Dollar as U.S. currency is now a global issue-Xinhua
Photo taken on March 23, 2020 shows a US dollar banknote in Washington DC, United States. (Xinhua/Liu Jie)
BEIJING, Nov. 7 (Xinhua) — The U.S. central bank raised the benchmark policy rate by 0.75 percentage points last week, the fourth such hike and the sixth hike this year, taking its benchmark rate to a range of 3.75% to 4%, the highest in 15 years.
The Federal Reserve said the hikes were necessary to dampen record inflation. Yet, before the previous aggressive monetary policies yielded results in the country, they have already wreaked havoc globally, given the dominance of the dollar in the international monetary and trading system.
Following interest rate hikes in the United States, many countries suffered currency devaluation, capital outflows, rising debt service costs and rising imported inflation. Some have even fallen into a currency or debt crisis.
Once again, the words of former US Treasury Secretary John Connally in 1971 ring true: “The dollar is our currency, but it’s your problem.
Having weathered the waves of instability and uncertainty of self-serving US monetary policy adjustments over the past few decades, more and more countries are sobering up at the devastating reality of dollar hegemony.
Photo taken on June 22, 2022 shows the US Federal Reserve Building in Washington, DC, United States. (Xinhua/Liu Jie)
The term “exorbitant privilege” was coined in 1965 by then French Minister Valéry Giscard d’Estaing to deplore American practices of using dollar dominance for personal gain.
The international monetary system characterized by a dominant US dollar was established after the Bretton Woods agreements of 1944. Since then, Washington has launched wars and imposed sanctions against any challenger to enforce dollar dominance.
In the 1980s, as a rapidly growing Japan sought higher international status for the yen, the United States imposed the Plaza Accord. This led to a dramatic appreciation of the yen against the dollar, ushering in Japan’s “lost decade” of sluggish growth and deflation.
In January 1999, when the euro was officially issued, it was worth 1 euro for 1.8 dollars. Two months later, the US-led North Atlantic Treaty Organization carried out airstrikes against the then Federal Republic of Yugoslavia without UN approval, triggering the Kosovo War. . The ensuing chaos triggered a flight of capital out of Europe and led to a rapid depreciation of the euro.
Ellen Brown, founder of the Public Banking Institute, once wrote in an op-ed that the US military attacked Iraq and Libya because they decided to reduce the use of the dollar in oil trade settlement or even to completely abandon money, which was seen as a challenge to the petrodollar system.
History has repeated itself with devastating results for those who challenge the dominance of the dollar. There seems to be an unwritten rule that the United States will not tolerate any threat to its “exorbitant privilege”.
U.S. dollar banknotes, coins and an image of the White House are laid out for a photograph in Washington DC, the United States, Aug. 20, 2019. (Xinhua/Liu Jie)
With a US dollar-centric system established after World War II, Washington took advantage of the dominance of the dollar to export domestic financial crises, harvest global wealth, and destroy the financial stability or well-being of other countries. Seigniorage, treasuries and the manipulation of monetary policies are tricks that the United States uses to make profits.
Take seigniorage for example. The cost of minting a $100 bill is less than 20 cents, but other countries have to pay $100 worth of goods or services for this paper bill. According to data from McKinsey, about half of US currency circulates outside the country, a huge source of annual revenue for the Fed.
Another privilege allows the United States to run an external deficit, importing more than it exports and consuming more than it produces year after year without incurring more debt to the rest of the world.
On October 3, the US national debt topped $31 trillion for the first time amid rising interest rates, bringing the US federal debt-to-GDP ratio to around 126%. Although experts have repeatedly warned that such high debt is a ticking time bomb with the potential to trigger a fiscal crisis and that a US default would most likely lead to a global financial meltdown, this has not not seem to bother successive US governments.
With the dollar as the world’s primary reserve currency, the United States can benefit from the sudden reversal of the Fed’s monetary strategy, moving from years of quantitative easing (QE) to a tighter one.
As the policy of QE increases the supply of dollars around the world, the resulting decline in interest rates actually encourages speculative activity in the stock market that can cause asset bubbles, adding value to stocks. American assets. As Fed policy becomes tighter, US assets that have risen in value are flowing back to America, leaving other countries with depreciated currencies and bad assets.
“The fact that many states accept the dollar to cover US balance of payments deficits has allowed the United States to take on foreign debt for free. Indeed, what they owe to these countries, they pay in dollars which they themselves can issue as they see fit,” former French President General Charles de Gaulle told reporters in 1965 .
An electronic display shows a real-time exchange rate of the Japanese yen against the U.S. dollar in Tokyo, Japan, October 20, 2022. (Xinhua/Zhang Xiaoyu)
With the US dollar as its weapon, the United States alternates between inflation and currency tightening to create “controllable turbulence” in the financial and economic sectors, which translates into business opportunities for American industry.
From the Latin American debt crisis in the 1980s to the 1997 financial crisis in Asia and the international financial crisis of 2008, the US dollar was at stake. came out unscathed or even managed to make a profit.
The United States has printed nearly half the amount of currency printed in the past 200+ years in just a year and a half, allowing inflation to rise and economic bubbles to burst. And the six aggressive interest rate hikes announced by the Fed this year have dealt another blow to international financial markets and hampered a weak global economic recovery.
In October, Japan’s finance ministry had to spend a record $42.8 billion in monetary interventions to prop up the yen after it fell below the psychologically important level of 150 against the US dollar, a record high. since 1990.
These hikes could increase pressure on capital outflows in emerging markets, push up imported inflation, increase debt vulnerabilities and reduce policy space, Malhar Nabar, a division chief at the Department of Finance, told Xinhua. IMF research.
In July, the International Monetary Fund estimated that nearly 30% of emerging countries and 60% of low-income countries were already over-indebted or approaching it.
A PRIVILEGE IN DECLINE
Under decades of US financial hegemony characterized by dollar dominance, frustration is growing around the world.
Last month, Saudi Arabia, a flagship oil exporter and mainstay of the petrodollar system, announced a drop in oil production, angering Washington, which had demanded the oil producer do otherwise.
US President Joe Biden has said he will review US relations with Saudi Arabia and there will be unspecified “consequences” for the kingdom.
Andrei Kostin, president and chairman of the board of Russia’s VTB bank, said Washington’s “militarization” of financial instruments has inevitably undermined confidence in the US dollar as the main reserve currency and means of payment, creating a strong argument for wider use of other currencies.
One problem with the current international financial system is a dominant dollar that “does not support any other currency, even the euro or the yen”, Mohammed Saqib, secretary general of the India-China Economic and Cultural Council, told Xinhua.
He said more countries would try to trade outside the dollar.
According to IMF data, the dollar’s share of global foreign exchange reserves fell below 59% in the last quarter of last year, extending a two-decade decline.
In a blog post in June assessing the composition of official foreign exchange reserves, the IMF said that “central banks no longer hold the greenback in their reserves as they used to.”
Fed up with a dollar-centric bullying system, Russia developed its financial transfer system and started trading the rouble. India’s central bank has introduced rupee payments with trading partners. The Bank of Israel added the currencies of Canada, Australia, Japan and China to its foreign exchange reserves, diluting the ratio between the dollar and the euro.
The decades-long dominance of the dollar has placed America in a strong position to dictate the terms of trade and finance for the past 70 years. Yet its dominance is gradually waning, said London economist Michael Roberts.
(Xinhua reporters Guo Yage, Wang Xinyi, Ma Zegang in Beijing, Xiong Maoling in Washington, Hu Xiaoming in New Delhi, Shi Hao in Moscow also contributed to the story.)■