How Trump’s Game of Chicken With Iran Could Weaken the Dollar’s Role as the World’s Currency

By Marshall Auerback, a market analyst and commentator. Produced by the Independent Media Institute

Ever since the dollar replaced gold at the center of the global financial system, many outside the U.S. have complained about “dollar hegemony,”and the “exorbitant privilege” conferred on the U.S. by virtue of this hegemony. What do these phrases actually mean? Broadly speaking, both are used interchangeably as a euphemism for a handful of economic controls the U.S. has on the global economy, especially the fact that U.S. dollars remain the principal currency held as savings by foreign governments, companies and individuals. Another aspect of this is the industrialized world’s central payment system that has cemented the dollar’s central role in global finance, which is to say, the SWIFT system.

The Society for Worldwide Interbank Financial Telecommunication, more commonly known by its acronym, SWIFT, is the dominant transmission network that connects more than 11,000 major financial institutions. It is a key component of this valued dollar liquidity as it provides the gateway to the Federal Reserve window (the means through which the world’s leading financial institutions borrow money). Although Brussels-based (and ostensibly neutral in a political sense), the board is dominated by U.S. financial institutions, and U.S. federal law gives the American government the capacity to shut down access to the system as part of its arsenal of potential sanctions. The U.S. has done that in the past with countries such as Cuba and, more recently, Iran.

Here’s the problem with that: any attempts by the U.S. authorities to politicize or unilaterally shut down access to the SWIFT system as a means of securing U.S. policy objectives, as the US is doing today to Iran (and possibly Russia later)risks backfiring profoundly as far as preserving dollar hegemony.

This is why:

  1. The more the U.S. seeks to sanction so-called “bad actors” by cutting off their access to SWIFT, the less the system itself will be viewed as a neutral international interbanking network, rather than an instrument of arbitrary U.S. power, and subject to the capricious whims of the U.S. government.
  2. As more and more countries begin to see SWIFT in these terms, it will inevitably induce moves to create an alternative. This will further diminish dollar liquidity, as well as enhancing liquidity for alternative currencies as they lend their support to this new system.

Economic network theory speaks of “positive networking externalities,” These emerge as an increasing number of other users use a network and therefore enhance its overall benefits to all users. The corollary also applies as it relates to “negative externalities,” whereby the system’s benefits (“marginal utility” in “econ-speak”) diminish in line with a decreasing number of users. Should these negative externalities begin to afflict SWIFT, this will invariably reduce dollar liquidity and, hence, worsen the ongoing prospects of dollar hegemony.

The Trump administration might well contend that all it is doing today is punishing a few rogue members of the global community. But it appears to be only Washington that acts here as judge, jury and executioner. Certainly that’s the case as far as Iran goes, where the EU, China and Russia take a decidedly different view.

From these countries’ perspective, America’s politicization of SWIFT creates an ominous precedent. One day it might be Iran, but the next day, it could well be Russia, or somewhere else. In spite of Trump’s purported affinity for Putin, his recent actions (pulling out of the Intermediate-Range Nuclear Weapons Treaty, selling more weaponry to Ukrainian nationalists) suggest a more aggressive tack with Moscow, which has also induced Putin to consider alternatives to SWIFT and enlist other nations as part of this effort, notably China.With their newfound Cold War enthusiasm directed against Russia, Democrats are also catalyzing this impulse on the part of Putin, so this is now a phenomenon that transcends the volatile U.S. president.

As far as China goes, Putin is pushing on an open door, as the country’s leadership is increasingly concerned about the growing trade war with the U.S., against a backdrop of an emerging new Cold War, this time with Beijing, not Moscow. The conflict is already extending well beyond trade, if Vice President Mike Pence’s recent speechis anything to go by. Discussions of an overt containment strategyhave become mainstream and bipartisan (even former President Obama used to talk about “containing” the rise of China).

Consequently, China’s leadership has every incentive to join Russia in searching for alternatives to a U.S. dominated financial system. That would introduce a new complicating variable to the existing structures, if successful. The economist Perry Mehrling rightly notes that“debts are promises to pay money, and money is the means of settling debts.” There is a corollary to that: if you impact the payments system in a manner that complicates the resolution of debt repayment, the whole money pyramid can become unstuck or, at the very least, unreliable, prompting the need to search for alternatives, especially when dealing with the world’s largest creditor.

At least in the case of Russia, or China, or Iran, we are looking at countries with a longstanding history of rivalry and strategic competition with the U.S. The new variable, however, is the increasing American antagonism to the EU, notably Germany, which is now channeling Europe’s increasing concerns about America’s reliability under Trump. The ambiguous midterm results do not dispel growing European anxiety that Trumpism is here to stay (even pre-Trump, many chafed at the dollar’s dominance, and the euro itself was conceived in part as an instrument to reduce the dollar’s dominance globally). In any case, as the FT’s Gideon Rachman has observed, the EU is not ideologically well predisposed to the sort of unilateralism that characterizes American nationalism, given that “its organising principle is the creation of international laws that limit the sovereignty of national governments.”

As that relates to a potential subversion of SWIFT’s political neutrality, Germany’s Foreign Minister, Heiko Maas, has acknowledged that work has begun oncreating a new European payment systemindependent of the dominant existing SWIFT system. This was confirmed byUniversity of Hull Professor of International Business Law Christopher Bovis:

The European Commission has been developing a system, a parallel system to SWIFT which will allow Iran to interface with European financial systems, European clearing systems, using the nominations supported and created by the European Investment Bank based on the euro.

One immediate aspect of the EU’s diversification strategy is working to establish“a special purpose vehicle to safeguard trade with Iran, as a U.S. crackdown on Tehran’s oil and finance sectors came into force.” Unfortunately, it hasn’t yet gained much traction, as most European banks and businesses are loath to risk sanctions from the U.S. market, even as the EU pledges that the Luxembourg-based SPV will help to insulate them from fines and worse (and German mercantilism also complicates matters, as it makes it harder for other nations/businesses to net save in a currency other than U.S. dollars, much as America’s ongoing current account deficits effectively means “exporting” dollars to foreigners, making the dollar more liquid and hence facilitating net saving in that currency).

But Trump does represent another order of magnitude for Berlin. The next German leader following Merkel may not share her instinctive caution and might well move to pursue alternative payment systems more aggressively. And if Beijing is on board, given China’s status as the world’s largest global creditor, it will certainly catalyze these changes more quickly. No question, though, the ship has already left the harbor, moving us closer to the day when King Dollar no longer stands alone at the apex of the global financial system. Ironically, this is another instance where “America First” impulses may well give rise to “America Last” results.

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  1. divadab

    As I say to Trump supporters, well, everyone, actually, “Trump might do something good”. If he’s successful in dismantling some of the corrupt and rotten imperial machine, by mistake, btw, then isn’t that something good?

    1. Kasia

      This is a very important point. Trump supporters are nationalists who by definition are anti-imperialist. They are very happy with every step Trump takes to dismantle the US Empire. Trump supporters want troops on the US border stopping the hordes trying to enter; they DON’T want troops in the Middle East making the region safe for Israel and Saudi Arabia.

      Opponents of Trump are forced to defend US imperialism and imperialism in general. This dilemma was most evident in the discussions of WW1. Imperialists attempt to blame WW1 on “nationalism”. But who were the main participants in WW1? On one side it was the British Empire, France and the French Colonial Empire, Belgium and the Belgian Colonial Empire, the Russian Empire, the Japanese Empire and the US. On the other side was the German Empire, the Astro-Hungarian Empire, the Ottoman Empire, and Bulgaria. I dare say it is a stretch to blame WW1 on “nationalism”. I think it would be more obvious to blame it on imperialism.

      In any case, Trump is well aware he is dismantling the US Empire.

      1. Anarcissie

        I don’t see a conflict between nationalism and imperialism. Nationalism usually manifests itself as support for an actual or proposed nation-state. The fundamental ideology of the state includes government, the theory that some people are better than others and should rule the others; the structure of governance creates the state. The ruling class of a powerful nation-state can invoke nationalism to cultivate political support (armies, police, taxes, etc.) for extending the state principle over other states, to wit: some states are better than other states and should rule the others. That is the ideology currently proposed by the American ruling class, and resembles those of the several nation-state empires mentioned, such as the British and French empires (and many others).

        It is true that a consistent nationalism would be averse to empire, since empire, in modern history, has invariably led to decay and ruin, but people generally are not very interested in consistency and in any case don’t read history. The ruin of the US has been working itself out for far longer than Trump has been in power, although he’s doing his part.

        1. Yves Smith Post author

          I disagree. A nation state cannot be independent and secure unless it is an autarky. Please tell me what states fit that category. Maybe Russia. The US isn’t due to dependence on foreign oil which per other posts, isn’t going away.

          Now the imperialist impulse usually becomes self-perpetuating, but its roots historically have been to secure natural resources.

      2. FluffythObeseCat

        Most Trump supporters throughout the central part of the U.S. are ardently pro-military. Presently our military is our primary vehicle for empire building (or maintenance). Trump’s anti empire tendencies were and often still are one of his biggest drawbacks with the Republican base in much of the U.S.

        To view his ‘supporters’ as anti-imperialist nationalists is to ignore how many dye in the wool Republicans held their noses when voting for him in 2016. Many voted against Hillary, not for Trump. Trump had to throw the military, the fundamentalist right, and the FIRE elite large gifts over the past 2 years not because he has immense influence over Republicans, but because he doesn’t. He showered the military with money, is packing the federal courts with social conservative judges, and gave Wall Street a massive tax cut. He did these things before attempting a public works program, in large part because he needed to buy the allegiance of these Republican power blocs. Problem is, they have little incentive to stick with him now that he’s pivoted to the more Democrat side of his agenda. Tariffs and infrastructure spending are not what moves them. Or at least, not what moves their social/political leaders. Who are all that matters.

        1. John k

          I see trump supporters as patriotic but not supportive of foreign wars. It’s their kids that come back in a box or maimed, physically and mentally. Trump did very well with his base when he castigated bush for Iraq, a big surprise to the rep. Elite.
          So yes, he’s deliberately dismantling imperialism while holding onto his base. He’s been fighting cia and dems plus msm, all of whom lust for war. I do worry if he thinks he needs a hot one to win re-election… I don’t think either Iran or nk, so who? Very popular to invade Saudi… no, family in too deep there… gotta be somewhere that’s floating on a sea of oil so the invasion can pay for itself a la Iraq… can’t be Mexico because refugees… it’ll have to be Venezuela.

          1. Unna

            Trump won the S.C. primary which, it’s my understanding, is a very military base ridden state with a large retired military population. They voted for him and he was “anti war” at least at that time.

      3. Matt

        “This is a very important point. Trump supporters are nationalists who by definition are anti-imperialist. They are very happy with every step Trump takes to dismantle the US Empire. Trump supporters want troops on the US border stopping the hordes trying to enter; they DON’T want troops in the Middle East making the region safe for Israel and Saudi Arabia.”

        I think this is largely fantasy. Perhaps you know Trump supporters that I don’t, but the ones I’ve interacted with are gung-ho about confrontation with Iran. They may not like Saudi Arabia, but they’re onboard with squeezing Iran for Israel’s benefit. True, they may not want US troops in the Middle East, but they’ve got no problems with lobbing cruise missiles into Iran or Syria as long as “our boys” aren’t put in harms way.

        1. Procopius

          Maybe the problem is “by definition.” I think an important reason Clintonistas/Centrists/Liberals/Democratic Establishment are unwilling to change is that they are certain they know what the Trump base are like. It’s the same as those annoying, “All [you] liberals want …” that I see so much of from the far right. They’ve pinned the labels “nationalists,” “populists,” “racists,” on their perceived enemies, and now are trying to understand those enemies through logical deduction from their definitions of those labels. Ain’t gonna work.

      4. Oso

        the ‘hordes’ as you call us are indigenous people, victims of US imperialism. human beings fleeing US sponsored tyranny are not a ‘horde’.

  2. timbers

    The process is slow – kind of like Global Warming. But it is not hard to see more and more nations have reason to unite against the U.S. in common economic interest, and get off the USD and it’s related SWIFT system.

    Tier 1: Iran, Syria, Russia, China, North Korea, Libya, Venezuela, Cuba, Afghanistan.

    Tier 2: Germany, various European nations, Turkey, India, Pakistan

    An incomplete list based an amateur knowledge which could added to if I kept thinking about it. But the trend towards greater commonality against heavy handed U.S. financial imperialism is easy to see, and Trump helps make it a bit easier.

    IMO it is Germany that could cause an inflection point away of USD. To a non interested observer, seems common sensical Germany should be preparing for the option to severe U.S. control over German finances. But politicians reside in a different world…who knows what they will do.

    1. No brains, no guts, no glory

      The European politicians do not have the brains or the guts to actually liberate Europe.

      They do everything US tells them do, even though it hurts only Europe, e.g., sanctions against Russia, bombing various MEA countries flooding EU with artificially created refugees, austerity, allowing US meddling in elections and promotion of welfare-state-killing right-wing parties, maintaining austerity etcetv

      It is family blogging umbelievable what spineless traitors they are when you think about it.

      1. Oregoncharles

        They are sloooowwwwly paying a price for their betrayal. Unfortunately, it’s mostly coming from the Right. The Greens have also been gaining in Germany, but they’re very internationalist. I assume they’d support greater financial independence, though; they certainly would in this country.

    2. John k

      Germany doesn’t want reserve currency for itself or the euro because they want to export stuff without importing goods, meaning they must accept and retain the importers currency as reserves. China and Asian exporters are the same. Russia is a bit different, but who wants to save roubles? Remember they went bk recently.
      Germany, China and Russia do want an alternative to swift. I see this as an alternative, useful because eu needs oil and gas imports. They will end up building more pipes for Russian gas, too.

  3. Matthew G. Saroff

    Yes, Trump’s actions could weaken the USD’s position as the world’s reserve currency and weaken the dollar exchange rate.

    I think that this is a good thing, since it strengthens the real economy (manufacturing, etc.) and weakens finance.

  4. The Rev Kev

    Russia has already set up the System for Transfer of Financial Messages (SPFS) as an alternative to SWIFT and I believe that the Chinese have also set up their own system. I think that with Trump, a lot of nations have been forced to consider the fact that so much of America’s foreign policy as well as trade policy is driven not so much as American politics per se as American local politics for the past coupla decades.
    As an example, is America really against Cuba so much or is this fueled to a large part by Cuban-American population in Florida which is such a key political state? Do Americans really hate Iran so much or is this to really please AIPAC which has so much political pull? Do Americans really want to fight Russia or is this a matter of deep state geopolitics? I think that most Americans would prefer to concentrate on working on their own country first hence the power of the MAGA slogan.
    The world is moving away from the unipolar model in use the past few decades back to the more normal multipolar world so it is only natural that there would evolve trading blocks that want to ensure their own security by making sure their financial system be not held hostage by another trading block. If the US had not threatened Russia directly by saying that they would be cut off the SWIFT system, the Russians would never have developed the SPFS system – nor the Chinese theirs. Countries like China and Russia are stockpiling gold reserves to give depth to their economies and it is only natural that they would move away from dollar payments to reduce another vulnerability. Not good news for the US as this picks up speed but there it is.

    1. NotTimothyGeithner

      Libya was the wake up call when the U.S. demonstrated it was “agreement incapable” despite the “adults” being in the room and that W wasn’t an aberration. The direct vassals might not want to acknowledge their position and call Trump an aberration, but the outsiders knew the U.S. was useless as any kind of partner or enforcer of any kind of nominal liberal world order.

      The U.S. is so rotten and Cuba is so small the foreign policy built around it needs to stay in place to maintain the reasoning for the MIC apparatus.

    2. Kurt Sperry

      “Not good news for the US as this picks up speed but there it is.”

      Could you walk me through why you think your average American mope’s interests are served by the US having brute force control of the SWIFT system or the USD’s global reserve status? I’m quite quite certain it helps *some* small subset of Americans, but I struggle to see how the average American benefits from being able to push around countries like Iran, Russia and Venezuela using SWIFT or having to run a huge trade deficit to keep its global currency status sufficientlly liquid. Just as I don’t see the point of pouring incalculable finite resources into the US global military empire, rather than more productive uses, again from the average mope’s perspective.

      From my average mope perspective, I don’t give two family blogs about maintaining any of that stuff. Good riddence to all of it I say.

      It all sounds like *good* news for the US to me.

    3. jo6pac

      Thanks for providing that info SPFS, the author must have missed it. The BRIC are on that system also and Iran just moved to it.

    4. Seamus Padraig

      I think that most Americans would prefer to concentrate on working on their own country first hence the power of the MAGA slogan.

      Congratulations! You understand us better than our own politicians.

  5. Chauncey Gardiner

    Re the Iran sanctions, so many exceptions have been granted that I suspect besides those mentioned, other workarounds have already been established. Further, the objectives of imposing these sanctions in the first place, namely pleasing current Saudi and Israeli leaders and big oil by precipitating regime change, are yet another neocon pipe dream. Given the gradual erosion of the importance of Saudi et al oil and the difficulties of ‘Emerging Market’ economies in accessing dollars during certain phases of the debt cycle, I suspect $USD hegemony will be gradually diminished in any event. I believe we would be well served to instead get out ahead of the parade with an international system alternative patterned after Keynes’ bancor that respects the neutrality of SWIFT. Finally, I think it’s time we looked in the mirror and asked ourselves why we need enemies in a world facing severe and potentially existential environmental challenges that beg for leadership in addressing global issues.

  6. Wukchumni

    What would be the best hedge against the Dollar no longer being king of the hill, top of the heap?

    Oil sounds good, but you can only put a gallon or so in a safe deposit box…

    1. NotTimothyGeithner

      If B’s (MoA) write up about the recent Israel incursion in to Gaza is accurate this could represent the end of the Western ability to strike at will.

      The U.S. empire is built around the post war international structures and their benefits even the EU as its run by Germany which still has U.S. occupation troops in Berlin. If Brexit is coupled with the PIIGS getting antsy and maybe Turkey leaving NATO, then you might have the U.S. equivalent of a Suez moment.

  7. Tomonthebeach

    Pleased so see that somebody besides myself noticed this fallout. Putin sure got his money’s worth out of investing in Trump. NATO is now not-o, everyone is cutting deals to get around us, despite MMT theorists, the US is going to pay for its debts somehow.

    Meanwhile, back on the Starship Trump-Enterprise, we are wasting trillions on a defense department that cannot defend us from our only true enemy – the one Pogo mentioned.

  8. John

    And what will replace the USD as the world’s reserve currency? That was the Euro’s goal but no one has enough confidence in the Euro for that ever to happen. Japan’s high public debt-to-GDP ratio would preclude the Yen, and with all the Brexit madness, the pound is out of the question. Australia, too, will likely run into difficulties in the next few years when its real estate bubble pops. The USD is here to stay, even if Trump’s behavior only encourages more alternative banking systems.

    Also, out of curiosity, does anyone subscribe to the (possibly conspiracy) theory that the Axis of Evil was really just a label for countries trying to challenge the dollar’s status as the global reserve currency by using Euros (with Iraq’s decision to sell its oil in Euros the reason why the US invaded in 2003)?

    1. JW

      My understanding of what the author is saying is that there won’t be a single reserve currency but rather several with the dollar presumably first among equals, or possibly a new East-West rift with Russia and China leading a single exchange mechanism.

      During the Cold War, IIRC, the Soviet ruble was the currency of exchange for the Bloc and Cuba, so there is precedent for a mulitcurrency world.

  9. marku52

    I don’t see how the US can be a “creditor nation” (runs a trade deficit for 30+ years) while China is also a “creditor nation”

    One of these statements is incorrect.

  10. QuarterBack

    After reading Juan C. Zarate’s 2013 book Treasury’s War: The Unleashing of a New Era of Financial Warfare”, I got an immediate sense that the U.S. Treasury was following a course that would effectively kill the goose that laid the golden egg, Dollar Hegemony, and ultimately its own empire. The book is a braggadocios insider’s account of how after September 11th, the totality of the Dollar system was harnessed to direct its enormous power to impose the will of the United States. It was also clear that by the time the book was published, that the author was not presenting a narrative of a necessary nuke-level aberration to respond to September 11, but rather a thesis for these tactics becoming the new normal.

    I am by no means an expert in economics, but I have been consulting to corporations large and small for the past 25 years, and I have observed that if there is one thing that all consistently value and desire above others, it is predictability. I believed that since the signing of Bretton Woods, the Dollar’s greatest contribution to the world was the dependable stability of financial order. This became the framework that allowed the members of the post WWII world community to pursue long term investments to improve the standards of living for themselves and the world at large. It also provided a strong incentive to defend or defer to the U.S. in order to ensure the stability of the system. Weaponizing the Dollar removes its most important purpose, its dependability, which inflicts nothing short of trauma to all participants.

    Global investment must now confront the very real possibility that the political winds of the U.S. may lay waste to long term plans; and in a way that is increasingly unpredictable in scope and scale. The best that can be hoped for is to significantly slow business activity until exceedingly complex risk analysis can be performed, or the other alternative being to frantically pursue building a replacement and fighting the inevitable costly, likely deadly, battle to install a new global financial order.

    Weaponizing the Dollar fundamentally undermines the very belief system and way of life that the global system relies upon. Such traumas inevitably induce a fight or flight reaction, both of which have potential to turn catastrophic if not resolved and returned to a predictable state.

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