Jul 19, 2014
In early July 1944, delegates from 44 countries gathered at the Mount Washington Hotel in Bretton Woods, New Hampshire. A three-week summit took place, at which a new system was agreed to regulate the international monetary and financial order after the Second World War.
The US was already
- the world’s commercial powerhouse,
- having eclipsed the British Empire several decades earlier. America was also on course to be
- among the victors of “Europe’s conflict”, even though its economy was largely unscathed by war. As such,
- was US-dominated and
- produced a settlement largely on US terms… Since then,
- global commerce has been conducted largely in dollars and leading economies have held
- the greenback as their primary reserve currency.
- The same system remains intact today, with the lion’s share of commercial settlements worldwide still clearing the US banking system – even if the parties involved have nothing to do with the States. The dollar’s hegemony continues to be cemented, meanwhile, by the operations of the
International Monetary Fund and World Bank.
- Founded at Bretton Woods, they’re
- both Washington based, of course, and
- controlled by America, despite some Francophone window-dressing. The advantages this system bestows on the US are enormous.
“Reserve currency status” generates
- huge demand for dollars from governments and companies around the world, as they’re needed for reserves and trade. This has allowed successive
- American administrations to spend far more, year-in year-out, than is raised in tax and export revenue.
By the early Seventies, US economic dominance was so assured that even after President Nixon reneged on the dollar’s previously unshakeable convertibility into gold, amounting to a massive default, dollar demand kept growing.
So America doesn’t worry about balance of payments crises, as
And Washington keeps spending willy-nilly, as
the world buys ever more Treasuries
on the strength of regulatory imperative
and the vast liquidity and
size of the market for US sovereign debt.
It is this “exorbitant privilege”
– as French statesman Valéry Giscard d’Estaing once sourly observed –
that has been the bedrock of America’s post-war hegemony.
It is the status of the dollar, above all,
that’s allowed Washington to get its way,
putting the financial squeeze on recalcitrant countries via the IMF
while funding foreign wars…
And for the past 70 years, the dollar has ruled the roost. This won’t change anytime soon. Something just took place, though, which illustrates that dollar reserve currency status won’t last forever and could be seriously diluted. Last week, seven decades on from Bretton Woods, the governments of
Brazil, Russia, India and China led a conference in the Brazilian city of Fortaleza to mark the establishment of
- a new development bank that, whatever diplomatic niceties are put on it,
- is intent on competing with the IMF and World Bank. It’s long been obvious the BRICs are coming.
The total annual output of these four economies has spiralled in recent years,
to an astonishing $29.6 trillion (£17.3 trillion) last year
on a PPP-basis adjusted for living costs.
That’s within spitting distance of the
$34.2 trillion generated by the US and European Union combined.
America’s GDP, incidentally, was $16.8 trillion
on World Bank numbers, and
China’s was $16.2 trillion
– within a whisker of knocking the US off its perch.
The balance of global economic power is on a knife-edge.
Consider also that the
BRICs collectively hold sway over 50pc of global currency reserves,
rising to almost three-quarters if you take the emerging markets as a whole.
The G7 nations between them control only 20pc
– and less than 8pc if you exclude Japan.
Based on such balance sheets, we’re now seeing institutional change.
The new BRICs Development Bank,
- modelled on the IMF, will have a
- $100bn currency reserve available
- to lend around the world, giving distressed debtor nations
For a long time, the BRICs have been paying in to the IMF, yet been denied additional influence over what happens to the money. Belgium has more votes than Brazil, Canada more than China. The institutions governing the global economy have failed to keep pace with reality. Modest reforms giving the large emerging markets more power, agreed with much fanfare in 2007 and again in 2010, have been stalled by Washington lawmakers.
The BRICs have now called time, setting up their own, rival institution based
The key to the dollar’s future is petrocurrency status –
whether it’s used for trading oil and other leading commodities.
Here, too, change is afoot.
- China’s voracious energy appetite and
- America’s increased focus on domestic production mean the days of dollar-priced energy look numbered. Beijing has struck numerous agreements with Brazil and India that bypass the dollar. China and Russia have also set up
- rouble-yuan swaps pushing America’s currency out of the picture. But
if Beijing and Moscow
– the word’s largest energy importer and producer respectively –
drop dollar energy pricing,
America’s reserve currency status could unravel.
That would undermine the US Treasury market and
seriously complicate Washington’s ability to finance its vast and
still fast-growing $17.5 trillion of dollar-denominated debt.
In May, Beijing and Moscow signed a huge multi-decade gas supply contract,
to sit alongside a similar oil deal agreed in 2009.
No one knows what share of
this energy trade will be on a yuan-rouble basis
– and the two governments aren’t saying.
This question, seemingly inane, is
among the most important diplomatic issues of our time.
At the moment, although Russia’s export partners do sometimes settle in roubles, most Sino-Russian trade is still in dollars. But the combination of this new gas deal, and western sanctions on Russia has seen Moscow and Beijing step up bilateral efforts to facilitate large-scale non-dollar settlement. With western anti-Russia sanctions likely to be tightened again after the tragic shooting of a Malaysian passenger plane over Ukrainian airspace, Beijing’s response will be closely scrutinised. I, for one, expect the Chinese to say little until it’s clearly established who grounded the plane and why. Although the dollar’s reserve status won’t end overnight, the global payments system is now moving inexorably towards that outcome.
The US currency accounted for just
33pc of all foreign exchange holdings in 2013, on IMF numbers,
down from 55pc in 2001.
Within a decade or so,
a “reserve currency basket” may emerge,
with central banks storing wealth in a mix of dollars, yuan, rupee, reals and roubles, as well as precious metals…
The dollar’s status is a big question.
Judging the outcome is more akin to star-gazing than scientific economics. But the establishment of this BRIC Development bank, timed to coincide with the anniversary of Bretton Woods, is an audacious and significant move. The world’s emerging giants now have thumbscrews on the West…
Aug 6, 2014
By Rachel Evans Aug 6, 2014
…U.S. and European Union sanctions against Russia threaten to hasten a move away from the dollar that’s been stirring since the global financial crisis. One place the shift has become evident is Hong Kong, where dollar selling has led the central bank to buy more than $9.5 billion since July 1 to prevent its currency from rallying as the sanctions stoked speculation of an influx of Russian cash. OAO MegaFon, Russia’s second-largest wireless operator, shifted some cash holdings into the city’s dollar. Trading of the Chinese yuan versus the Russian ruble rose to the highest on July 31 since the end of 2010, according to the Moscow Exchange.
While no one’s suggesting the dollar will lose its status as the main currency of business any time soon, its dominance is ebbing. The greenback’s share of global reserves has alreadyshrunk to under 61 percent from more than 72 percent in 2001…
Since the U.S. currency replaced gold as the bedrock of the financial system after World War II, the greenback has weathered numerous crises. It emerged from the collapse of the Bretton Woods system in 1971, endured the introduction of the euro almost three decades later and maintained its status as a haven currency even when the 2008 collapse spread from Wall Street to economies around the world.
The Federal Reserve’s unprecedented monetary stimulus to stem that crisis channeled cash into the economy through debt purchases, leading nations including Brazil and Germany to claim the U.S. was debasing its currency.
The crunch increased interest in tenders divorced from a single nation’s strength, spurring the International Monetary Fund to boost almost 10-fold the allocation of special drawing rights, a reserve asset whose value is based on a basket of currencies…
China is making a push for greater use of its currency in international trade. The People’s Bank of China extended a yuan swap line to Switzerland in July after agreeing a facility with the European Central Bank last year. The nation also agreed to allow companies to clear yuan-denominated transactions in London and Frankfurt for the first time. The Hong Kong Monetary Authority bought U.S. dollars in the foreign-exchange market this week to curb gains in the local dollar, which is pegged to the greenback, after purchasing $8.4 billion in July, the most since at least October 2012…