Tariq Saeedi
Is the US Dollar heading toward collapse? — For some it is an ardent desire and for others it is a worrisome possibility.
The fact is the greenback has lately been in troubled waters. However, as of now, its collapse is more of a theoretical inference.
What happens to the dollar and what the dollar does to itself, is a matter where the analysts generally build their narrative around their own preconceived notions. In the choppy sea of pseudo-objectivity and outright wishful thinking, there is very little on which to anchor a meaningful conversation.
A convenient starting point can be the testimony of the US Secretary of the Treasury Janet Yellen before the House Financial Services Committee on 9 July 2024.
As reported by Eve Maddock-Jones, the acting editor of Investment Week, Yellen was asked about her biggest concerns around foreign institutions regarding the US, one of which was the “protection of the dollar.”
Investment Week – Janet Yellen
https://www.investmentweek.co.uk/news/4335313/janet-yellen-sounds-fears-us-dollar-weakened-sanctions
Yellen said she is concerned about the strength of the US dollar going forwards, after widespread implementation of sanctions by the country have pushed other financial institutions to seek trades in other currencies.
She said: “We have very powerful sanctions that are available because of the important role of the dollar in international transactions, the ability to cut off foreign banks or other businesses or individuals from the ability to transact through the US Financial system and to participate in the dollar.”
The US has levied its monopoly as the global base currency against various social and economic counterparts over the years and run various sanctions and tariffs against them.
China has been another notable target of US financial barriers.
Both countries have been embroiled in a trade war for some years, and Yellen voiced concerns about how, generally, “the more we have used sanctions the more countries are looking for ways to engage in financial transactions that do not involve the dollar.”
The testimony of Ms. Yellen in plain language:
· The weaponization of the US Dollar has been in place for a number of years.
· Some countries and financial institutions don’t like it and seek alternatives to the dollar.
Not only Russia and China but many other countries have expressed concerns over the weaponization of the dollar and the voices calling for the alternatives are growing.
Moving from the statement of Ms. Yellen and out to the field where the conversation is taking place let’s first listen to the side that is convinced that the dollar is unconquerable.
An analytical article at Investopedia, written by Sean Ross, reviewed by Thomas J. Catalano and fact checked by Suzanne Kvilhaug look in detail at the question: What It Would Take for the US Dollar To Collapse
It was updated on 17 June 2024.
Here are the Key Takeaways of their article:
· Currencies collapse when there is a sustained loss of faith in their stability or usefulness as a store of value or medium of exchange, often because of economic mismanagement, political instability, or a significant shift in global market conditions.
· The value of a currency is determined by the demand for it, which is very high for the US dollar, given the US’s position as the world’s largest economy and perceived political stability.
· The US dollar’s prevalence as the world’s primary reserve currency, making up 58% of worldwide currency reserves, further contributes to its high demand and stability.
· Despite occasional challenges and concerns, the likelihood of the US dollar collapsing is considered to be extremely low, given its strong global position and the underlying strength of the US economy
What It Would Take for the US Dollar To Collapse
Sean Ross assures the readers that the US Dollar was in no immediate, or even long-term, danger of collapse.
In his long article, he looks at different scenarios for the collapse of the collapse of the dollar and rejects them.
However, he adds a word of caution: “Nevertheless, we shouldn’t be too sanguine: history shows that even the sturdiest of human edifices crumble, becoming ruins future generations barely notice as they trammel them underfoot.”
For deeper analysis, we must turn to Brookings (The Brookings Institution), arguably the most prestigious think tank in the USA, in existence since 1916, and credited with many major developments including its contribution in the creation of the United Nations, the Marshall Plan, and the Congressional Budget Office. It publishes the journal Foreign Policy.
The Brookings carried a commentary on 23 August 2024, written by Sam Boocker, the former Research Analyst – Economic Studies, at the Hutchins Center on Fiscal and Monetary Policy, and David Wessel, the Director of the Hutchins Center on Fiscal and Monetary Policy, and Senior Fellow – Economic Studies.
The changing role of the US dollar – Broookings
https://www.brookings.edu/articles/the-changing-role-of-the-us-dollar/
In the first half of their commentary they explain that the US Dollar is a world currency since 1920s and is deeply entrenched in the global financial system.
Here is the latter part of the Boocker and Wessel commentary:
Is the dollar destined to lose its dominance?
Most economists think not, at least not any time soon. First, in some instances, the dollar’s prominence has increased, not fallen. Outstanding debt securities held in dollars have grown from 49% in 2010 to 64% in 2024, for example.
Second, competitor currencies, like the euro or Chinese renminbi, do not share the attributes that have made the dollar dominant. Most government debt in Europe is issued by individual member states, not by the EU, and the eurozone crisis damaged the currency’s attractiveness. The Chinese government maintains strict capital controls to manage its exchange rates, making it difficult to move money out of the country, and the renminbi is highly illiquid.
Though the dollar’s role in the global economy is contested, Steve Kamin of the American Enterprise Institute and Mark Sobel of the Official Monetary and Financial Institutions Forum argue that the U.S. can maintain the benefits of a strong dollar over the long haul by “[preserving] the unique characteristics and properties of the U.S. economic and financial system, [running] sound U.S. macroeconomic policies, [avoiding] the unilateral abuse of financial sanctions, and [upholding] worldwide trust and confidence in America’s ability to act responsibly and fulfill its special responsibility for the smooth management of the international monetary system.”
What are the challenges to dollar dominance?
Sanctions. Since 2010, the U.S. has increased its use of sanctions. Critics of U.S. sanctions contend that the U.S. has “weaponized the dollar,” especially when the U.S. imposes sanctions without the support of its allies and partners. In China and China-aligned countries like Russia, leaders aspire to bank and trade in their own currencies away from the watchful eyes of Uncle Sam. The Chinese government, for instance, has promoted the renminbi as an alternative to the dollar in trade and development finance as a part of its Belt and Road Initiative. Leaders of the BRICS alliance—Brazil, Russia, India, China, and South Africa—have explored developing a common currency, though most experts give that little chance of success. If the United States is capricious with sanctions, acts unilaterally, and fails to develop a doctrine of economic statecraft, the dollar could be dethroned, Treasury Secretary Janet Yellen has warned.
Debt and dysfunction. U.S. politics are contentious and polarized. Fiscal policy is undisciplined, with the debt-to-GDP ratio rising to new, previously unheard-of heights. Ratings agencies have downgraded U.S. long-term credit. Bickering over appropriations, Congress has shut the government down several times. Further political instability could erode investor confidence in the dollar.
Technology. Innovations in payment technology could reduce the dollar’s role in the global economy. Josh Lipsky, senior director of the Geoeconomics Center at the Atlantic Council, notes that “[de-dollarization] is less about how countries hold foreign exchange reserves and how much are in dollars—which is how we’re traditionally measuring this—versus how money is being settled.” Transactions involving different currencies have long been slow, expensive, and difficult to track in real-time; it was easier to instantly see the value of currency in U.S. dollars than in some less well-used currencies. But that’s changing. As Brookings’ Eswar Prasad explains: “For example, transactions between pairs of emerging market currencies are becoming easier as financial markets and payment systems mature. Typically, converting such currencies to dollars, and vice versa, has been easier and cheaper than exchanging them for one another. But China and India, for example, will soon no longer need to exchange their respective currencies for dollars to conduct trade cheaply. Rather, exchanging renminbi for rupees directly will become cheaper. Consequently, the reliance on ‘vehicle currencies,’ particularly the dollar, will decline.”
Central Bank Digital Currencies (CBDCs) could also upend the dollar’s role as a currency “middleman” by reducing settlement times, making it cheaper and easier to trade non-dollar currencies, and, unlike SWIFT and CHIPS, integrating messaging and payments.
Foreign governments have taken note. In 2015, China built the Cross-border Interbank Payment System (CIPS) which, in addition to integrating messaging and payment systems, allows countries to bypass SWIFT, CHIPS, and the dollar. SWIFT remains much larger than CIPS, though the latter has been growing rapidly in recent years. The Chinese are also developing mBridge, a CBDC. The Federal Reserve has built FedNow, an instant payment network, but the U.S. could fall behind the rest of the world in payment technologies. As Jared Cohen of Goldman Sachs notes, “If the dollar’s position were to change, it would come from evolution, not revolution.” /// nCa, 9 September 2024 [to be continued]