The End Is Near For Dollar Hegemony
Sure, people have been predicting an end to King Dollar for many decades, but this time it might actually happen.
Western nations are actively exploring ways to seize Russian central bank assets to fund Ukraine as political disputes in the US and Europe threaten its flow of financial support.G7 officials have intensified talks in recent weeks on spending some of the roughly $300bn in immobilised Russian sovereign assets, a radical step that would open a new chapter in the west’s financial warfare against Moscow.
There are very good reasons that this hasn't happened yet. Janet Yellen has predicted that the dollar would lose it's reserve currency status based on the weaponizing of sanctions alone, but the outright seizing of $300 billion is the next level up. Which is why even the G7 is having trouble agreeing to do it.
Having a potential legal basis, though, is one thing; whether it is economically or politically wise to use it is another. A powerful concern is that doing so could harm international financial stability — and the dollar and euro’s status as reserve currencies — by undermining the essential trust involved in depositing reserves with other nations.Freezing Russian assets was a sound way to squeeze its ability to fund its war. EU plans to tap windfall profits generated from holding them do not affect their underlying ownership. But going further and confiscating the reserves crosses a line. Countries such as China might come to fear reserves held in euros or dollars were no longer safe.
There is also a risk that even if Russian assets were seized under, say, a special G7 mechanism, countries elsewhere might then think it acceptable to settle disputes by grabbing reserves. Rightly or wrongly, many nations of the “global south” would see it as another example of wealthy democracies adapting the rules to their own interest.
Here's what it means: Russia, despite unprecedented global sanctions, still maintains a current account surplus. (roughly budget surplus + trade surplus). This is why the sanctions haven't worked.
The U.S. OTOH, has a massive trade and budget deficit with no chance that it will change anytime soon. Thus it is vital that foreign nations continue to use our dollar as a means of world trade. Without that demand our borrowing costs (interest rates) would skyrocket. Just imagine what 15% mortgage rates would do to the U.S. economy.
Comments
You'll know when dollar hegemony is over --
-- when nobody wants dollars. It's not enough to mention some fact and then say "dollar hegemony is over." To be sure, dollar hegemony is imperiled by US proposals to seize Russian assets. Here's the story without an FT paywall:
Biden is eyeing using $300B in frozen Russian assets to help Ukraine. It could backfire.
Let's review how dollar hegemony works.
1) The US government has dollars printed or encoded
2) The printing/ encoding of the dollars is justified through the issuance of Treasury bills
3) Banks buy the Treasury bills, and the US government issues more Treasury bills and more dollars to pay the interest on the Treasury bills.
4) The banks keep the Treasury bills and the dollars because to unload them would imperil the value of the Treasury bills and dollars which they had purchased previously.
The problem occurs when powerful owners of Treasury bills and dollars decide to cut losses and unload. This could occur in the instance of a general failure of confidence in the US economy. Seizing foreign assets could be a catalyst for that failure of confidence.
Oh, and as for Ukraine? Sure, they could shove $300 billion of stolen Russian assets into Ukraine. More likely than not the money would go to US-based weapons industries which would manufacture weapons given to Ukraine. Ukraine's primary problem, though, isn't really a weapons shortage of the sort that $300 billion worth of US weapons would cure. Rather:
1) The collective West combined cannot keep up with Russia's production of 135mm artillery shells, nor can they replace Russian control of the airspace over eastern Ukraine with NATO control, nor can the collective West give Ukraine certain types of weaponry that will not merely be destroyed in Russian airstrikes.
2) Russia is killing off Ukrainian armies faster than they can be drafted, properly trained (and not just some hastily-put-together nonsense), and sent off to the front lines. Thus Ukraine skimps on training and attempts to throw people into battle where they become cannon fodder.
3) Ukraine's manpower shortage is exacerbated by a) the slaughter of armies in pointless "counter-offensives," b) problems with surrender and mutiny of armies, c) endemic draft-dodging, and d) an enormous refugee problem. All of these conditions together probably mean that Ukraine will probably disintegrate as a nation-state in a couple of years, unless the Ukrainian leadership can wrap their heads around the idea that they will be allowed to keep western Ukraine if they surrender to the Russians soon.
4) Ukraine's general corruption. What can you expect from a government of embezzlers?
Now, sure, Russia has problems of its own, which is one reason why the battle lines haven't changed a whole lot in two years. (The other big reason is that Russia is only fighting the Special Military Operation with a small portion of its total army.) But those problems are nothing like 1) through 4) above.
“The loyal Left cannot act decisively. Their devotion to the system is a built-in kill switch limiting dissent.” - Richard Moser
Drip by drip the end of the $ is getting closer.
Good comment
A growing global economy helps push demand for dollars.
A recession will crush that, especially with our enormous deficits.
Our ruling regime
is definitely in trouble, big trouble.
They could sacrifice all of us to escape being fingered as the cause of it.
Neither Russia nor China is our enemy.
Neither Iran nor Venezuela are threatening America.
Cuba is a dead horse, stop beating it.
Yes, They will sacrifice all of us
We're not players. We will end up paying for whatever disaster our politicians and their employers visit on us, and they will skate away relatively unscathed. Ours is a casino economy and I would guess much of what passes for economics is trying to explain away how much money is really just vapor. The dollar has become over time the original crypto currency.
This also could be a factor.
I don't understand
the holding of treasuries, or the reserve currency thing, at all, but I do understand this:
The Third World is not poor. The Third World is rich in resources. The people of the Third World are poor at the point of a gun, and those guns are provided, either directly, or indirectly, through loan guarantees, by the American taxpayer.
Putin and Xi are trying to make the point that they have what is of value -- resources and labor. With those two real things they can make consumer goods, food, pipelines, fuels, hardware, software, roads, port facilities, ships, and weapons. They don't need loans. They don't need reserve currencies. They don't need the U.S. telling them what they need. But they are both pro-labor compared to Yeltsin and compared to the Chinese leadership that welcomed U.S. manufacturing to their shores. They have both increased the standard of living of labor in their countries, of their workforce, especially compared to the Bushworld, grifter, lawless, unfettered capitalist plunder gangs that gouged them in an attempt to enslave their people.
They both see the increase of power of the people who do the work in their countries as a good thing. They are the opposite of our leadership.