A group of economists were asked to reflect on a question about sanctions on Russia and their potential long-term consequences for the United States.
At issue is a source of American power so ubiquitous that for generations it has been held steadfast: the almighty dollar and its role as a global reserve currency.
Imagine being able to run up huge deficits every year; spend more on your military and government programs; enjoy cheaper interest rates on debt; and in any case never worry about the collapse of your currency because it is used everywhere.
Now imagine also being able to punish your enemies by cutting off access to this currency, making it illegal to transfer money through US banks.
The United States does not have to imagine this exorbitant privilegeto borrow a term from a former French leader: it has been the reality since World War II, when the US dollar became the dominant international currency.
Around the world it is popular with individuals, businesses and governments, from cross-border sales to central bank holdings that other countries use to stabilize their economies.
“It’s a great deal,” said David Laidler, professor emeritus at Western University and a University of Chicago-trained monetary economist.
“It’s international money, that’s what it is.”
Now the steward of that international currency, the United States, with its allies, has cut Russia out of the banking systems; prohibited dollar transactions; the isolated Russian central bank; and almost secured the first Russia debt default in a century.
What if Russia tries to get help from the Washington-based International Monetary Fund or the World Bank? The United States and other G7 countries are working to block that access as well, all punishments for Russia violently invading its neighbor.
As US President Joe Biden said Friday: “[We’re] crushing the Russian economy “.
So this week dozens of leading economists were asked in a recurring survey run by the University of Chicago if we are about to witness a revolutionary economic event.
Those economists at Yale, MIT, Harvard, Princeton, Berkeley and Stanford were asked specifically if this weapon of dollar finance could lead countries to move away from the dollar as the dominant international currency.
Most confessed they had no answer as to where things go from here: 42% said they didn’t know, 16% predicted a change, and 28% no change. Fourteen percent had no opinion or did not respond.
Those who foresee no change have argued that there is no logical successor to the dollar. Others have argued that the pre-eminence of the greenback will gradually be eroded by cryptocurrencies and other currencies.
That debate is taking place beyond the academy towers.
Some bankers have called Russia’s punishment a turning point in financial history, predicting that US rivals have new incentives to start using other currencies, especially after the US seized Afghanistan’s assets last year following the takeover of the Taliban.
The role of the dollar: how it started
The dawn of American monetary supremacy coincided with the last world war, as the sun set not only on the British Empire but also on the rule of the British pound.
Guests from around the world were welcomed to Bretton Woods, NH, in 1944 with a declaration by US President Franklin Roosevelt, who later described the goal of that conference: to avoid a repeat of the international economic war of the 1930s that culminated in the bloodiest conflict in human history.
At the heart of this effort was the creation of the two bodies mentioned above, a new International Monetary Fund to stabilize currencies and a World Bank to lead development and reconstruction.
They would be in the US capital and the IMF would base it exchange rates on the US dollar, which in turn was pegged to the price of gold (until 1971).
Great Britain resentful his loss of status e wanted remain the epicenter of the financial world, but its huge war debts and damages have left the United States as the undisputed superpower of the capitalist world.
The US dollar is still involved in nearly 90% of all international exchange rates today, is used in half of cross-border purchases of assets, and accounts for approximately 60% of central bank reserves held in cash and bonds.
This centrality makes US sanctions a particularly powerful tool.
Remember Meng Wangzhou? Canadians undoubtedly remember the extraordinary ripple effects, economic and humanwhich followed the arrest of that Huawei executive.
What is less well known is the reason for Meng’s arrest: Chinese citizen accused of violating US sanctions against Iran.
She was accused of sending payments from China, in US dollars through a New York bank, to a secret Huawei branch in Iran, and then hiding those payments.
How is it going now
Not surprisingly, American rivals want to reform the system.
The Chinese central bank 13 years ago called for reforms towards a multinational reserve currency system and now has a digital currency system with a so-called e-yuan app that has passed 260 million userseven if he insists on this it is not facing the dollar.
Russia has complained bitterly for years about the US abusing its currency supremacy and Vladimir Putin She said last year the US is biting the hand that feeds them, reducing confidence in the US-centric system.
All of our sanctions are crushing the Russian economy.
The ruble has lost more than half of its value.
The list of private companies leaving Russia is growing by the day.
Russia has been trying for years to de-dollarize by drastically cutting the use of greenbacks in trade with Brazil, India, China and South Africa and in holdings in the Russian National Asset Fund.
Is the change imminent?
The United States worked to preserve its advantage.
Just this week, the Biden administration announced a study on government-backed cryptocurrency development and one of its stated goals was to preserve America’s role in the financial system.
So is the change imminent?
A software entrepreneur and hedge fund manager who has written about how cryptocurrencies will affect the dollar says it is inevitable but will happen gradually, over the course of many years.
“In my mind, it’s already happening. And it was already happening before anything Russia-Ukraine started,” said Erik Townsend.
“It’s running out in slow motion. You can’t replace something until you provide the replacement.”
In his view, digital currencies are the logical successor, as the title of his book suggests: Beyond the blockchain: the death of the dollar and the rise of the digital currency.
The euro has been too unstable, he said, disappointing early expectations that it could rival the dollar. The Chinese yuan remains little used internationally.
He said it will take a period of technological upheaval to determine which form of digital currency becomes most popular for international transactions.
He expects that we will see competition between currencies created by the government and the private sector, we will have new exchanges in which we will convert these currencies and, eventually, governments may regulate or limit rival foreign currencies.
What is the Canadian angle?
He said US politicians took too long to launch a study like this week, given the importance of this issue for their country.
More than 100 countries are already studying or experimenting with central bank digital currencies for cross-border or domestic use, the White House said this week in announcing its study.
Not that the dominance of the dollar is all good for the United States
TO information notes because members of the United States Congress have spelled out some of the drawbacks of a stronger dollar: it makes foreign goods cheaper and easier to import, so American manufacturing plants have a harder time competing, causing closures and lost jobs . Lower interest rates can also lead to more debt.
Laidler says it’s still, all in all, a big plus for the United States. The end of dollar hegemony would leave America less powerful and less wealthy, he said.
It is firmly in the camp of those who doubt the greenback will be supplanted anytime soon: there is no other currency that rivals it, he said, and as for digital currencies, he said central banks will end up adopting and regulating them.
“I think it’s a long way off,” he said of the disappearance of the dollar’s reserve status.
And what is the Canadian interest in all of this?
Laidler said some Canadian nationalists might like the less influential United States, but it would also hurt our country as we depend on American buyers for three-quarters of our exports, he said. “The United States would be a less prosperous country … It wouldn’t be a good thing.”