King Dollar Holds Onto His Throne – For Now

It’s come to this, a competition of conferences. In Washington, the capital of the world’s largest capitalist nation, representatives of the World Bank and International Monetary Fund were in a celebratory mood last week. It is 80 years since 730 delegates from 44 nations gathered in a rehabilitated hotel in Bretton Woods, New Hampshire, and succeeded in establishing a world financial order that crowned the dollar King of the currencies, a throne he has held even after Richard Nixon ended the convertibility of the paper dollar into the yellow metal in 1971.

Putin Rallies The BRICS To Save His …. Economy

Simultaneously, some 5,000 miles to the east, in Kazan, the capital of the Russian Republic of Tatarstan, a group of countries was addressing the same issues being discussed in Washington. But rather than celebrating the reign of King Dollar, they were figuring out how to dethrone him. Their host was Vladimir Putin, a man with a powerful incentive to consign the dollar to the scrap heap of history, to use a phrase with which he undoubtedly is familiar.

American sanctions are enabling his best friend, Xi Jinping, to buy Russian oil at heavily discounted prices, have forced his nation’s inflation rate up to a reported 9 percent, and required Russia’s central bank to raise its key interest rate to 21.00 per cent. Iran has been hit even harder by exclusion from the dollar zone. The Mullahs’ economy suffered an inflation rate of over 40 per cent for four consecutive years, massive unemployment, and an inability to gain access to Iran’s overseas assets. The regime totters.

The 53 nations that met in Kazan included the original members of the bloc known as BRICS – Brazil, Russia, India, China, South Africa – and new and prospective inductees, some eager to establish an alternative trading system, “BRICS Bridge”, available should they displease the Americans and be excluded from access to the financial institutions that now oil the machinery of world trade.

The Dollar Reigns

“For trade, cross-border investment and foreign-exchange, the dollar remains by far the currency of choice,” says The Economist. The dollar is used in 54 per cent of foreign invoices (the second-place euro clocks in at 30 per cent), 66 per cent of world debt is denominated in dollars (Euro 22 per cent), and dollar assets still comprise about 59 per cent of global foreign currency reserves (euro 28 per cent). Most US percentages are declines from earlier years, due largely to the emergence of the euro trading area, but dominance persists.

There are reasons for dollar dominance. The US economy is large, dynamic, and home to the rule of law and a host of investor protections. Dollars are easily convertible into foreign currencies. Foreign investors can bring home the profits from their investments. Our labor market is fluid, our R&D and innovation world class. The dollar is “a store of value”, likely to retain its purchasing power.

Joyce Chang, JPMorgan chair of global research, believes “the factors that support dollar dominance remain well-entrenched” but that new global payment systems “are evolving rapidly and facilitating cross-border transactions without the involvement of U.S. banks. … This could undermine the dominance of the dollar…”. Former White House economist Joe Sullivan believes there is sufficient trade among BRICS nations to make it possible for a BRICS-issued currency to “dislodge the U.S. dollar as the reserve currency of BRICS members.”

Xi A Discredited Salesman, Trump and Harris Threaten The Dollar

But Xi’s inability to stanch the illicit stampede of wealth out of China, much of this capital flight ending up in billions of US dollars, did not make him the best spokesman for an alternative to the dollar-dominated system. For which there was little enthusiasm by most delegates, who had been warned to bring dollars or euros as their credit cards could not access the international system while in Russia. India’s Narendra Modi, a leading rival of China for regional leadership, made it clear that he seeks reform, rather than overthrow of dollar-based institutions. The Kazan conference might have enabled Putin to show that he was not politically isolated, but it also showed that a system that would allow him to participate fully in the global economic order remains beyond his reach. The plus from Putin’s point of view probably was the number of bilateral, non-dollar trade deals that were struck in the corridors and at side meetings.

Which brings us to the US elections. Neither Trump nor Harris is sufficiently shaken to be stirred into action to protect the dollar’s role as an international reserve currency by calling halt to the printing of new IOUs. The  candidates’ fiscal incontinence is on display; the treasury’s printing presses are churning out new IOUs; inflation is proving to be undead; central banks are stocking up on gold.

Confounding many, the dollar goes from strong to stronger, perhaps in anticipation of an end to rate cuts, perhaps because of the strength of the US economy, which continues to grow while most others stall. As storied investor Warren Buffett’s warned, “Never bet against America”.

Which is what Putin, Xi and other BRICS leaders were urging many countries to do last week. They argued that a monetary and payments alternative to the dollar would free America’s allies as well as its adversaries to cock a snook at America, especially important as political and trade tensions mount. The first step towards such policy independence, say BRICS advocates, is development of a payment system independent of the dollar.

But the threat to dollar suzerainty comes less from the enemy without than from the enemy within. A real estate developer wants to use tariffs and other devices as a wrecking-balls for the dollar system, Harris wants to replace markets with bureaucrats to manage the economy. When the cartoonist Walt Kelly’s great sage, Pogo, claimed “We have met the enemy and he is us,” he was not talking about our preference for profligacy over prudence, entitlements over deficit reduction. But he might well have been.