2024-02-21 22:20:56
- JP Morgan, Goldman Sachs and the influential Council on Foreign Relations are sounding the alarm for the elite to sober up and save the currency hegemon
- Global trade and greenback reserves are dwindling, and Donald Trump is about to put the final nail in the coffin
Will the world’s most powerful currency survive – about 90% of transactions until recently were invoiced in dollars, 50% of international payments are still made in them, and more than 50% of the world’s reserves are in US banknotes. Why? Because since the Second World War, they have a special status as an all-powerful hegemon in the markets, because they are a global means of payment, preserving their value even in the most severe crises.
Unfortunately, the clouds over the greenback have been thickening lately, and the alarm is being raised by not just anyone. The alarm was raised not by its opponents, but by the staunchest defenders of the US currency.
Among them is one of the most authoritative think tanks in the USA, influencing the country’s foreign policy for at least a hundred years, and two of the largest banking groups: JP Morgan and Goldman Sachs Asset Management. The curious thing is that, independently of each other, the three institutions publicly expressed their concerns, and “24 hours – 168 stories” found them on their websites, where they are without unnecessary panic colors.
“The hegemony of the US dollar is in question due to geopolitical and geostrategic changes, including the ongoing Russian-Ukrainian crisis – JP Morgan analysts note. – Although the dollar has maintained its dominance in transactions, some de-dollarization is taking place in foreign reserves. US money is also losing some influence in the oil markets, where more and more sales are now being made in currencies other than the dollar.” Goldman Sachs, in turn, found that if the dollar represented 72% of the world’s foreign exchange reserves in 2002, then 20 years later – in 2022, there is already a decline and they have decreased to 58%.
The reason for concern is that this currency has the status of a safe haven in times of crises and if there is a retreat from it, the question arises who is the contender for its throne? Everyone remembers how during the nightmarish financial turbulence of 2008 and the following pandemic, investors flocked to the US money to save the value of their holdings. The fact is that the dollar coped perfectly with the challenges, because, on the one hand, the US is the world’s money printer, and on the other hand, it is always the first to emerge from crises.
The Federal Reserve manages to better manage critical situations than other central banks in the world. According to some, the explanation is that it is run by the oldest and most reputable private financial institutions in the United States, which have survived all sorts of catastrophes. But this unusual status of the dollar is also due to the fact that the post-World War II US is no ordinary country.
They are a leading global power, securing the values and defense of the Western world with the largest contribution to NATO. But it is also the number one creditor with the most serious stake in institutions such as the International Monetary Fund and the World Bank. This, together with the powerful and innovative economy, was a guarantee that the dollar will be the global ruler for a long time to come.
But something went wrong…
Not long ago, an alarming article appeared on the website of one of the most influential think tanks in the USA – the Council on International Relations. It notes that America has benefited from the dollar’s dominance in international markets for decades, but Washington must be careful not to squander this huge asset on political infighting and “reckless policy-making.”
The material also states that thanks to the huge demand for dollars and collateralized US Treasury bills, the US can borrow at incredibly low interest rates compared to most countries. What’s more, the White House and American companies can borrow from foreign lenders in dollars, and the value of those debts doesn’t change because of the fluctuations in exchange rates that almost all other debtors around the world suffer from. As all this goes with another huge plus – due to the impressive demand for dollars internationally, its value strengthens against other currencies and leads to cheaper products for American consumers, the article also emphasizes.
On the other hand, this unique situation gives the US another advantage – low debt servicing costs lead to the accumulation of a staggering debt of over 32 trillion dollars. An extravagant amount that in no way hinders economic development, on the contrary, it stimulates it. At the same time, bipartisan debates about raising the debt ceiling always bring up a nightmare question that makes Fed bankers’ hair stand on end — if another update is not voted on in Congress, will it lead to bankruptcy?
The answer is yes, but this has always been the case so far. This time, however, the scandal was too noisy, and against the background of other trends, Fitch Ratings downgraded America’s credit rating, which was another “Caution!” signal. Regardless of everything, this global and unusual hegemony also gives the White House an unprecedented advantage – it it can impose large-scale and effective sanctions on its opponents, and this is a powerful foreign policy tool, the Council’s article also notes.
The problem, according to her, is that after Russia’s war against Ukraine, Washington increasingly resorts to sanctions against various countries, although the risk it takes is great. There, for example, it is recalled how the White House put pressure on Europe to end trade with Iran, and suddenly there was talk of looking for an alternative to SWIFT and dollar-based payment systems. While it didn’t come to that, Russia and China have now officially stated that they want to do just that in their trade with the BRICS countries (Brazil, Russia, India, China, South Africa, Egypt, Ethiopia, Iran, Saudi Arabia and the United Arab Emirates). The first idea was to have a common currency with which to pay each other, but it was rejected due to disagreements. And since China has been pushing for years for the yuan to become an international means of payment, it has begun to conclude direct currency swap agreements with Argentina and with Brazil, with which the turnover is 150 billion dollars.
On this occasion, Goldman Sachs notes that de-dollarization is more perceptibly intensified with the Russia-Ukraine war, since in parallel with it, Saudi Arabia and China begin negotiations to use the yuan in oil transactions. A small touch in this case is that Moscow and Beijing also use this currency because of the sanctions.
Along with this, the Council on Foreign Relations notes that Beijing is seeking similar deals with other countries and that this would pose a “challenge to the US dollar as the world’s default currency, given China’s dominance of global goods trade.
Against this backdrop, another plot is unfolding that aims to erode greenbacks. If in 1999 70% of global foreign currency reserves were in dollars, then in 2022 they are already below 60%, and this is again due to the Celestial Empire. It used to have the largest portfolio of US Treasuries, but as relations soured, Beijing began to phase them out. Currently, China’s holdings of US securities are at their lowest level since 2009.
To avoid the risk of the dollar’s influence continuing to decline, the Council’s paper makes several recommendations. The first is that doubts about the US currency should be quelled internationally and it should retain its status even if a competitor or alternative to it emerges. Second, there must be some solution to the public debt issue – either to remove the ceiling above it, or to start good faith debates in Congress to eliminate the risk of US bankruptcy.
It is obvious that any hint in this direction is a brutal blow to the confidence of the dollar. Who would keep their money in dollars if there is constant talk of bankruptcy of the issuing country? Third, America should use sanctions more wisely, the Council on International Relations believes. “Their use is often justified, but it should not be excessive – it is recommended there. – The dollar has been strong for more than seven decades. Its decline, if it happens, should at least not be due to the United States’ own missteps.”
And amid all these worries, Republican presidential candidate Donald Trump did something that left the US elite and media in a stupor. His threat that if European countries did not spend enough on defense, NATO would not protect them and he would tell Putin to do “whatever he wants” with them did the unthinkable. That same day, CNN ran an article that global defense through the Alliance and trust in the USA is the reason why the dollar is what it is – the most influential world currency. However, the logical question was also asked there – whether it will continue to be so.