represents less than 10% of global trade, but is essential to the other 90%.

Control over the world’s reserve currency gives the US significant power over other countries. It controls the on-and-off ramps of the global financial system and can sanction any country it perceives as an economic or political adversary.

Moreover, the government can issue loans to foreign countries in its own currency. The International Monetary Fund loans money to countries that need to import essentials like oil, food and medicine but lack the needed dollars.

Providing loans to countries typically comes with strict neo-liberal conditions, namely opening up the economy, privatizing public enterprises and liberalizing financial markets. The results have been less than optimal.

The petrodollar made it easier for the US to finance its debt and led to profligate spending by the US government. In 1985, just ten years after the petrodollar agreement, the US became the biggest debtor in the world.

In 1974, the US national debt was $485 billion, or 31% of GDP. This year, the national debt surpassed $35 trillion, representing 120% of GDP.

Interest payments on the national debt will exceed $850 billion this year, making it the biggest item in the national budget, ahead of defense spending and social security. Without a major course correction, servicing the national debt will crowd out all discretionary spending in a few years.

The debt crisis underscores rising US concerns about de-dollarization. Fewer users of the dollar means fewer buyers of US debt.

Investors have long regarded US bonds as a safe haven. Bonds offer a stable return and payment is guaranteed by the government. But in the past few years, investor demand for long-term US debt has come under pressure. A clear sign of trouble: the dollar and gold, which for years had traded in a narrow bandwidth, started to diverge.

The concern of investors is based on simple arithmetic. If the US issues more dollars/debt than economic growth justifies, it causes inflation. When bond yields are 4% and inflation is 8%, bonds are a loss-making investment, which is not good for pension funds and other investors with long-term commitments.

The US bond market is valued at $50 trillion, a massive amount by most measures. But the figure pales in comparison to the nominal value of the global dollar system, which is virtually incalculable but in excess of a quadrillion dollars.  

The off-shore shadow banking is estimated at $65 trillion.

The derivative market is valued at $800 trillion.

The off-shore shadow banking market is $65 trillion.

The eurodollar market is $5 trillion to $13 trillion.

De-dollarization means that many of the trillions of dollars floating around the world will gradually come home. When countries move toward multicurrency trade, demand for dollars will only decline.

Dollars flowing back into the US will not only spur inflation but also reduce the pool of potential buyers of US debt. Fewer buyers means higher interest payments, which leads to higher debt.

De-dollarization is the first challenge to the dollar since 1944, when the Bretton Woods Agreement made the gold-backed dollar the benchmark for all other currencies. Given the geopolitical tension between BRICS and G7 countries, a Bretton Woods II is highly unlikely.

Instead, we will see a growing number of multicurrency agreements and at some point the launch of a BRICS trading currency. The BRICS currency unit will be asset-backed but will be digital only. No coins or paper money would be issued.

The global financial system is thus likely to fragment into three parts: the dollar-led fiat system, multicurrency agreements and a BRICS-led trading currency. The dollar system will exist alongside the other two systems but the dollar is likely to be the world’s last reserve currency.

Reserve currencies are a remnant of the (neo)colonial era. They primarily benefit corporations and the wealthy. A multicurrency system will primarily benefit countries, allowing them to take responsibility for their own future by reclaiming their monetary and fiscal autonomy.

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