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:
- 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.
- 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.