Unfettered globalisation is over. That is not a controversial statement at this point for obvious reasons, from the post-Covid-19 retrenchment of complex international supply chains to the decoupling of the US and China. It’s hard to imagine a reset to the 1990s neoliberal mindset, even if Joe Biden wins the US presidential elections, or if the EU experiences a moment of renewed cohesion in response to the pandemic.
The world is more likely to become tripolar — or at least bipolar — with more regionalisation in trade, migration and even capital flows in the future. There are all sorts of reasons for this, some disturbing (rising nationalism) and others benign (a desire for more resilient and inclusive local economies).
That begs a question that has been seen as controversial — are we entering a post-dollar world? It might seem a straw-man question, given that more than 60 per cent of the world’s currency reserves are in dollars, which are also used for the vast majority of global commerce. The US Federal Reserve’s recent bolstering of dollar markets outside of the US, as a response to the coronavirus crisis, has given a further boost to global dollar dominance.
As a result, many people would repeat the mantra that in this, as in so many things, “you can’t fight the Fed”. The dominance of the US banking system and dollar liquidity, both of which are backstopped by the Fed, will give the American dollar unquestioned supremacy in the global financial system and capital markets indefinitely.
Others argue that “you can’t replace something with nothing”. By this they mean that even though China, Russia and other emerging market countries (as well as some rich nations such as Germany) would love to move away from dollar dominance, they have no real alternatives. This desire is especially sharp in a world of increasingly weaponised finance. Consider recent moves by both Beijing and Washington to curb private sector involvement in each other’s capital markets. Yet, the euro, which represents about 20 per cent of global reserves, can’t compare in terms of liquidity and there are still big questions about the future of the eurozone. The gold market is far too tight, as evidenced by the fact that it is now virtually impossible to buy the physical metal.
But there are economic statistics, and then there is politics. It’s telling that China has been a big buyer of gold recently, as a hedge against the value of its dollar holdings. It is also testing its own digital currency regime, the e-RMB, becoming the first sovereign nation to roll out a central bank-backed cryptocurrency. One can imagine that would be easy to deploy throughout the orbit of China’s Belt and Road Initiative, as an attractive alternative for countries and businesses that want to trade with one another without having to use dollars to hedge exchange-rate risk.
This alone should not pose a challenge to the supremacy of the greenback, although it was enough to prompt former US Treasury secretary Hank Paulson, a man who does not comment lightly, to write a recent essay surveying the future of the dollar. But it isn’t happening in a vacuum.
The European Commission’s plan to bolster its recovery budget for Covid-19 bailouts by issuing debt that will be repaid by EU-wide taxes could become the basis of a true fiscal union and, ultimately, a United States of Europe. If it does, then I can imagine a lot more people might want to hold more euros.
I can also imagine a continued weakening of ties between the US and Saudi Arabia, which might in turn undermine the dollar. Among the many reasons for central banks and global investors to hold US dollars, a key one is that oil is priced in dollars. Continuing Saudi actions to undermine US shale put a rift in the relationship between the administration of US president Donald Trump and Riyadh. It is unlikely that a future President Biden, who would probably follow Barack Obama’s pro-Iran stance, would repair it.
Even with oil prices this low, Dallas Fed president Robert Kaplan recently told me that energy independence remains “strategically important” to the US and that “there will still be a substantial production of shale in the US in the future”. Who will fill the Saudi void, then? Very probably China, which will want oil to be priced in renminbi. A decoupling world may be one that requires fewer dollars.
Finally, there are questions about the way in which the Fed’s unofficial backstopping of US government spending in the wake of the pandemic has politicised the money supply. The issue here isn’t really a risk of Weimar Republic-style inflation, at least not any time soon. It’s more about trust. Some people will argue that the dollar is a global currency and that its fortunes do not really depend on perceptions of the US itself. Certainly, events of the past few years would support that view.
But there may be a limit to that disconnection. The US can get away with quite a lot economically as long it remains politically credible, but less so if it isn’t. As economist and venture capitalist Bill Janeway recently told me: “The American economy hit bottom in the winter of 1932-3 after [Herbert] Hoover lost all credibility in responding to the Depression and trust in the banks vanished with trust in the government.”
It could be that one day, trust in the dollar and trust in America will reconverge.
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