This Is Why The US Dollar Is A Powerful Sanctions Weapon…For Now
About ten years ago, Swiss banks did something unthinkable. One by one, they shelved centuries of secrecy and handed over sensitive information to a US government looking for tax crooks. One of the main reasons for the reversal: the dollar.
The currency provided a means to legally prosecute even small Swiss financial institutions from across the Atlantic. It was not the first time that the greenback was used to pull geopolitical levers. For at least 78 years, the world economy has revolved more or less around it.
Today, a large part of Russia’s sanction for its invasion of Ukraine is impeding its access to dollars. And some experts believe that this use of the currency to deplete a “rogue nation”, and the fracturing of the global economy that may result, could have a similar fiscal impact on the currency itself – accelerating a process already in progress. Classes.
Last year, the IMF noted that dollar reserves held by central banks had fallen to their lowest level in a quarter century, reflecting what some saw as the “declining role” of money.
In fact, one of the reasons given for Russia’s resistance to sanctions so far is a long-running effort to preemptively rid its economy of dollars. Fresh calls for China to reduce its reliance on the dollar system have only fueled speculation about the status of the US currency.
Subscribe to get counterintuitive, surprising and impactful stories delivered to your inbox every Thursday
However, projecting the end of dollar dominance is a long-standing practice. Economist Paul Krugman recently noted that he published his first paper on the subject, and that was over 40 years ago. Even as the soft power and credibility of the United States has risen and fallen, its currency seems to endure.
But if the reign of the dollar is truly coming to an end, what will happen next?
The answer is unclear, as the perceived shortcomings of competitors like the yuan (China’s relatively tight control over its currency) and the euro (tied to too many disparate political entities and too few assets for global investors) are obvious.
As with other aspects of geopolitical influence, there may simply be no focal point for a single currency in the future.
Goodbye gold, hello greenback
The rise of the dollar began with World War I, which left its main combatants and other countries in need of dollar-denominated loans and American goods.
It helped that the dollar remained pegged to gold even as other countries were forced off the gold standard, and by the end of World War II the United States owned the major part of the world’s gold. When the United States itself abandoned the gold standard in 1971, it only reinforced the role of the dollar as a “world currency”.
Of course, potential usurpers surfaced. At the start of this century, the euro seemed poised for the top spot. Jay-Z even seemed to prefer euro banknotes to store his own considerable wealth in a 2007 video.
Shortly after this video was released, the sovereign debt crisis in Europe erupted. This has shaken confidence in the euro-denominated debt issued by countries and has generally reduced the “liquidity” – a measure of how easily it is possible to buy and sell something in an open market – of linked assets. to the euro.
Meanwhile, the relatively large US bond market continued to provide liquidity to investors buying and selling dollar-linked assets.
The desire for a system less dependent on the dollar spurred interest in reviving something like the “bancor” – a global currency unsuccessfully proposed by economist John Maynard Keynes in the 1940s. digital currencies that will provide more leeway around the dollar.
In times of heightened geopolitical tension, it is natural to ponder the implications of a reserve currency that can serve as a pressure point. “I’m aware of that,” former US congressman Eric Cantor told the recent annual meeting of the World Economic Forum in Davos. “Because every time we use it, even our allies and friends start wondering, why can you do this?”
Yet, with most global trade still being conducted in dollars, there is a great deal of skepticism about the prospects for the currency’s decline.
Earlier this week, the former CEO of digital currency advocate Twitter appeared to selectively jump in time by wondering when the dollar lost its status as the world’s reserve currency. His tweet was buried by others who corrected it. “Dude, we need to talk,” replied a political science professor.
Republished with permission from the World Economic Forum. Read the original article.