King dollar won’t be dethroned as a reserve currency
The collapse of the Bretton Woods exchange rate regime in August 1971 coincided with a spectacular wave of inflation and economic volatility. The 1970s witnessed the Opec oil prices hikes, a deep recession, the rise in gold prices from $35 to $800 an ounce, a savage bear market in US Treasury debt and Britain’s desperate quest to secure an IMF loan to protect sterling. The 1980s witnessed the worst global recession since the Great Depression, the collapse of international banks like Continental Illinois, Latin America’s sovereign debt crisis and a US-Japan trade war.
The 1990s witnessed financial Armageddon in emerging markets as diverse as Thailand, Mexico, Indonesia, South Korea, Turkey, Argentina and Russia amid a wave of bank failures, currency collapse and hyperinflation. The first decade of the twenty first century culminated in Lehman’s failure, Wall Street’s subprime debt disaster, $12 trillion in central bank new money lifeboats and the near collapse of some of the world’s biggest banks. There is no doubt that international finance has a financial casino dimension, thanks to leveraged trillion dollar pools of capital — daily turnover in the foreign exchange market alone is $5 trillion — that move across the planet at the speed of light.
It is ironic that John Maynard Keynes, the architect of Bretton Woods in 1944, once proposed the blueprint of a global currency called Bancor to replace the discredited gold standard. Keynes died in 1946, a year where a bankrupt, exhausted Britain was ruled by a Labour Prime Minister Clement Atlee with zero ambitions to reshape the international financial system. Britain did not even want to give up sterling and the independence of the Bank of England while the German Bundesbank and the Banque de France midwifed the creation of the euro and the ECB in the late 1990s. However, the Greek/Cyprus, Irish, Spanish and Italian banking crises all proved to the world that the euro would not replace the US dollar as the world’s reserve currency in our lifetime. China’s yuan, tightly managed by the People’s Bank of China (PBOC), crippled by capital controls, serves as a trade finance currency in Hong Kong and Burma but has no hope of challenging King dollar as the global currency hegemon.
This is not to deny the fact that a common currency benefits regions whose economies are integrated and cross-linked by the exchange of capital, people and traded goods. This was the intellectual ballast behind the introduction of the euro in 1999 but synchronised monetary policy in the absence of fiscal and political unification led to a succession of economic, banking and currency crises in the Club Med nations of peripheral Europe. The GCC common currency proved a non-starter.
Countries as different as Panama, Hong Kong, Saudi Arabia and Argentina simply pegged their currencies to the US dollar and surrendered their monetary policy independence to the Federal Reserve. The closest thing to a world currency since the Roman Empire’s gold dinari, the British Empire’s pound sterling, the Soviet empire’s non-exchangeable rouble is postwar America’s US dollar. Even Bretton Woods’s $35 gold war linked to the dollar. Keynes called gold a “barbarous relic” because the gold standard contributed to the financial shocks and deflationary misery of the Great Depression in the 1930s. Keynes was right even though in the long run he too is dead.
As long as Russia and China challenge US supremacy in international relations, a formal global central bank and a common currency is a fanciful nation. US President Donald Trump’s protectionist policies and threats to start trade wars with China, Mexico and even Canada have undermined faith in the US dollar’s role as a global reserve currency. Trump also broke a taboo by openly talking to promote US industrial exports from the Rust Belt. Even though China has a $350 billion trade surplus with the US (which has a $500 billion trade deficit, Trump’s erratic policies do little to promote the yuan’s stature as a reserve currency and the Communist Party has imposed, financial repression on its 1.3 billion people from the moment Mao seized power and established the Peoples Republic in October 1949. Japan’s two “lost decades” and the failure of Abenomics have relegated the yen to the second league of global currencies. The euro lost its bid to supplement, let alone replace, the US dollar as a global currency in the Greek sovereign crisis. IMF Special Drawing Rights are just government book keeping units. Bitcoin is a joke. King dollar has not been dethroned and will not be in our lifetime.