After the Bretton wood chapter, the US economy didn’t look behind. Petrodollar agreement in 1973 strengthened the worldwide use of the US dollar even more. The inflationary troubled period of the 1970s US economy moved to disinflationary and booming stages in the 1980s. The 1980s was significant in a sense that Soviet Union; the then main rival of the US was facing socio political wreck as well as economic downturn which actually paved the way for the US to be the imperium of world politics. Apparently Soviet Union broke down in 1991 and threw over communism.
During 1990 to 2000, we observed momentous changes in world geopolitical and socioeconomic situations. The collapse of Soviet Union and the rise of China, a far spread idea of globalization and advancements of tech and engineering happened throughout the decade. This was a period in which workers in other countries, especially the Chinese workers and machines replaced the middle-class workers in the US. After the death of Mao Zedong, power went to Deng Xiaoping’s hand in 1978 and he significantly worked for the economic reformation of China and Open-Door Policy which was eventually drafted by the US about activity in China, joining the World Trade Organization in 2001 led China to the outburst of Chinese competitiveness and exports in world trade.
From 2000 to 2010, China is running current account surpluses. On the other hand, the US is still making current account deficits. The amount of the US current account deficits figured as $491 billion in 2018 which shows how much more American citizens, businesses and government are borrowing from their foreign investors than they’re lending. On the contrary, China’s overall current account surplus is around $120 billion as of September,2020. It indicates that the country’s net foreign assets value increased over the time. As for the US, debt and non-debt liabilities (pension, healthcare insurance) raised a lot in the US which occurred due to the printing of more money to finance the debt. The elected US officials spent a lot of borrowed money and made a plethora of promises to fulfill the voters’ wishes. As it’s our tendency to only give importance to what we get and not to have concerns over where the money comes for it, the US officials surely took the advantage.
Nonetheless the US caught up in the long-term debt cycle, it even outbroke further while the Federal Reserve lowered interest rates and made money or credit available. The Fed lowers interest rates in order to stimulate economic growth. It generally encourages borrowing and investment but when rates are too low, subsequent inflation may occur over the time. Though inflation is the savior for subsidizing the debt, it would cost the US economy by US dollar depreciation. Dollar devaluation eventually caused more inflation. Situation worsened further when interest rates were cut to 0% in 2008, since the Great Depression. Debts were increased further than income. However, the sinking ship somehow survived from the wreck when it worked positively as the Central Bank bought financial assets from the investors, respectively the investors also bought other financial assets, which subsequently rose the prices of the assets, it seems good for the economic wellbeing but the riches were better off ones. Thus, it enlarged the wealth gap meaning inequality. Investment borrowers and corporate borrowers took the benefits and used it to make purchases of stocks. The demand increased stock prices; corporates were profited enough by this. The distribution of money didn’t hold proportionately. As a result, the wealth and income gap continued to be in the upward direction. Conservative voters didn’t take these factors lightly. These circumstances along with other socio-political issues paved the way for Donald Trump becoming the president of the US. His cut on corporate taxes and run on big budget deficits were good for stocks, capital markets, businesses and the capitalists somehow for the lower earning people too. Simultaneously the political gap was intensifying between the Democrats and the Republicans.
US dominance in world politics faded a bit, relative wealth declined and international rivalries also intensified over time. Trump, the extreme nationalist and populist leader is taking more aggressive decisions on economic and geopolitical disagreements. Abandoning international allies and violating multilateral treaties are some examples of the overall turbulence that the US is going through. Acerbities increase not only with the international rivals especially China, Russia and Iran also with the allies particularly Europe and Japan concerning trade and military expenditure issues. The rivalry with China over many aspects such as trade, technology, capital and geopolitical issues is also going deeper.
In March 2020, after the COVID pandemic broke out, isolation was enforced which led to the disruption of economic activities. The US government borrowed a huge amount of loan to facilitate the people and the economic activity. Federal Reserves printed a lot of money and bought a lot of debt. Now, the question is among these plenty of troubles and turmoil, would Dollar still keep its confidence as a king currency?
To get the review we need to dig deep into the world economy’s other currencies and their intertwined relationship with the dollar. As we know, there are around 200 currencies in the world. Majority of them are only applicable in their own countries. Then there are 3 currencies considered as global currencies – US Dollar, Euro and Japanese Yen. According to the IMF, the US Dollar is the most popular currency in the world and used as reserve currency throughout the world. The last fiscal quarter of the US in 2019 shows that 60% of world reserves are in the US Dollar. The closest currency that is close to the US as reserve currency is Euro that holds 20% of global reserves. Essentially there is a huge gap between the US Dollar and Euro. But the dollar index which measures the value of the US Dollar against a basket of top 6 currencies – Euro, Japanese Yen, Pound Sterling, Swiss Franc, Swedish Krona and Canadian Dollar. It shows a record of deterioration of the dollar index. The Dollar Index reached at 96 by June,2020. It now declined up to 93.56 in recent studies. Recent pandemic crisis made it even worse.
Initial situation of pandemic, share markets and stock exchanges were plummeting drastically. In order to get safety and keep transactions and trade functioning during the economic crisis they needed cash and the US Dollar was the safest heaven for them. So, the urge for the US Dollar made its value index higher up to 96. Then a few months after, the currency value dropped down 5% in July. Such a sharp decline raises points about the trustworthiness and plausibility of the unique role that the dollar played all along in the global financial system. Stephen Roach; a Yale University professor and former Chairman of Morgan Stanley Asia, predicts that the US is going to face a dollar collapse by the end of 2021 and over 50% chances of a double dip recession. The dollar collapse would happen by 35% against other major currencies within the next two year. Double dip recession means the economy will boost up from a recession period followed by a quick recovery but is short lived and then it again falls into recession. The question now arises here if the Euro has the potentiality of being a reserve currency if the US things do not work out? If we think deeply into the Eurozone, it certainly didn’t come along with its Brexit issue.
Moreover, many political entities and different countries make the Euro quite difficult being a dominant reserve currency. Again, if we look at the US’s current situation, despite having large current account deficits and international imbalances the US dollar holds almost 90% of Forex or foreign exchange transactions. 40% of world debt is in the US dollar that is accounted to $14trillion which necessitates the bank in abroad to hold dollar conducting businesses. Nonetheless all international trades in oil transactions are done in the US Dollar. Hence, it clearly shows that the rest of the world is inextricably dependent on the US in many perspectives. So, the dependency gives the US the dominance power of printing money how much it likes.
The repetitive economic stimulus (increasing money supply or promoting debt-based spending in a normal sense) would further weaken the dollar value eventually lead to dollar devaluation which is seemingly optimistic for the global economy and the dollar-based investor. Meanwhile, the rest of the world would bear the cost of the US economic stimulus as it did before by adjusting to the US inflation. But, how long this will prevail while it is clearly apparent that if the US Congress and Federal Reserve are going to take the stimulus program on a regular basis, the bigger and bigger would the debt be.
The polarization of the US politics, weaken economy would surely make the dollar less attractive to the investors. Certainly, the USA’s dominance is not only being challenged, but its global trade share shrinking is consistent. While in the 1960s, 40% of world GDP was in the US dollar. Now the number has been reduced to 25% only. Experts are predicting the slowing death of dollars but it’s not going to happen very soon. Day after tomorrow, you would wake up and find the dollar not to be the reserve currency anymore; it certainly is not the case. Business and Economic analysts saying that it would be a gradual process. In the short run, people will tend to adjust with the dollar as it’s their habit of thinking of the dollar as a safe shelter. The perspective is not going to change so soon. But in the long run, there is a possibility of the dollar losing its plausibility.
Over the past several years; Russia, China, Iran, Venezuela and many other countries are thinking of substituting international transaction currencies other than dollars. So, scholars are expecting of Chinese Renminbi to be acclaimed as the new reserve currency if the dollar loses its value as a global currency. Over the 25 years, the Chinese economy has grown on average two or three times faster. This extreme success necessarily leads towards the prediction that China is going to overthrow the US as the monarch of the global trade. Benn Steil; the director of International Economics Council on Foreign Relations stated, “The Chinese love the Bretton Woods story. They see us here in the US as being the British of the 1940s, a declining imperial power facing economic and political problems that threaten its global position. And they see themselves as being the Americans of the 1940s.” Essentially the US sees this also, the effort of the Trump administration imposing high tariffs, trade war with China, instigation around China based Huawei Corporation and Tiktok app are evidently showing that the US is considering China as their potential rival and certainly with many systematic processes the US trying to slow down its decline. But lots of interdependence exists between both countries. China holds trillions of dollars in US treasuries as well as holds 3 trillion dollars of US debt.
For China, the US is the largest exporting partner and for Japan, it’s the second largest trading partner. So, they have to buy a lot of US dollars. Germany, France and the UK have more liabilities in their balance sheet than they have in their own currency. Hence, they also need dollar for day to day transactions. Let’s check the foreign reserves of the major countries. Russia holds 30% of the Euro reserve and only 23% in the US dollar. It seems that it is trying to reduce dependence on dollars. As most of Russia’s trading partners are in Europe, it’s not a big issue but earlier in the recent pandemic situation, Russia’s international reserve value shrank by 5% in one week as many of the investors and traders rushed to the dollars.
China, the biggest rival of the US holds only 4% of foreign transactions in its currency, Renminbi. The number is nowhere close to the US dollar nor to the Euro. Again, we can’t clearly review Renminbi as the new reserve currency just because China is going to be the big bro in Economy. As an example, Japanese economy was going very fast in the 1980s or 1990s and its economy is stable so far but Japanese Yen isn’t considered to be a good store of value as a foreign reserve.
Therefore, it’s an issue of paradigmatic debate whether the US dollar could hold its power, if not then which currency would overtake the dominance isn’t very transparent. The scholars in relative fields predict that US economic declination has just started. But there is no clear-cut value when it will completely lose its dominance over the world economy.
The steady decline of the US will surely be reflected through the decline of the dollar as an international currency. And again, we’re living in a transitional period for the pandemic situation. Though measures and circumstances make it apparent that there must be a change in world order but the duration as well as the specification of time are kind of uncertain. If the United States would survive the economic devastation or the inauguration of any new monarch would likely to take place, time will say the rest.
The writer is a postgraduate student of University of Dhaka