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.