The war in Ukraine clearly changes the situation. This has upended many assumptions about who is militarily strong and who is weak in media warfare. The war will be remembered as the end of the era of peace dividends, when the world enjoyed decades of global peace and stability without major wars. China could not have risen without the peace dividend. Russia and Ukraine now face a necrotizing war that is eating away at their social and economic fabric. No one will win until both sides negotiate a path to peace.

Geopolitical strategist George Friedman claimed that the biggest lesson of the current war has nothing to do with Russia or Ukraine, but “the United States has demonstrated that the most powerful weapon in the world is perhaps be the armed dollar”. “American war strategy stems in part from an unwillingness to commit Russian troops to combat, both out of aversion to losing further wars and because the enemy’s center of gravity today is not not military but financial.” Physical warfare is waged by Russia and Ukraine, while NATO engages in proxy warfare, using financial sanctions and supplying arms to Ukraine to fight every last Ukrainian. Such is the cruelty of power politics.

As the dollar accounts for 40% of global trade billing, as well as 60% of official reserves, there is no doubt that it carries more weight than the euro, yen or RMB. The fact that the EU and Japan have joined the sanctions means that Russia is struggling to evade sanctions or escape a shortage of liquidity, not only in foreign currency, but also domestically. As Friedman shrewdly observed, “the combination of banning Russian energy imports into the United States and managing the dollar as a weapon – in concert with a grand alliance – poses an unforeseen military crisis for the Russia”.

Why does the US dollar have such prominent advantages?

The standard argument is that the USD has superior advantages as a unit of account for global credit and billing, means of payment and store of value, accruing to the issuer “exorbitant privileges” by being able to issue currency at will. For many years this has been true, because as the dollar depreciated over time against other currencies, the world exploded with extra liquidity, ease of payment and higher yield on the holding US bonds, stocks and real estate. However, each time the dollar appreciates as US interest rates rise, global liquidity tightens and non-US borrowers holding USD debt will pay more, exposing themselves to the risk of default and deflation of the asset bubble. The Asian financial crisis of 1997-98 can be understood as an appreciation of the dollar in a dollar zone without a lender of last resort. It wasn’t until the Fed lowered interest rates and increased dollar liquidity that Asian economies rebounded.

Thus, the rest of the world was both obligated and willing to hold the currency. In the words of former US Treasury Secretary John Connally, “my dollar, your problem”. The problems multiplied after the war on terrorism, when the United States began to apply sanctions against revisionist countries like Iran. Over time, the scope and intensity of sanctions have expanded to countries, companies and individuals. The only problem with sanctions is that despite inflicting economic pain, proud countries never seem to be in a rush to come to the negotiating table.

Recently, several researchers have brought new insights into why the dollar benefits not only the United States, but also its users who create an ecosystem that reinforces its superiority. Harvard professor Yakov Feygin and Dominik Leusder examined the class politics of the dollar system and concluded that it was in fact an ecosystem supported by global private and political elites. After all, “in many countries, the dollar system allows corrupt elites to safely transport their ill-gotten gains to global banking centers located in jurisdictions with opaque property laws.” Until recently, London and New York had no problem taking money from Russian oligarchs.

Wealthy people in both developed and developing markets prefer to trade in dollars and hold dollar assets. Global corporations, pension funds and asset managers hold dollar assets because they can have both a store of value and quick liquidity through dollar swaps. Political scientist Herman Mark Schwartz therefore conceived of the dollar as the state currency of a quasi-imperial world system, in which different economic regions are linked by a common reserve currency. In this sense, the pound, euro and yen, having tied themselves to quantitative easing and similar sanctions, are like vassal currencies within an imperial system. Reserve currencies that lack the military clout or depth of stock markets that offer superior returns cannot seek to be a dominant currency.

Are there alternatives to the dollar system? The OECD, in its latest assessment on the war in Ukraine, warned that attempts to develop alternatives could “potentially reduce the dominant role of the dollar in financial markets and cross-border payments”.

My point of view is that the RMB is still far from offering an alternative to the dollar. But the Bank for International Settlements’ Innovation Center has just released preliminary results from Project Dunbar, a collaborative effort between the central banks of Australia, Malaysia, Singapore and South Africa to see how a platform -common form for multiple central bank digital currencies (multi-CBDC) could enable cheaper, faster and more secure cross-border payments. The project is technically feasible, but many regulatory and political obstacles remain. One possible issue is how Deep State national security concerns play into these platforms.

As the Roman Empire fully understood, money is the basis of all success in war – you fight for money and you need money to fight. But the Roman Empire fell when its currency was continually debased. The denarius was strong as long as the Romans did not lose wars. The minute that was disputed, everyone went back to gold.

The more things change, the more they stay the same.

Contributed by

Andrew Sheng

ANN