Pandemic threatens dollar hegemony

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US, WASHINGTON (ORDO NEWS) — With the onset of the crisis caused by the outbreak of coronavirus, the United States is increasingly demonstrating a severe case of dissociative identity disorder (a condition in which you alternately feel one or the other person), writes Benjamin Cohen, professor of international political economics at the University of California at Project Syndicate.

On the one hand, the US Federal Reserve has responsibly assumed the leadership role in international finance (as during the 2008 global financial crisis). In March, the Fed quickly restored a network of bilateral currency swap agreements with 14 foreign central banks and introduced repurchases (REPOs) for even more monetary authorities, thereby ensuring an adequate supply of dollars to meet global liquidity needs. The US Central Bank has again become the world lender of last resort.

On the other hand, US President Donald Trump rejected the idea of ​​the need for international cooperation to combat the effects of the coronavirus pandemic on economic activity. He still adheres to the principle of “America first”, which means that other governments should look for any semblance of leadership elsewhere. The Trump administration has made clear that it will act alone and exclusively in the “national interest.”

This manifestation of a conflicting identity is not a sign of America’s good fortune, nor does it bode well for the dollar, which has long been the dominant currency in the world. The longer America shows two opposing faces, the greater the likelihood that it will lose its place at the top of the international monetary system. After all, will international investors and foreign governments want to continue to trust the money of an increasingly unreliable partner?

Of course, at the moment, a mass exodus from the dollar is unlikely. The Fed’s recent actions are a response to higher demand for dollars (rather than measures to prevent panic selling). The coronavirus crisis has also confirmed the role of the dollar as a safe haven.

However, even before the pandemic, investors and central banks were looking for an alternative to the “unloved dollar standard” because of the unpredictable behavior of the Trump administration and its xenophobic nationalism. Discontent over Trump’s indiscriminate use of financial sanctions to punish countries such as Iran, as well as any country that does business with him, including US allies, is also growing around the world. Using the dollar as a weapon, Trump is pushing others to return fire.

Thus, China is increasingly promoting the yuan as an alternative to the dollar, for which it is gradually opening its domestic bond market of $ 13 trillion (the second largest in the world) for foreign institutional investors. Similarly, European countries have launched a new mechanism specifically designed to circumvent US sanctions on Iranian oil exports.

As the dollar was already bleeding a bit, the pandemic only widened its wound even wider. This, in turn, will have far-reaching consequences for America’s influence in the world and, ultimately, for the US-led post-war international order.

The contribution of the dollar to American power is obvious. As the issuer of the world’s dominant currency, America has long been taking advantage of what Valery Giscard d’Estaing once called “an unjustified privilege.” As long as foreigners crave dollars, the United States can spend as much as they want to project power around the world, just speeding up the printing press. America can also influence more directly, for example, by making dollars available to friends and less accessible to enemies.

But now Trump’s capricious behavior and his desire for isolationism threaten to undermine the US geopolitical power. And as soon as everyone sees that America’s power is waning, the dollar will begin to lose some of its attractiveness, setting in motion a vicious circle: a weaker dollar gives rise to a weaker USA, which gives rise to a weaker dollar, and so on.

It should be recalled that the pound had a similar fate in the 20th century. The loss of international authority by the pound was both the cause and effect of the slow transition of Britain from an empire to a medium-sized island nation off the coast of continental Europe. The dollar is not immune to the same progressive degeneration.

The fall of the US and the dollar will lead to the destruction of one of the key pillars of the post-war liberal order. For many, this order was synonymous with US geopolitical dominance. But in the absence of American leadership, competing political models that advocate nationalism, populism and various kinds of “illiberal democracy” will come to the fore. Doubling America’s identity will affect not only Americans, but the whole world. A forecast of the post-war order oriented to the dollar looks like never before gloomy.


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