A group of economists was asked to think about a question about sanctions against Russia and their potential for deep and long-term consequences on the United States.
At stake is a source of American power so ubiquitous that it has been assumed for generations to be unshakeable: the almighty dollar and its role as the world’s reserve currency.
Imagine being able to run up massive deficits every year; spend more on your military and government programs; benefit from lower interest rates on debt; and still don’t worry about your currency collapsing because it’s used everywhere.
Now imagine being able to punish your enemies by cutting off access to this currency, making it illegal to transfer money through American banks.
The United States does not need to imagine this exorbitant privilegeto borrow a term from a former French leader: This has been the reality since World War II, when the United States became the dominant international currency.
Around the world, it’s popular with individuals, businesses and governments, in everything from cross-border sales to central bank holdings that other countries use to stabilize their economies.
“It’s a very good deal,” said David Laidler, a professor emeritus at Western University and a monetary economist trained at the University of Chicago.
“It’s international money, that’s what it is.”
Today, the steward of this international currency, the United States, together with its allies, has cut Russia off from the banking systems; prohibited dollar transactions; isolated Russian central bank; and almost assured Russia’s first debt default In a century.
What if Russia tries to seek relief from the International Monetary Fund or the Washington-based World Bank? The United States and other G7 countries are also working to cut off that access, with any punishment for Russia violently invading its neighbor.
As US President Joe Biden said on Friday: “[We’re] crush the Russian economy.”
Thus, dozens of eminent economists were interviewed this week in a recurring survey led by the University of Chicago if we are about to witness a life-altering economic event.
These economists from Yale, MIT, Harvard, Princeton, Berkeley and Stanford were specifically asked whether this weaponization of dollar finance might lead countries to abandon the dollar as the dominant international currency.
Most said they had no answers about how things were going: 42% said they didn’t know, 16% predicted a change, and 28% predicted no change. Fourteen percent had no opinion or did not answer.
Those who did not foresee any change argued that there was simply no logical successor to the dollar. Others countered that the greenback’s preeminence would be gradually eroded by cryptocurrencies and other currencies.
This debate is taking place beyond the towers of academia.
Some bankers have called Russia’s punishment a turning in financial history, predicting that US rivals have new incentives to start using other currencies, especially after the US seized assets from Afghanistan 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 on the dominance of sterling.
Guests from around the world were welcomed to Bretton Woods, NH, in 1944 with a declaration of US President Franklin Roosevelt, who later describe the objective of this conference: to avoid a repetition of the international economic war of the 1930s which resulted in the bloodiest conflict in the history of humanity.
At the heart of this effort was the creation of the two aforementioned bodies, a new International Monetary Fund to stabilize currencies and a World Bank to lead development and reconstruction.
They would be located in the American capital, and the IMF would base its change rate on the US dollar, itself indexed to the price of gold (until 1971).
Britain wanted some his loss of status and wanted to to remain the epicenter of the financial world – but its huge war debts and damages have made the United States the undisputed superpower of the capitalist world.
The US dollar is now involved in almost 90% of all international currency exchanges, is used in half of cross-border purchases of goods and accounts for around 60% of central bank reserves held in cash and bonds.
This centrality makes US sanctions a particularly powerful tool.
Do you remember Meng Wanzhou? Canadians will no doubt remember the extraordinary ripple effects, economic and Humanthat followed the arrest of this Huawei executive.
What is less known is reason for Meng’s arrest: The Chinese citizen has been accused of violating US sanctions against Iran.
She was accused of sending payments from China, in US dollars via a New York bank, to a secret Huawei subsidiary in Iran, and then concealing those payments.
How are you now
It is not surprising that American rivals want to reform the system.
central bank of china 13 years ago called for reforms towards a multinational reserve currency system, and it now has a digital currency system with a so-called e-yuan app that has more 260 million usersalthough he insists on this is not aiming for the dollar.
Russia has complained bitterly for years that the United States is abusing its monetary supremacy, and Vladimir Putin noted last year that the US is biting the hand that feeds it, reducing trust 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 day by day.
Russia has tried to de-dollarize for years by drastically reducing its use of greenbacks in trade with Brazil, India, China and South Africa, and in Russian national fund holdings.
Is change imminent?
The United States worked to preserve its advantage.
Again this week, the Biden administration announced a study on the development of government-backed cryptocurrency, and one of its stated goals was to preserve the American role in the financial system.
So is change imminent?
A software entrepreneur and hedge fund manager who has written about how cryptocurrencies will affect the dollar says it’s inevitable but will happen gradually, over many years.
“In my mind, this is already happening. And it was already happening before this whole Russia-Ukraine thing started,” said Erik Townsend.
“It ends in slow motion. You can’t replace something until you provide the replacement.”
According to him, digital currencies are the logical successor, as the title of his book suggests – Beyond Blockchain: The Death of the Dollar and the Rise of Digital Currency.
The euro has been too volatile, he said, dashing early expectations that it could compete with the dollar. The Chinese yuan remains little used internationally.
He said it would take a period of technological upheaval to determine which form of digital currency would become most popular for international transactions.
He expects to see competition between currencies created by the government and the private sector, we will have new exchanges where we convert these currencies, and ultimately governments will be able to regulate or restrict rival foreign currencies.
What is the Canadian angle?
He said it had taken far too long for American politicians to launch a study like this week’s, given the importance of the issue to their country.
More than 100 countries are already studying or piloting central bank digital currencies for cross-border or domestic use, the White House said this week when announcing its study.
Not that dollar dominance is entirely positive for the United States
A information note as members of the U.S. Congress have explained some of the downsides of a stronger dollar: it makes foreign goods cheaper and easier to import, so U.S. manufacturing plants find it harder to compete, leading to closures and blue collar job losses. Lower interest rates can also lead to increased debt.
Laidler says that’s still, overall, a big plus for the United States. An end to dollar hegemony would leave America less powerful and less wealthy, he said.
He is firmly in the camp of those who doubt that the greenback will soon be supplanted: there is no other currency that rivals it, he said, and when it comes to digital currencies, he has says central banks will eventually adopt and regulate them.
“I think it’s still a long way off,” he said of the demise of the dollar’s reserve status.
And what is the Canadian interest in all of this?
Laidler said some Canadian nationalists might appreciate a less influential United States. But it would also hurt our country given that we rely on American buyers for three-quarters of our exports, he said. “The United States would be a less prosperous country… It wouldn’t be such a good thing.”