The Dollar Problem: Troubleshooting Our Way Out
Kahlil Wall-Johnson, Orinoco Tribune, May 1, 2023 —
So many novel schemes have been announced that one can hardly keep track of how many new or existing currencies are set to replace the dollar, never mind the question of how they would potentially overlap and interact with each other.
The greenback, the 1,000+ military bases and black sites, the Navy, and Coca-Cola are all instances of the American Century in different areas of life. Yet, on occasions, there seems to be an assumption that the dollar can be circumvented and that the rest will come crumbling down. On a similar note, many independent media platforms have come to resemble something of an echo chamber when it comes to the immediacy of overcoming dollar hegemony. It is often repeated that this process has been supercharged by a particularly brazen act of financial aggression from the Empire, or that the dollar has been dumped thanks to a bilateral agreement. So many novel schemes have been announced that one can hardly keep track of how many new or existing currencies are set to replace the dollar, never mind the question of how they would potentially overlap and interact with each other. We can only pray that these initiatives bear fruit as soon as possible, but why ignore the roadblocks which remain to be addressed?
The gist of this piece is neither to deny the necessity of unraveling the dollar system nor that this process has begun. The point, rather, is to call attention to several hurdles that are often swept out of view by enthusiasm, which is nevertheless understandable. For those of us, myself included, who must rely on others to interpret the world of finance, it can only be expected that we would harbor many oversimplifications regarding a question such as this. We might begin with one of the rare sources of doubt on this issue, Naked Capitalism; a platform which avidly reports on the Empire’s trials and tribulations. Yves Smith, the outlet’s founder, makes the point that many commentators who consider themselves to be geopolitical realists when it comes to Ukraine, for example, actually paint a distorted picture of the feasibility of rapidly ditching the dollar. Well aware of making themselves “unpopular” by adopting this position, Yves Smith has compared her dissent to the insightful skepticism she once voiced regarding Greece’s hopes to thwart the Troika, when there was a similar excitement surrounding Greece’s ability to leave the Eurozone and transition to a new currency. Yes, today’s momentum is qualitatively different, but this doesn’t make troubleshooting these issues any less relevant.
A good chunk of these hurdles are of a logistic-technical nature and answer the question of how long it would actually take to roll out some of these proposals, given the required political will and stability. Here, the experience of adopting the Euro is the most readily available comparison. There is no reason to repeat these excellent clarifications on the sheer time needed to roll out the IT and payment systems required for such an endeavor. But, as we will see in a moment, these technical issues lead to some of the more ideologically laden questions that will be addressed later on.
In general, the proposed paths to de-dollarization either call for increased circulation of the yuan or the implementation of a novel reserve currency. Yet proponents of the first possibility rarely describe how this would come to be. The most glaring condition which has yet to materialize is that China cannot and will not run a trade deficit in order to pump out yuan as “a trade deficit is tantamount to exporting jobs. Wage growth and high levels of employment are imperative to the legitimacy of the regime.” To compound this, the author I have been quoting also argues that there are a whole series of traits absent from Chinese financial regulations that would make yuan holdings more desirable. Could there be another route to exporting yuan other than the one precluded above? In any case, this is not to refute the widely-reported growth in the yuan’s share of global trade finance. The point is that the potential barriers touched on above could put a ceiling on this growth in yuan-denominated trade, for instance, and retard our timeline for a post-dollar world.
As for the latter option—a novel, supranational reserve currency—the foreseeable barriers have more to do with political will and the current ideological climate. One of the first of these problems that might arise was described by Naked Capitalism’s expert witness, Clive: “Prior to the Euro taking over from the former national currencies there was a need for parallel running – because of the time it took to get all the financial plumbing able to handle Euro payments. So you had to have an exchange rate,” which, in turn, led and would lead to “instances where particular national currencies have to devalue (or appreciate) against the new reserve currency” with huge political costs. Yet this is really only the tip of the iceberg when it comes to the national sovereignty sacrificed by adopting a supranational currency. I recommend that the reader refers to the original pieces for context, but the bottom line is that in order for any currency to replace the dollar, it would, unfortunately, have to assume many of the features that undermine the national sovereignty characteristic of the dollar and euro. The counterargument here is that despite this loss of independence, the pros would still outweigh the cons. Yet still, it is often overlooked how:
Any supranational currency, to actually work (as opposed to being something used only trivially, like the SDR), needs to have a legal structure that has the authority to bind and compel national governments. Even if the mavens were to design an instrument much less trouble-plagued than the Euro, the new supranational currency would still require participating states to cede some important elements of national sovereignty. It does not matter what the ‘it’ is, be it a gold or commodity based currency, SDRs, or Bancors. The same sort of legal and governance issues apply.
Again, “under Bancor, the new Bancor Superstate has substantial power to punish countries that don’t manage to stop running either chronic trade deficits or surpluses.” Yves Smith then asks: “Why should countries like China, which see their trade surpluses as the result of investment, hard work, and technical improvements, be happy that the bancor police will clip their wings?” And most importantly, how does all of this fit into the dawn of the multipolar world, with its heavy emphasis on national sovereignty?
Even the most earnest and celebrated sages of de-dollarization are fully aware of the “rocky road” ahead. Understandably, one of the first rocks that Pepe Escobar mentions in a recent article, based on an interview with Eurasian Economic Commission (EEC) Minister for Integration and Macroeconomics Sergey Glazyev, is none other than the recurrent sovereignty question that we have been focusing on: “the EEC cannot ask for member states to adopt specific economic policies,” never mind the domestic changes at the Russian Central Bank that, according to Glazyev, would be a prerequisite for the adoption of a new currency for the Global South or this recent statement from Dmitry Peskov, Putin’s press secretary: “In theory, I think, Russia is ready to do so now, but we will not stand a chance to succeed. We need more time.”
The watched pot
This century is rife with examples of the US legal-financial apparatus stealing other countries’ assets. In Killing the Host, economist Michael Hudson documents how, starting in 2014, Paul Singer’s vulture fund obtained a ruling from Second Circuit Judge Thomas Griesa to block debt write-down negotiations and demand full payment on defaulted bonds that had been bought at a heavy discount. The US Treasury and State Department warned that this would create “’a detrimental effect on the U.S. dollar’ by encouraging countries to denominate their debt in other currencies and put them outside the jurisdiction of United States courts” (p. 352). Michael Hudson himself noted how the “ruling threatened to drive foreign countries in general away from borrowing in dollars” (p. 357). Of course, the treatment of Venezuela, Iran, Afghanistan, and Russia are further and more recent examples of such disincentivizing behavior from US courts and banks.
Nobody is trying to insinuate that the protagonists of the multipolar world will not find a way to dispense with the greenback or deny that the behavior of the Empire is driving this trend at an ever faster rate. What I would like to bring attention to is that the problem of achieving the integration required to bind a bloc of countries via some variety of shared currency is also at odds with a) the lack of any ideological movement to glue it together and b) the fact that multipolarism is none other than an exaltation of individual sovereignty and as such stands in contradiction to ceding monetary sovereignty.
The case of China compounds this scenario given that China has achieved its current status thanks, in part, to being fully integrated into the dollar system. The antagonism between the Chinese economy and dollar hegemony is not a black-and-white picture. The point is that the PRC has decades of experience growing within the current arrangement, and the risks of forfeiting sovereignty for an untested supranational currency may not yet have sufficient appeal.
The more sober assessments of this subject wind up concluding that the most realistic option for countries at the moment is to increase bilateral trade in their own currencies. Likewise, cases of this are often reported as examples of the dollar being wholly abandoned between two trading partners. Yes, this is a step in the right direction, but these pieces rarely ask if the central banks under consideration will continue to periodically settle up with each other in dollars, or how the country running the trade surplus might be planning to deal with accumulating the other’s currency. The countries of Southeast Asia are a relevant example, as they already “take each other’s currencies, but their central banks square up in dollars every few months.” This is important given the fact that “many trade partners have currencies that are too weak, volatile, or illiquid in large transactions to be suitable to retain as foreign exchange reserves” and because, however obvious, the net trade is never zero between two countries. The US trade deficit is functional because governments exchange dollars for US Treasury securities. But such a hierarchical relationship is unlikely to appeal to aspiring sovereigns seeking to sidestep the current system.
The boogeyman of integration
Latin America’s struggle to reintegrate over the centuries provides some valuable material for the questions we have raised so far. There are many questions that Eduardo Galeano posed in Open Veins of Latin America, which are still relevant today. In assessing the effectiveness of the divide and conquer strategy imposed on the continent, he asked, “What integration can be achieved among themselves by countries that have not even been able to integrate internally?” (p. 260). Similarly, he warned of the ways in which common market and integration schemes could be wielded by foreign industry “to blow down with one puff the feeble national producers” (p. 255) as governments renounce their customs income and further noted how under previous pretexts of integration, “‘differences in degrees of development’ between the various countries ‘tend to sharpen’” (p. 256).
A disclaimer must be added regarding these concerns over unequal regional and national development. Philosopher Domenico Losurdo’s work is particularly relevant as his writing is permeated by a critique against those who call for an “egalitarian distribution of penury, inclined to a populist distribution of this condition into a synonym for political and moral excellence” (p. 297). It is a critique that he uses to defend the trajectory of the PRC at a time when the party had been reproached by Westerners for the different stages of development found in the cities when compared to inland regions.
In the case of Latin America, neither would different speeds of industrialization, between countries or within a given state, be an excuse to shy away from such aspirations. In fact, regional disparities are unavoidable. However, factors such as Brazil’s sub-imperialist status within the continent—a fact stressed by Galeano himself and hammered in by the Brazilian troops in Haiti for example—the respective unpredictability and instability of the current Lula and Fernández Administrations, and the compromised nature of both governments do raise certain doubts, to say the least. In any case, the point is to underline how the projects which Galeano wrote of, such as the Latin American Common Market, operated under the guise of development and regional integration. So too must today’s proposals be scrutinized for their potential for subversion and their degree of antagonism to US interests.
Take Lula’s sur initiative. For starters, it is an implicit disavowal of the struggle for the sucre currency, which was already partially implemented and is a product of the Chavista and Cuba-led Bolivarian Alliance for the Peoples of Our America (ALBA). Specifically, the sur proposal is linked to the Brazil-dominated Southern Common Market (MERCOSUR), from which Venezuela has been excluded for almost eight years due to the “rupture of democratic order.” However, it was in the context of the 7th Summit of the Community of Latin American and Caribbean States (CELAC), yet another body dedicated to the integration of the continent, when Lula recently voiced his vaunted commitment to a novel currency to be used between his country and Argentina.
Nicaragua-based writer Stephen Sefton wrote a brilliant, no holds barred interpretation of the joint Declaration produced by January’s CELAC summit: the Declaration began with the customary regurgitations about democracy in Venezuela—Maduro was not present because the Argentines couldn’t guarantee that he would be safe from their own country’s legal apparatus. Again, it calls for “the lifting of the illegal blockade of Cuba but not of the illegal unilateral measures against Venezuela… Nor does the Final Declaration mention the theft in broad daylight of the patrimony of the Venezuelan people, the company CITGO, the gold stored in London, and billions of dollars in the European financial system, by the United States and the governments of the European Union.” Troubling, is it not? Especially given that many of those who have gotten worked up about dodging the dollar do so precisely because they imagine it would make such instances of theft more difficult.
The declaration also endorsed human rights and decolonization without a single mention of Guantanamo; an omission which, in Sefton’s words, “indicates the level of the capture by the United States and its Western allies of the consciences of many leaders in the region.” As for the bizarre comparison made by Lula between US aggression toward Venezuela and Russia’s relationship with Ukraine, we can only guess that it was a gesture of gratitude to his backers from both the Democratic party of the US and the Brazilian elite who helped bring him to power.
Yet Sefton is most articulate when considering the feasibility of sur living up to the expectations of certain journalists:
One has only to look at the economic history of Europe of the last 20 years to understand the futility of the idea that such a common currency will reduce regional dependence on the US dollar. Quite simply, all the corresponding independent financial architecture is lacking, for example a robust payments system, independent insurance institutions and other key financial services, a regional system of rating agencies or a banking system capable of resisting aggressive speculation in international financial and commodity markets. The idea looks like another example of the superficiality and ideological dependence on the West of the region’s social democratic political classes. They seem to hope they can evade facing the implications of the fundamental truth they themselves recognize in relation to environmental issues and other issues, for example, volatile commodity prices or foreign debt, that Western capitalism harms the peoples of the region and the whole world.
The capitalist model of the mythical invisible hand of the free market and its neoliberal fictional corollaries is collapsing. Even so, most governments of the CELAC countries seem to want to apply that same economic model to promote their countries’ development. This reality makes especially unconvincing point six of the Final Declaration, which affirms “the importance of prioritizing sustainable economic recovery with a cooperative, inclusive, equitable and solidarity-based approach.” But that economic model already exists in a well advanced form, thanks to the same revolutionary countries of the Bolivarian Alliance of our Americas (ALBA) that so many of the region’s governments attack and disparage without justification.
Integration: By whom?
To be sure, the question of Russian and Chinese-driven integration in Eurasia is a different picture. There, one doesn’t find the same muddled superposition of acronyms (ALBA, CELAC, UNASUR, MERCOSUR, CARICOM, etc.) found in Latin America, with little to celebrate other than annual summits, their ranks ebbing and flowing with each cycle of elections and coups. But despite being pegged to regional superpowers, the Eurasian Economic Union or the Shanghai Cooperation Organization still reach the following impasse: will member states ever adopt significant economic policies? As raised earlier, perhaps there will be some friction, somewhere, between the vector of integration and the multipolar ethos of sovereignty—perhaps not.
Still, in some cases, integration is lauded as if it could be a collaborative, cooperative process between equal partners as if it weren’t a question of the integrator and the integrated. But if collaboration has a place here, then there is an equal dose of the expansion of a particular power, and its inescapable competition with infringing plans for integration and disintegration. The ground covered by BRI is unquestionable and, some would argue, revolutionary—but then again, the project is not encumbered by the facade of the democratic process and equal footing between all participants. It is clear that the binational agreements that string together China’s BRI are a qualitative break with Anglo-American terms of engagement, and there is no doubting their relative win-win character. The point is that perhaps such headway, actually existing integration, requires a certain degree of centralization. The decision making and planning consolidated, in this case by the PRC, would appear to be a prerequisite for the execution and stability of any project with similar ambitions.
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References:
Galeano, E. (1997). Open Veins of Latin America: Five Centuries of the Pillage of a Continent. Monthly Review Press.
Losurdo, D. (2016). Class Struggle: A Political and Philosophical History. Springer.
Hudson, M. (2015). Killing the Host. Islet.