THE world’s superpower is slowly unravelling. Political and social divisions are so deep that 57 per cent of Americans believe their country is in a ‘cold civil war’, according to a recent poll by Edelman. Last year, you needed only to glance at social media to see major American cities being looted and burnt, or armed militias roaming the streets, motivated by ideological beliefs, scenes which would be familiar in Weimar Germany or Romanov Russia.
However, in the background a more fundamental decline is happening to America, as a result of the gradual loss of international confidence in its currency.
Like everyone else, the US is dealing with the economic fallout from lockdown, a problem which has come at the worst possible time for the major western economies, which collectively failed to deal with the aftermath of the 2008 financial crisis. America has been luckier than the others. As the issuer of the global reserve currency – the dollar – it has been able to increase demand across the world for its assets and borrow capital on the international markets with far more ease. It also continues to enjoy supreme financial firepower to pursue its foreign policy objectives.
However, continued profligacy from successive US administrations since 2008 has increasingly threatened the dollar’s long-term future as the global reserve currency, and the spending plans of the new Biden administration could seal its fate for good. The Democrats, influenced by an emergent hard-Left bloc within their party, have essentially accepted that MMT (Modern Monetary Theory) should be America’s route out of the economic crisis.
This month, Biden has set out a whopping $1.9trillion coronavirus relief stimulus package, which at the forefront will involve handing out $2,000 cheques to the majority of citizens. This package is likely to be one of many to come, as proponents of MMT are of the view that borrowing and spending are the answer to pretty much every economic problem.
While the stock market has cheered this announcement, waiting for the successive waves of money to flow into equities, paying for the ever-increasing debt burden looks nearly impossible. The US government will either need to raise taxes substantially (economically inadvisable), make spending cuts (politically unfeasible), or issue more debt through Treasury notes. However, with American debt-to-GDP now higher than after World War Two, investor confidence cannot be relied on for the long term, and the Democrats are ideologically poised to continue spending at these record levels for the next four years.
The most conceivable outcome is that the world will begin to wean itself off the dollar as the global reserve, and countries will diversify into a wider range of currencies and assets, which can better maintain certainty and confidence without reliance on a single country’s monetary policy.
There are signs this is already beginning to happen. The first movers have been America’s rivals, the Russians and the Chinese, who have steadily accumulated and increased their gold reserves over the last decade and have already facilitated trading for oil with blacklisted nations such as Iran. Last week, Russia made the important announcement that it is now holding a greater value of gold as reserves than US dollars, which went mostly unnoticed by the mainstream media, despite the huge international significance.
It’s not just America’s rivals who are beginning to diversify their reserves outside the dollar. The EU is expected to warn that global markets are too reliant on the currency, with a draft European Commission paper arguing that EU countries need to ‘shield’ themselves from the impact of US dollar sanctions on other countries. The fact that the bloc is keen to continue this move even after the end of the Trump administration – whose foreign policy it often disagreed with – shows that this is about more than politics, but recognition of a changing world order that will inevitably depend less on the dollar.
The end of the dollar as the global reserve currency is unlikely to be immediate. First of all, there’s nothing to replace it in the short term, but impetus appears to be building to a point where a new international monetary system will come of age in the next two decades, possibly based on the IMF’s Special Drawing Rights, which creates an international standard through a basket of major currencies.
Some will cheer what looks to be the beginning of the end for the international monetary system which has been in place since 1944. However, for the western world this is not good news. Without the privilege of issuing the world’s reserve currency, our greatest ally will see both its soft and hard power decline on the international stage. It will be harder to secure the goodwill of friendly states, and even harder to put pressure on rogue states who are acting against our common interests. It will be our common enemies who benefit.
Ultimately, it will be the American people who suffer the most. They will find themselves in a new world where their money buys less, where they will have to accept significant inflation or face spending cuts and higher taxes, and where their country’s international power and prestige is much reduced. One can only imagine the long-term impact of this on a society which already appears to be unravelling.