This is the second part of the story. If you haven’t read the first part, do read it. In the last blog, I discussed the history and the significant reasons for the US dollar to earn the global reserve currency status.
The reasons included:
1. The Strongest Economy.
2. Great Fire Power(Military)
3. Huge influence in global affairs because of World War 2.
4. The accumulated gold during war times.
Post-war, the US provided huge financial aid packages to Europe for rebuilding. It also opened its economy to Europe and East Asia, primarily Japan. This allowed the US to create a hegemony in the world. Then came the Nixon Shock and the Petro-Dollar agreement, due to which the US dollar, even after losing its convertibility to gold, stayed as the world’s reserve currency.
All the above things are discussed in detail in the earlier blog…
After decades of global reliance on the US dollar, why an increasing trust deficit?
Reason 1: Too much debt.
Currently, the USA has a huge debt. A lot of that debt money has come from the Federal Reserve(which does money printing). It means that the US created a lot of money not by producing real assets, services, or products, but by printing money out of thin air. Because the US dollar has huge demand in the international market, the money printed is absorbed. Refer to the previous blog to understand how money printing contributes to a country’s debt.
100% Tariff: The solution to save the Dollar? (Part-1)
Now, this doesn’t mean other countries aren’t printing money. Every fiat currency has the same properties. However, the rest of the world can’t do what the US did as its currency is the world’s reserve currency.
Today, the US has a GDP of about $28 trillion, meaning it produces goods and services worth $28 trillion yearly, but its debt is at $35 trillion. This is the value of just the Federal Debt. The Government alone owes more money than the entire production capacity of the United States. Every year the US is getting more in debt. In 2008, not too long ago, the US had a national debt of about $12 trillion. The interest expenses alone are putting the US into more debt.
Reason 2: The Unfunded Liabilities.
The US has promised its citizens Medicare and Social Security. These liabilities are called “Unfunded Liabilities”. These liabilities are obligations that do not have enough funds to pay for. So, when the government is paying for pensions and medical facilities, it is doing so by getting more in debt. Debt is never a problem when an organization is creating assets with it. The problem comes when the debt is used to bail out or give pensions or non-productive schemes.
The cycle looks like this…
This has created a trust deficit because, every time the US gets into financial trouble, it prints money. This creates doubt in investors about the legitimacy of the practice.
Reason 3: The weaponization of the Currency:
For the last few years, the US has been using the power of its currency to dictate global trade, investments, and policies that suit its interests. It imposes unilateral sanctions on countries that don’t do what the US wants. This is why Nations are seizing every opportunity they get to de-dollarize. What they did with the Russians has sparked the consequences. They froze around $600 billion of the Russians and distributed them to the Ukraine. The countries now fear that their reserves are not safe with the US. Central banks worldwide have been increasing their gold purchases and diversifying their reserves. This trend will continue and is probably irreversible.
China has more manufacturing power than any country on Earth. They are trying to push their currency for international trade. India is trying bilateral agreements for trade in local currencies.
There might be other reasons for the growing trend of reducing reliance on the US dollar, but here are the majorly responsible ones.
Trump and the 100% tariff:
Recently, the former POTUS and the 2024 presidential candidate is said to have promised a 100% tariff on countries that are moving away from the dollar. But today the US has over a trillion-dollar trade deficit with the world. In today’s world, it is tough to dictate international trade as many countries are growing and are looking for their interests and a 100% tariff would possibly push the US away from global powers. For instance, if the US tries imposing a tariff on India for using the Rupee to trade with countries like Sri Lanka, Nepal, etc. The US would start a trade war with a country it needs more if the China problem arises. Yes, Bharat would face economic consequences for the same, but it would soon align with other powers which will not be in the best interest of the US. The US knows that very well and that’s why they didn’t put sanctions on India for buying the Russian oil and weapons. They had imposed sanctions on Turkiye, a NATO ally, for purchasing the Russian S-400 missile defense system but gave a waiver to Bharat for the same purchase. This strategy would work for smaller countries with very little leverage.
What can be done?
The former candidate for Republican Presidential Nominee, Vivek Ramaswamy’s idea of putting the dollar back into a commodity-backed system might work. The US is home to large coal mines, oil reserves, and reserves of precious metals. The US dollar can be backed by all the commodities the US is home to. This will firstly, tie the hands of the Federal Government and the Federal Reserve. The government will avoid excessive spending and focus on asset creation. Any government shouldn’t promise a social scheme that can’t be delivered without printing money. This will put money in the hands of the beneficiaries but will ultimately go to the rich.
He also said that zero-based budgeting is essential, to which I agree. Zero-based budgeting requires the government to create a new budget each year without considering the previous one. Doing so, they will spend money only on what is needed. Governments around the world should function like businesses, efficient and accountable.
Even if the US acts ignorant of this issue, the dollar will remain the global reserve currency for quite some time as the USD has gone deep into the international system. Any change in the reserve currency status will take at least a decade(according to experts). However, it may face a slow death of the reserve currency status which will cause internal challenges due to rising inflation, stagnant wage growth, and increasing wealth inequality. Yes, it isn’t income equality that is dangerous, it is the wealth divide that might act as the ultimate nail in the coffin.
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