Dethroning the Dollar: What Governments Propose, IT Disposes

Today we continue our discussion of the prospects for the rebellion by the Russia, China, and the Global South against the dollar hegemony. We will recap and extend yesterday’s analysis before turning to the critically important yet routinely ignored IT issue.

Most commentators focus on one of two post-dollar-hegemony scenarios. One is for a new country to step in the role of reserve currency issuer once played by the UK and assumed over time by the US. The other is to create a new currency not controlled by any national central bank.

Stephen by e-mail gave a good summary:

Dollar hegemony is reducing, largely as a result of weaponising it;

Countries such as Russia and China are actively seeking to break free of the dollar, and will do so over time, especially if true underlying economic decoupling from the US also takes place;

But do not expect some overarching alternative to the dollar as global reserve currency to be in place any time soon. Institutional stickiness and the relative lack of attractive currencies to hold drive that, as well as the realization that a Euro / SDR / Keynesian Bancor type arrangement concedes national sovereignty;

Instead we are likely to end up with a multiplicity of arrangements associated with bilateral relationships between “non dollar” states who may choose to hold each others currencies on a portfolio basis, for example;

The dollar will likely stay hegemonic as reserve currency in the “western” bloc though, barring some total catastrophic event that cannot be foreseen at the moment.

More specifically, in the “existing currency replaces the dollar” scenario, the logical successor is China by virtue of the size of its economy and its international commerce. But China has been and is likely to remain unwilling to take the steps necessary. That includes: running trade deficits to get the renminbi widely held outside China (that amounts to exporting jobs, which is anathema to a regime that depends on high wage growth for its legitimacy), having open capital markets (no capital controls!), looking benignly on foreign investment, including substantial ownership of all but the most important domestic companies, and tolerating a high degree of financialization (growth-sapping1 high levels of secondary market trading and asset management).

The second alternative is a supra-national currency. But we’ve seen that movie. It’s the Euro. Any supranational currency, to actually work (as opposed to being something used only trivially, like the SDR), needs to have a legal structure that has the authority to bind and compel national governments. Even if the mavens were to design an instrument much less trouble-plagued than the Euro, the new supranational currency would still require participating states to cede some important elements of national sovereignity. It does not matter what the “it” is, be it a gold or commodity based currency, SDRs, or bancors. The same sort of legal and governance issues apply.

And given that the big pitch of the “fair world order” is a multipolar system with more national (or at worst regional trading bloc) autonomy, trading the old dollar boss for an untested currency boss is not going to sound very appealing….unless it finally starts looking less bad than the ad hoc arrangements that evolve.2

For instance, consider this section of Wikipedia’s description of the bancor:

This newly created supranational currency would then be used in international trade as a unit of account within a multilateral clearing system—the International Clearing Union—which would also need to be founded….

The ability for capital to move between countries seeking the highest interest rate frustrated Keynesian policies. By closer government control of international trade and the movement of funds, the Keynesian policy would be more effective in stimulating individual economies….

In the words of Benn Steil,

Each item a member country exported would add bancors to its ICB account, and each item it imported would subtract bancors. Limits would be imposed on the amount of bancor a country could accumulate by selling more abroad than it bought, and on the amount of bancor debt it could rack up by buying more than it sold. This was to stop countries building up excessive surpluses or deficits. Each country’s limits would be proportional to its share of world trade … Once initial limits had been breached, deficit countries would be allowed to depreciate, and surplus countries to appreciate their currencies. This would make deficit country goods cheaper, and surplus country goods more expensive, with the aim of stimulating a rebalancing of trade. Further bancor debit or credit position breaches would trigger mandatory action. For chronic debtors, this would include obligatory currency depreciation, rising interest payments to the ICB Reserve Fund, forced gold sales, and capital export restrictions. For chronic creditors, it would include currency appreciation and payment of a minimum of 5 percent interest on excess credits, rising to 10 percent on larger excess credits, to the ICB’s Reserve Fund. Keynes never believed that creditors would actually pay what in effect were fines; rather, he believed they would take the necessary actions … to avoid them.

In other words, under bancor, the new bancor superstate has substantial power to punish countries that don’t manage to stop running either chronic trade deficits or surpluses. Why should countries like China, that see their trade surpluses as the result of investment, hard work and technical improvements, be happy that the bancor police will clip their wings? Why should a chronic deficit country like Turkiye sign up for prompt punishment by the bancor regime, as opposed to taking its high inflation lumps and hoping it can right its economic ship without calling in the IMF?

Now to the IT issues. From bank IT/payments systems expert Clive:

Wading through iterations and variations of this sort of Gold Standard 2.0 makes me weary.

If one had a magic wand and could simply set this all up and migrate everyone to it, that would be one thing. But what about the inevitable transition period? For a while – probably a long while – you’re having to run two currencies (the legacy currency you usually operate in, i.e. US$, and the new reserve currency). So there’s a cost and complexity penalty right there.

And since we don’t have a magic wand, all accounting and payment systems have to be redenominated. It was complex enough with the adoption of the Euro. That took a decade of planning and several more years of system changes.

The introduction of the Euro brings up another overlooked point. Prior to the Euro taking over from the former national currencies there was a need for parallel running – because of the time it took to get all the financial plumbing able to handle Euro payments. So you had to have an exchange rate.

The Exchange Rate Mechanism managed this. Currencies traded in an increasingly narrow band against the new reserve currency. Initially this was +/-10%, then 5% then, if I recall correctly, just +/-1%. But there’ll be instances where particular national currencies have to devalue (or appreciate) against the new reserve currency. Devaluations have political costs for the government doing the devaluing. Often (and sometimes incorrectly) it’s seen as a failure of some sort. So how is this managed, politically? The other option is national currencies float against the new reserve currency as determined by the ForEx markets. But if no-one manages the new reserve currency (so it’s like a fancy Bitcoin in its intellectual underpinnings) then this is just a fast-track to libertarian wish fulfilment — the reserve currency “free” to operate without government “interference” and markets rule without political restraint.

Shorter, the US (and the Federal Reserve) are bad. But some kind of Randian-typing-one-handed titillation of how the world, apparently, sheds the malign “western” control and domination and instead has some weird and awful free-for-all where the reserve currency isn’t owned or directed by any identifiable (or politically and publicly accountable) agency isn’t my idea of fun.

The Mir card stuff was just handwaving. No way will Chinese banks licence Mir without China being a legal (or similarly functioning inter-government agreement) stakeholder or shareholder in the scheme. And even if they are, unless China has the majority vote in the Mir legal entity, it won’t permit the Chinese banks to abandon the existing domestic payment schemes and give Mir a monopoly. That is simply not how China works, not ever before and not now either. The most I can see is some kind of EPoS platform sharing and interoperability between domestic Chinese payment schemes and Mir. What, then, is the incentive for scheme subscribers (either cardholders, merchants or card issuers) to use Mir?

They’d have to make fees cheaper, but unless the Mir cost base is less (and I’ve not seen any workings as to why it should be and find it a dubious premise given the reduced Mir user base compared to, say, the Chianese incumbents, it can leverage economies of scale) then someone, somewhere, will have to subsidise it.

To add one more point to Clive’s discussion: the Euro went live over two decades ago. There is vastly more code at banks. Legacy systems interact in all sorts of funky ways, so making changes of this scale will be even more daunting than then.

Mind you, I am not saying the dollar will not become less important. Nor am I saying the efforts of Russia, China and the Global South to use it less will be ineffective. What I am saying is many of the new world order proponents are out over their skis. We will not have a new currency regime arising suddenly, like Athena emerging full grown from Zeus’ forehead.3 It will be incremental, ad hoc, and likely halting and messy. But successful experiments often come out of a period of milling about.


1 Yours truly is not making up the “growth sapping” part. During the last decade, when quite a few economists were trying to figure out what causes “secular stagation,” several studies, particularly one by the IMF, found that highly financialized economies had lower growth, and that asset management was a particularly unproductive activity.

2 Mind you, one possible path of evolution is for trade levels to fall and countries to be more autarkial. That may not be a bad thing. Bilateral deals and ad hoc arrangements could be satisfactory.

Keynes was sensitive to the destabilizing effects of chronic trade surpluses in a gold/fixed rate currency system, and though the world would work much better if trade was mainly to acquire scarce or not-available resources, like spices and palladium, and less so for goods that potentially could be made many places. Admittedly, Keynes also lived in an era where manufacturing was much less specialized than now. Even if the US had a civilian manufacturing base, it is inconceivable that we could quickly convert it to war production as we did in World War II.

3 Remember, we were supposed to have self-driving cars by now.

Print Friendly, PDF & Email


  1. fjallstrom

    I appreciate this series focus on the practical matters of replacing dollar hegemony.

    My perspective is mostly historical-political, and as I see it the dollar hegemony can not be seperated from the US political hegemony. The dollar as world currency allows the US to use its printing press to mobilise the worlds resources, rather than just its own. It serves to get tribute in exchange for IOUs, which makes the tribute less visible, and as always the tribute strengthens the imperial upper class at the material expense of the tributees and the political expense of those in the imperial core that doesn’t get the tribute (even though there may be some material trickle down). And it serves as a reinforcing mechanism for the empire in bribing vassal leaders or withholding from unruly vassals.

    The obstacles in replacing the dollar means that its end is likely to be on ketchup model, first nothing, then a trickle, then suddenly. We might have entered the beginning of the trickle phase. What replaces when the “suddenly” phase comes along probably depends on the specifics of power balaces, infrastructure and needs of the political powers making that suddenly very necessary decision.

    1. Will

      I seem to recall from Graeber’s history of debt that even after the fall of the Roman Empire, or maybe it was the Carolingian, that even without their coins in circulation people in Europe still kept accounts and transacted with those currencies. I wonder if that could happen with the dollar, ie, keeping it as merely a unit of account for international transactions.

      1. John k

        Yes, it seems there has to be some ‘stable’ reference of value that’s not necessarily used for trade. Various countries have varying inflation rates, so determining the price of, say, wheat in roubles vs, say, Turkish lira might otherwise be tricky. Of course, us is also experiencing inflation… there are other possibilities such as gold, which has been pretty stable vs the dollar for a few years.
        As the dollar fades for use in trade I can’t see gold as a sub, but maybe useful as a value ref.

    2. eg

      This. It is no coincidence that the US has over 700 military installations around the world and that $USD is the world’s reserve currency; nor that the IMF and the World Bank are also world-straddling $USD institutions. This sort of arrangement between an empire and its vassal states used to more nakedly (and thus truthfully) go by the names of imperialism and colonialism — but as Hudson points out, we now have “Super Imperialism” and the propaganda organs of empire busily work to convince hoi polloi that those benighted times belong to the past.

      Nonsense on stilts. As first depicted in C.S. Lewis’ The Screwtape Letters and so memorably and succinctly put by Verbal Kint in The Usual Suspects “the greatest trick the devil ever pulled was convincing the world he didn’t exist” — and so for the American Empire, its oligarch class and all the comprador elites around the world who enrich themselves at the expense of exploited peoples everywhere.

      1. John k

        My fond hope is that as fewer are willing to hold $ and the us is forced to reduce its trade deficit, us foreign adventures and bases become unaffordable, and mmt is used for internal infra and other such uses. Granted mmt is not useful if there are no labor or commodity resources available… but bringing troops home, and reducing not very useful fancy weapons of war fab should free up some resources.

  2. PlutoniumKun

    Thanks so much for this – over the years I’ve read quite a bit on petrodollars, dollar hegemony and its alternatives, etc., but the nuts and bolts of how it really works has largely evaded my limited capacity for understanding it. I’ve always suspected that there is both more to it, and less to it than is often understood (i.e. the mechanics are complicated, but the deeper importance is often understated). This is all very enlightening.

  3. Jay

    . Even if the US had a civilian manufacturing base, it is inconceivable that we could quickly convert it to war production as we did in World War II.

    No, it’s not. The most important military science paper to emerge from the Ukraine war is The Return Of Industrialised Warfare at RUSI. It turns out that we still need ww2 style artillery ammunition in massive quantities, exactly the type of stuff our old civilian industry could quickly convert to manufacture.

    1. Yves Smith Post author

      Making Shit Up is a violation of our written site Policies.

      You did not read the RUSI paper, The Return of Industrial Warfare by
      Alex Vershinin, or are choosing to misrepresent it. Vershinin never once said the West could easily or quickly convert current civilian operations to military output.

      Experts how have looked at its assessment of the disparity between Russian production and the West’s have concluded it would take ten years for the West to catch up with Rusisa’s artillery production. And Russia has been deploying artillery at a higher rate than presented in this paper, which cites around 7,000 artillery rounds a day. Douglas Macgregor recently said 20,000 rounds is now a light say for Russia and 40,000 rounds an average day. Even the older figures confirm the impossibility of using our current manufacturing base to crank out weapons on a mass basis any time soon.

      Anyone familiar with the evolution of manufacturing in the US will confirm that the US is vastly different than in the 1930s, when it was comparatively cheap and low cost to repurpose many machine for other uses. We are 70 years past that! We don’t even had hte manufacturing base, let alone the sort of lower-end, flexible machine shops and other simpler operations that once dominated US manufacturing. Comparisons to WWII are misguided. Russia similarly was able to move its factories to the east of the Urals to keep them safe from the Nazis. Think they could to that now?

      1. JCC

        Too true.

        Back in the late 80’s and into the 90’s when I was working for a major machine tool mfg. I would go into many shops that were still using large mechanical lathes and milling machines made during the WWII years and repurposed for general manufacturing use.

        By the late 90’s most of those machines were getting scrapped and replaced by smaller CNC machine tools that were designed for cell use and for very specific purposes. Other than in a few GE plants, I saw few that were manufacturing bullets and other similar products.

        And now most of those shops have disappeared altogether. Just building out the manufacturing systems would take a few years today, and I don’t see any of that happening.

        1. Stephen


          At that time even in the UK we had lots of general machine shops that supported the aero industry. A whole web of sub contractors existed. I worked at one for a time. The lower supply chain tiers have mainly now been outsourced to China even if the OEM is still here.

          In the 1940s the Mosquito bomber was made in repurposed furniture factories. Even most of those are now in China. Simply making uniforms on a mass scale would be tricky too: the indigenous clothing factories either do not exist or are geared to low scale high end clothing.

        2. Gus 2021

          It’s also the skills required are not learned over night ,and most of the machinests have retired or died ,I remember that most of my machine shop courses would be cancelled from lack of enrollment.

    2. Lex

      So then why is the new push from our 15,000 155mm shells per month only expected to get to 20-25,000/month sometime in the “spring” of 2023? And to get to 40,000/month is projected to be 2024-2025. Amortized we’ve been giving Ukraine almost 100,000/month and it’s not enough. The MIC is loudly calling for long contracts and having new money thrown at it. If it was so easy to convert, this would be the time but it is apparently not possible. Nor are we factoring in the industrial supply chain needed to make all this ammunition.

    3. Samuel Conner

      The thought has occurred to me that if US really wanted to ramp up artillery ammunition production quickly, it would invoke the Defense Production Act, repurpose the installed base of CNC lathes and milling machines, redirect raw materials currently destined for other products, etc., etc. But even then, assuming that steel of the right kind exists in inventories at sufficient quantity, you need the shell case castings at scale. And the fuses are probably not easy to make without specialized machinery.

      I suspect that it could be done, but it would be extremely expensive and it would be extremely disruptive of other industries — to make this one product you might need to interfere with current output of dozens of other products.

      To do it at reasonable cost, it would be necessary to build new capacity from scratch, which will take a long time.

    4. Richard

      “Even if the US had a civilian manufacturing base, it is inconceivable that we could quickly convert it to war production as we did in World War II.”

      Industrial mobilization for World War II was not easy either. See: Maury Klein, A Call to Arms: Mobilizing America for World War II.

  4. Lex

    Is it necessary to have a global reserve currency? I realize that it makes international trade smoother and that it’s beneficial for financial investment. What I don’t understand is its real economic benefit for the broadest group of stakeholders. I can see it providing predictability for everyone and a good measure of economic strength / weakness that makes national economies quickly comparable. On the other hand it seems to have all the issues of deep centralization like economic problems in the reserve currency nation (or even economic decisions) creating uncontrollable effects everywhere else. For example, doesn’t the currently strong dollar pose significant danger to debtor nations?

    I get that no reserve currency will make international trade and finance messy and stickier. But I assume the former will find a way and maybe we need less of the latter?

    1. Yves Smith Post author

      A reserve currency or a currency system greatly facilitates trade. Up to a point, trade bolsters economic growth. However as we have also seen, it can and has increased inequality within countries, which can be politically destabilizing, and overly mobile capital is even more so.

      1. James

        Please allow me to provide an example to illustrate my understanding of why Yves is 100% correct on this, as usual.

        Say you are a Swiss manufacturer of widgets. You have customers in Chile, Japan, and Iceland – and suppliers in Canada, Russia, and China. All of your customers and suppliers want to negotiate 5 year contracts with you at fixed prices.

        Which currencies will you negotiate these contracts in? If you say “whatever they want” then a big move in any of 6 currencies will bankrupt you. Good luck getting any sleep. If you say CHF then all 6 of them may go elsewhere because why should they shoulder the risk?

        The obvious solution is to agree on a standard international currency to conclude such contracts in (USD) so you don’t have to have a knock-down drag-out fight every time you negotiate with a customer or supplier. Now your currency risk with your suppliers has disappeared – you only have currency risk on the value-add. The market for hedging instruments in USD is liquid and the instruments are relatively inexpensive. You need to hire someone with expertise in hedging USD – and those people are plentiful. Etc, etc, etc.

        1. giandavide

          i think this perspective is very biased, cause it doesn’t consider the costs of owning dollars, an inflated money that was subject of the greatest creation ab nihil of economic history. the euro indeed wasn’t a first choice, it was an emergency choice caused by soros destabilization of euro currencies, especially the one of my country, Italy. without that Anglo-Saxon finance intervention there wold be no euro, and the considerations here about it would show as useless as they are. a monetary snake, as it was called the ecu, is aimed to grant stability, unless some anglo saxon finance guy wrecks it, always sustaining their currency, either wrecking other countries economies or limiting themselves to the usual tina arguments

    2. Anony

      Thinking outside the box, what if a new international trade currency was administered by a responsible international body (haha) to tackle actual global problems like climate change, refugees, and pandemics? We need a ton of money to address these problems even on a very superficial level, so couldn’t it be financed out of this pot?

      I guess there needs to be a mechanism for coercion, maybe through an clearly delineated escalation of sanctions for poor behavior. Or just members doing what UN does, but without as much structural tyranny from the security council.

    3. danpaco

      To take this thought further..
      Couldn’t any currency be used for any transaction?
      For hypothetical example, could Russia ask countries to pay for grain in Yen and oil in Swiss Franc. The Chinese could ask for different currencies for different products, and so on. The net effect being that currencies could mean something else on the world market vs the domestic market (black market globalism?).
      I guess I’m questioning the binary approach that the article suggests and am imagining a messy post dollar currency marketplace in the years to come.

    4. Jan Krikke

      My thoughts entirely. With Central Bank Digital Currencies, all cross-border payments can be settled instantly. The settlement currency does not have to be a reserve currency.

  5. YankeeFrank

    One thing I’ve learned over the years at NC is that trouble can brew at the margins. If the emerging independence from US hegemony leads even 10% or so of global trade currently facilitated by the USD to switch away is it possible would this have a large effect on the US economy and trade position?

  6. vao

    For specific goods which are exchanged essentially on a regional basis and whose presence on globalized markets is minimal, could it be that specialized regional trade zones arise based on some major local currency or basket of currencies?

    Just for the sake of a made-up example: jute is basically a concern for India, Bangladesh, China, Pakistan and Nepal (major producers/exporters/importers, with a few other Asiatic countries such as Indonesia and Turkey having a small presence in the market) and also a couple of African countries (Kenya exporting, and Nigeria, and also to a much smaller extent Egypt and Tanzania, importing).

    Would it be plausible that such a narrow sector devolves into a renminbi-based market — instead of relying upon the USD? After all, China is a major trade partner for all parties involved, whereas Western countries play a very minor role (only Belgium having a significant presence by being a re-exporting country, I gather). Are there such very specialized sectors where trade does not rely on the USD?

  7. Carlos Munoz

    Yves throw away comment on autarky being perhaps a good thing is incisive and should be explored. I think the era of global trade is over, that Adam Smith was fundamentally wrong and that civilizational nation states with defined cultures, languages and borders are the necessary future. In a word, f*** global trade.

    Getting there is difficult. We need defenders of each distinct People (multiple Putin’s) for starters. And we need to blow up, destroy globalism including the attendant trade and financial complexities. If the EU is a bust, larger global systems even more so.

    1. giandavide

      adam smith was against global trade, his market perspective required an economic system that cannot discharge his tensions in foreign markets

  8. The Phoenix

    Yves posed some really good questions and presented issues to be dealt with.

    First, there will be no replacement of the USD with CNY or any other national currency. In the past we have seen that national currencies used as global reserve currency arise from economic power but inevitably allow the issuing nation undue and extortionate influence. This was/is obvious with GBP and to an unbearable degree (to most of the world now) with USD (side note: at least both were backed by gold for a while, now they’re just fiat). As Yves points out, CNY is a non-starter .. and who wants to hold RUB as a major part of their reserve. No one. So let’s move on to the only viable option, a new “currency”.

    Second, the EUR was doomed to fail (or succeed depending on your goal). The stated goal of the EUR was to facilitate trade within the eurozone while reducing FX risk (for whom?). That is incidental. The main goal is to undermine the national sovereignty of the nations involved, as evidenced by Yves expose of the Greek crisis. In other words, it is the worst of all possible worlds, where not only do you give up control of your monetary policy but you are subservient to the EC AND there is no way out.

    Third, if using another nation’s reserve currency is being subservient to that nation, and if giving up your national currency is being subservient to an extra-national possibly hostile organization with no (or a very painful) way out, then a hybrid (like the Bancor) IS the ONLY option (or best if you want to trade, which everyone should and must).

    Here I want to make a few points: why would Turkiye or China give up some economic and/or financial control to a Bancor? Well I would argue that they are already there with the USD. Except, not only do they have little to no influence in the US, at best US monetary and financial policy primarily benefits the US and at worst they face aggressive and hostile interference by the small group of actors who control the US for their benefit and the (eventual) detriment of the US & other populace. Therefore, the prospect of setting up a system that is not controlled by the US is very attractive.

    Also I would somewhat disagree with the IT specialist. Bitcoin has a lot to teach us, same with blockchain in general. Just because some (many?) use it to scam others doesn’t erase the advancements in our understanding of money, finance, payments, and economics that arose from that, and the lessons learned are helpful in designing a better monetary/financial system. Even if we don’t use any blockchain based ideas and/or technologies, the level of software development and telecommunications maturity and the number of available engineers is so vastly different from 20+ years when the EUR was introduced that you can expect the robustness and time to delivery to be cut by an order of magnitude.

    Just my 2 cents.

    1. Lovell

      One major problem for bitcoin/crypto is that its partisans want it decentralized and stateless. Who/what is going to regulate its adoption and circulation to maintain stability of value and prevent FTX-like collapse?

    2. Foy

      As to your last comment, the Australian Stock Exchange spent $A250m and & 7 years of a blockchain based software development for a new exchange system only to throw it all out recently when they could not get it to work, and start again. So I’m not sure that robustness you mention exists or that the time to delivery is cut by an order of magnitude for software developments. Definitely not anything blockchain based, it does not scale adequately. Blockchain is a solution looking for a problem to solve.

  9. David in Santa Cruz

    As is so often the case the “meat” is buried in the footnotes and the Comments!

    Not my area of expertise, but it seems that “Autarkial” bi-lateral trade agreements and contracts could be made to work quite well, especially when you have a deep-water People’s Liberation Navy in the background. Finance is parasitism. Raw materials and foodstuffs have real value. Skilled labor and know-how add real value to those raw materials and foodstuffs. Money is not a thing.

    The necessary components for all those autonomous cars charged off the renewable grid that by now were supposed to be chauffeuring us down to the cannabis shop require components that the U.S. can’t source or manufacture any more. I’ve toiled in Silicon Valley for 40 years and watched all the little machine shops, fab shops, plating shops, metal shops, and casting shops disappear because they’re not “green” and the work can be done “cheaper” elsewhere. The sterile self-driving future is never going to happen outside the gated enclaves of Our Billionaire Overlords.

    What a beautiful world this will be; What a glorious time to be free…

    1. Old Sarum

      Glorious time to be free:

      I’ve always thought that Steely Dan had their tongues firmly in their cheeks when they gave us that song about the duck & cover era.


  10. kemerd

    I am not an expert on the economics/finance side of the problem but I am qualified on commenting on the IT side of it.

    It is indeed true that the banks’ systems are very old and have “interesting” issues in all levels. However, all banks have an easy way to add a new currency unless the new currency happens to use an existing code (unlikely to be the case). So, adding a new international currency would cost them exactly nothing to their systems.

    The issue of building a reliable message exchange system from scratch is more difficult but still much easier to deal with than when it is done for the first time. This is a well-known phenomenon in software engineering: that duplication of an existing system with even better characteristics costs significantly less, including very complex systems. Recent examples are Netflix’s streaming system, Google’s search engine, Twitter clones, etc. All of these systems are a lot more complex than an international financial message exchange system or a payment processing network.

    In short, I am not as pessimistic as Clive, the problem is not technical but getting the initial commitment for creation of such a system from sufficiently significant group of countries. Once it gains momentum, the rest would simply at least interface their systems with it.

    1. Yves Smith Post author

      Clive who does this for a living says absolutely not, as did others who worked at banks in 2015. The currency pricing and balances interact with tons of other systems, and introducing a new element can cause all sorts of blow ups.

      And nothing is free. The fact that you claims that calls into question your entire comment. It suggests you have little/no experience with large IT systems and are spitballing.

      You’d even need to first set standards across bank as to what the currency is to be called!

      1. kemerd

        The technical issues of underlying software are not comparable to introduction of euro as that was a change of national currencies; most systems especially older ones does not associate national currencies with a code. i.e. there are very old systems that treat monetary amounts without a unit which banks are very hesitant to touch or change. So, introduction of euro was a big undertaking because of this as they had to have two such currencies for a while and had to adjust older systems to account for it.

        On the other hand, consider how much US banks suffered when euro was introduced? This is comparable to introduction of a new supranational currency; the impact was negligible for them.

        It would also be interesting to hear the experience of new eurozone countries experience in dealing with IT problems on the first wave of enlargement: I did not pay any attention to it but I don’t remember reading about any such problems. i.e. an IT problem is once solved, doing it again takes considerably less time, even a difficult one like changing national currencies.

        Again, underlying principles of message exchange systems are well understood with all the potential issues like interaction with legacy systems and software; I believe even a new implementation from scratch would cost a lot less and can be done in a fraction of time that was required for the originals.

        BTW, I saw a comment by a guy who claims that can be done in a week or so in some of the previous threads; that is not what I say but he is right that the anything related to software systems would be a problem only specialists would pay close attention.

  11. Wukchumni

    There were around 2 billion of us when the world went to a fiat based economy only 90 years ago, and now 4x as many, unlimited money was certainly good for unlimited growth, it had taken humanity 69,909 years to get to 2 billion, whee doggies!

    We’re on a petroleum based currency now which has been practically limitless in conjuring up money out of the ground, too.

    That was always the issue with a specie based money system, there was no way to grow it other than a few tricks (issuing gold certificate banknotes in the USA-payable in gold coin) but totally insufficient in terms of how much could ever be in circulation, there were limits to how much metal was around, etc.

  12. Kouros

    Things are very complex as well as systems are sticky we get it.

    But it is likely going to be like with climate change, changes, changes, until we reach a new equilibrium.

    How much debt can the US sustain to ensure reserve status to its currency? On a longer horizon time, how long it will take (one can simulate this easily) for the US debt to grow so large that the annual interest payments will become unserviceable?

    And then the continuous political interference of the US in a country’s economy and finance, ultimately, at limit, acting as a thief (see the stealing of Afghan and Russian assets, see the threats to the Iraqi government that if they decide to request US to remove its troops from Iraq about $35 bil USD belonging to Iraq in US banks would disappear).

    The “convenience” of a reserve currency are vanishing as fast as ice is melting in Greenland. The US mightily relies on enterprises held in private ownership in various countries to push the “globalist” agenda, because global oligarchs don’t really mind using the structure created by the US for their own benefit.

    We have seen that very rich people have no interest but their own, no allegiance but their own. As such, it is only a matter of time before most of the world (which will have most of the real, actual productive capacity under its control) will decide to go for something else.

    Yes, democracy/ multipolarity is messy, and has costs. But maybe we will learn how those costs could be minimized. This is a worthwhile pursuit and I do hope humanity, in its multifaceted make-up, will decide that uniformity is not good, doesn’t create resilience and space for living and prospering for human cultures nor for life in general.

    I am thinking how long it took life, and how complicated cell biochemistry is, to evolve in the variety that humans are now destroying.

    Given this bigger picture, the squabble over the status of US dollar as a reserve currency seems trivial. Money is not ATP (maybe gold is a bit) so if we are to continue to work with fiat money, then we have to be a bit more imaginative.

    1. KD

      How much debt can the US sustain to ensure reserve status to its currency? On a longer horizon time, how long it will take (one can simulate this easily) for the US debt to grow so large that the annual interest payments will become unserviceable?

      The US doesn’t have to sell interest bearing bonds. It can just sell something with a set face value payable in 50 years. Then it can sell more in 50 years to satisfy the maturing bonds if it wants.

    2. spud

      one of the reason why bill clinton was so against democratic review of free trade, was because yes it was a open process, messy, sloppy, and lots of fighting.

      bill clinton was of course a slippery con man. that type wants quick opaque decisions, because those type of quick and efficient policies hide crimes against humanity.

      so if you want to be free, then efficiency is your enemy, and a less efficient trading system is your friend.

      the business press here just gushes over the efficient supply chains that were built up under bill clintons polices,

      i always say, efficient for whom?

  13. steven

    Oscar Wilde said it all a hundred years ago: “They know the price of everything and the value of nothing.” Convince or coerce people into believing money is wealth and you can keep creating money as debt until there is nothing left to buy. Then there is Minsky: “Anyone can create money. The problem is getting it accepted.” Not if you have 800 military bases around the world. Bilateral currency exchanges are the first drops out of the catsup bottle. The deluge will come when the world’s consumers insist on receiving ‘value’, i.e. real wealth for what they possess or produce, not more reserve currency, more ‘debt that can’t be repaid and won’t be’.

    Soddy’s “Ingredients of Wealth” provides a good guideline for value investors in today’s overheated world: ‘natural energy’ (that would be sunlight, not fossil fuels), discovery (kind of hard to do when all your talent is invested in financial engineering) and diligence (again, kind of tough when all the work is being performed half a world away).

    One would have to conclude after the lessons of the pandemic that the West’s leadership are slow learners.

  14. James

    Sorry to keep pushing Eurodollars but I really think they are a viable third option. As Milton Friedman writes in ‘The Euro-Dollar Market: Some First Principles‘:

    “Euro-dollar deposits in the post-World War II period originated with the Russians, who wanted dollar balances but recalled that their dollar holdings in the U.S. had been impounded by the Alien Property Custodian in World War II. Hence they wanted dollar claims not subject to U.S governmental control.”

    It seems to me that China and Russia have pretty much the same motivations today. I think Friedman’s paper is worth reading.

    1. Yves Smith Post author

      Huh? The object is to get out of the dollar system. Dollars traded outside the US are with banks that have their transactions ultimately backstopped by the Fed. They are either licensed in the US or have correspondent banking agreements governed by US law with US banks that are licensed in the US. So very much subject to sanctions.

      1. James

        I respectfully disagree. Eurodollars are not dollars – they are essentially securities that can be created by any bank anywhere in the world. As the Friedman quote in my comment above makes clear, they were originally created to be outside of the jurisdiction of US banks and the US Fed.

        Eurodollars are “within the dollar system” in that they allow their holders and those who lend them to bookkeep in US dollars, while being “outside the dollar system” in that they can be completely outside of the reach of the US government and institutions that it controls. Banks that offer Eurodollar banking can interact with US banks if they choose to, or they can not interact with US banks at all if they choose to go that route.

        Please feel free to check out the links in my comment above. They are not the best references (the Wikipedia page starts with “Eurodollars are U.S. dollars held in time deposit accounts in banks outside the United States” which is extremely misleading) but that page does make things clearer the further down one reads.

        1. Yves Smith Post author

          You are badly informed. Here is the Investopedia definition of Eurodollar. They are deposits, not “securities”:

          The term eurodollar refers to U.S. dollar-denominated deposits at foreign banks or at the overseas branches of American banks.

          As I indicated, any bank that holds and trades in dollars will either be licensed in the US or have a US law correspondent agreement with a US bank, and will have to go through that bank to execute trades. The system is backstopped by the Fed. Banks that deal in dollars do so only by virtue of running large intraday exposures with each other, with the assurance that they will all be settled at the end of the day assured by the Fed.

  15. J. Konrad

    IMO, comparing the Keynesian proposal/Bancor to IMF and EU constraints on national sovereignty is ridiculous. The whole point of the Keynesian approach was to enhance, not diminish, national sovereignty. Keynes for whatever reason constantly gets associated with the Bretton Woods institutions even though he was blackmailed into accepting them over his own proposals thanks to America’s dominant position as Great Britain’s creditor in the aftermath of WW2.

    Keynes supported permanent capital controls. Keynes supported import tariffs to balance trade flows. Keynes supported government control of the financial sector and called for socialized investment, and also claimed that goods/products should be primarily homespun whenever possible.

    The IMF and EU on the other hand would never be caught dead advocating for any of the above measures, because it runs against the direct interests of those running said organizations – American elites for the IMF and German elites for the EU.

    You ask why chronic deficit countries like Turkey should be penalized for their deficits. Well, the Keynesian approach would penalize not Turkey but Turkey’s creditors, to ensure that the creditors running up vast trade surpluses against countries like Turkey would have their surplus confiscated and redistributed via loans, investment, and devaluation of the Turkish currency (with corresponding appreciation of creditor nation currencies) to encourage more countries to purchase Turkish exports to help the Turks restore trade equilibrium, giving Erdogan or whoever else enough breathing room to pursue their domestic policy objectives. Compare that to today’s helplessly weak, non-International Clearing Union/Bancor backed Turkey, whose only tools to avoid an even worse IMF structural adjustment seems to be hyperinflation and getting ravaged on a daily basis by bond vigilantes.

    You ask why chronic surplus nations like China should be penalized for their surpluses by having it redistributed. Well, it’s because the onus of the responsibility lies not on the deficit countries but on the creditors, who, after having out-competed their opponents, choose to permanently enshrine their advantage by hollowing out the productive capacity of their competitor nations and forcing a vast reduction in the standard of living of the average citizen of the debtor nation, so that they never have a chance of coming back. Another example would be Germany vis a vis Greece during the Eurozone crisis. Surely, Yves, you are not so stupid as to pretend that American capitalists offshored their production to China for any other reason than besides cheaper labor costs, and likewise are not so stupid as to pretend surplus nations abusing their power like Germany in the EU to send debtors into permanent depressions are somehow a net good for the world.

    Furthermore, all the focus on who is a creditor and who is a debtor misses the point. Keynes knew that nations will never be permanent debtor or creditor nations due to constantly changing geopolitics and the ongoing march of history. America forced through the Bretton Woods system believing that they could retain hegemony and would always be a creditor nation. They are now a debtor nation surviving only by controlling the institutions (IMF, World Bank), having the most vicious military in the entire world, and having their currency be the world’s main reserve currency through other tricks like the petrodollar. It is in every creditor nation’s long-term self interest to have something like the ICU and Bancor to generate trade equilibrium, because history has proven that they cannot count on remaining a creditor forever, and inevitably, when the tables turn and they become a debtor nation, it will be them being abused and crying out for help rather than abusing others.

    The best argument against Keynes/Bancor/ICU/etc. is not that it disproportionately punishes debtor or creditor nations (it doesn’t and is in every nation’s long term interest), nor that it is a constraint on national sovereignty (on the contrary it would empower national sovereignty by curtailing the ability of investors to go on a “capital strike” against any nation proposing increased social expenditure or pursing other worthwhile domestic policy objectives), but that the capitalist elites of all nations would not tolerate it any more than they would tolerate the continued operation of an Anti-Trust agency, an Environmental Protection Agency, or any other regulatory apparatus that constrains their profits and empowers workers and citizens. Kalecki wrote a very prescient essay predicting that the capitalists would not tolerate the post-WW2 Full Employment policy for very long and would eventually seek to get rid of it, and was proven right. Likewise the only way ICU/Bancor or a Keynesian financial architecture would work is if it was being run by hardcore socialists who could be trusted not to sabotage or eventually dismantle the system (and if by whatever miracle we ever get to the point where socialists somehow run the world’s financial institutions, one might ask why we wouldn’t just opt for full on socialism rather than a compromise constantly in danger of being overturned).

    There are reports that China and Russia are thinking of moving towards a gold-backed world reserve currency, and if those reports are true then that’s just foolishness repeating Bretton Wood’s mistakes. Zhou Xiaochuan, a former Chinese central banker, once called for the establishment of an ICU/Bancor system so China does know the Keynesian method is better and perhaps will go about de-dollarization in a smarter way, but the Russian economic policymakers are genuinely stupid and still too liberal as can be evidenced by how Putin kept on Elvira “we must boost foreign investor confidence :D” Nabiullina as his central bank chairwoman right as he started a war, without even bothering to perform import substitution beforehand, so we might just end up with Bretton Woods 2.0 this time with China as the creditor nation instead of America, all prone to the same pressures and eventual failure.

    1. Yves Smith Post author

      This an aggressive straw-manning of the post, which is bad faith argumentation and a violation of house rules, even before the gratuitous insults.

      The entire point of this discussion is what if any new overarching system will come about, not the merits of any such system.

      That in turn means issue at hand is whether the countries interested in bucking the buck would implement a bancor.

      You can handwave all you want to about bancor’s merits, which I never covered and therefore did not dispute, but your comment in fact proves my point: that it requires the loss of national sovereignity. Yes, current arrangements do too, but there’s a tremendous amount of resistance to implementing sweeping new measures that out of the box require the loss of sovereignity and one is not sure about fine print implementation details (which may be done in a not-even-handed manner to boot) versus living with a system you know, have optimized many systems and practices around, and (in the majority of cases) think you can handle.

      From your text:

      …surplus confiscated and redistributed via loans, investment, and devaluation of the [trade deficit] currency (with corresponding appreciation of creditor nation currencies) to encourage more countries to purchase [trade deficit country] exports to help restore trade equilibrium.

      Why should China, the biggest economy in the world and a linchpin player in any new order, agree to give up their trade surpluses, which they see as necessary to preserve social cohesion and the legitimacy of their regime? China sees its trade surpluses as the result of hard work and prudent investment.

      Similarly, the action that earned Russia the most sympathy in the rest of the world was the Collective West seizing its foreign currency reserves. Yet the bancor mechanism does that to trade surplus countries. Why should countries in that position agree to that prospect?

      Moreover, this regime preserves the bad assumption that also applies in IMF programs, that devaluing a currency will restore competitiveness. That is often not the case. Philip Pilkington wrote long form as to how we’ve already seen that movie in the UK and it didn’t work. Similarly, a secondary reason for our skepticism about the idea of having Greece leave the eurozone was that its export mix would not benefit enough from a cheaper currency to offset the damage done by higher costs of key imports, particularly food and fuel.

      And conversely, pray tell how can China become more of an autarky? It is structurally dependent on food and fuel imports. The ability for countries become markedly more self-sufficient is limited once you get past Russia.

      Moreover, countries are not subject to the tender ministrations of the IMF unless they allow them in, while they will have to accept bancor rules from the get go. Malaysia didn’t during the Asian financial crisis. Countries can believe it won’t happen to them, and for most it does not, but all have to agree to participate in a bancor bloc if that were to happen, and accept its stricture.

      As to your capital strike claim, your “capital strike” is an uninformed anti-globalist trope. The most destructive force for developing countries is not your implicit claim of malign targeting but malign neglect. The Fed’s indifference to the impact of its interest rate policies, as in hot interest rate inflows and outflow, is devastating;

      On top of that, for currency issuers that don’t run persistent large deficits, outside investors can’t push them around. And even with Japan, which has been running deficits for decades, it took Covid + sanctions blowback to finally generate some inflation and serious weakening of the currency. Sweden’s retreat from “Swedish” policies was due to an ideological shift to neoliberalism, not any investor thuggery. Ditto Australia.

      Similarly, the petrodollar is a myth, as we have explained at length in earlier posts. Oil being priced in dollars is a reflection of the dominance of the dollar and dollar institutions, and not a cause.

      BTW you are also engaging in precisely the behavior I described at the top of the post with the 2015 Greek bailout: choosing to treat analysis as advocacy and shooting the messenger because you don’t like what a neutral analysis finds.

  16. Christian

    I’d like to give my 2c:

    I work in South Africa for a large financial institution doing investments.
    Some investmenst are done in the rest of Africa, mainly in dollars (some starting to be done in euros).

    As I see/understand it (and this is from a distance) the only reason that USD are used is to ensure that hedging instruments are available (the institution I work for is not interested in any exchange rate risk). If there was a ready market or interest rate swaps/ cross currency swaps/FX futures and forwards in the local currencies (and liquidity!) then the USD and EUR would not be needed.


Comments are closed.