Dethroning the Dollar: Why the Alternatives Are Not Ready for Prime Time

Between the idea
And the reality
Between the motion
And the act
Falls the Shadow

The Hollow Men, T.S. Eliot

We’re going to again make ourselves unpopular with our stance on the future of the dollar, just as we did during the 2015 Greece bailout crisis. Then we were virtually alone in predicting that the negotiations would fail and that the plucky Greeks had no leverage against the Troika (the ECB, IMF, and European Union), meaning they’d have to accept the so-called IMF “memorandum”. In fact, the outcome was worse than anyone, even our site, predicted.

In the end, after Greece rejected a debt refinancing with an end-of-June drop-dead date, the ECB withdrew key support for the Greek banking system, putting it into crisis. Food, fuel and pharmaceutical shortages were starting when Greece accepted a worse deal than the one on offer in February.

Saying Greece would not prevail infuriated those who thought that more IMF “reforms” would do more damage and what Greece needed was debt writedown. We agreed that the Troika was administering bad economic medicine. But that had nothing to do with who would get their way.

What the Greece advocates reflexively rejected was that Greece had no way out of its debt yoke. Their fantasy was that Greece could exit the Euro, repudiate or at least denominae a lot of its debt, and gain competitive advantage by devaluing its currency.

That was a non-starter. Even at first pass, if I recall correctly, on the order 70% had been restructured and converted, so it was no longer governed by Greek law. So even if Greece could have launched its own currency, it would not have been able to redenominate or restructure its debt. And the non-Greek law debt would become more costly to service when the new drachma traded lower than old Euro-equivalent values.

An even bigger impediment was launching a new currency. Merely designing, printing and distributing new cash would take over a year. Even before getting to the bank IT issues, ATMs would need substantial overhauls either to handle a new currency or euros and the new currency.

And on the IT side, banks and payments processors would need to code for a new currency and also write routines for conversion into major currencies. And this isn’t just banks in Greece. This is all major international banks, currency traders, and payments processors. They don’t have any reason to hurry because Greece. Our IT experts said the coding would take at a minimum three years, and given how most bank IT projects roll, five to seven was more realistic. In the meantime, already desperate Greece would suffer massive capital flight if it announced it was exiting the Euro but was not able to make an immediate changeover.

That’s the 50,000 foot version. We spelled it out in much gorier detail over many posts.

Back to the dollar. It’s ironic that many of the anti-globalist and/or pro-Russians commentator pride themselves as being realists in their analyses of the war in Ukraine, with their discussions of the merits of particular items of Soviet v. Western weapons, ammunition consumption, logistics, recruitment and training. Yet they stay at the handwave level when it comes to the operations of banking and finance, despite the astonishing accomplishment of banks and payments processors delivering accurate statements of account, month in, month out, picking your transactions out of a flow of billions a day.

Yes, the dollar hegemony is past its sell-by date. The US acts as there is no risk of the dollar era ending, as witness its remarkable grab of hundreds of billions of Russian central bank assets (the actual number is now believed to be less, a lot of money looks to have slipped away). However, the fact that the countries outside the collective West would very much like to reduce the role of the dollar in international trade, investments, and financing does not mean it will happen any time soon.

First, let’s think at a high level about successor regimes. There are, broadly speaking, two ways this could go. One is that an existing currency could displace the dollar. We’ve seen that movie, with the dollar assuming the role of pound sterling. It took two World Wars and a Great Depression for that transition to take place. The second is to form some sort of new, non-national currency (some have suggested SDRs as a starting point).

As we’ll explain, for any non-national currency to be anything more than an intermittently-used gimmick, it will wind up impinging on the sovereignity of the states that participate. Is anyone willing to bet Eurozone 2.0 will be that much of a improvement on the original?

Back to the first option. A successor reserve currency would need to have a large enough economy with capital markets open to foreign investors with perceived-to-be-fair trading markets and well-regulated institutions. Foreigners who wind up holding the reserve currency will be subject to its rule of law of the reserve currency country, such as it is. Even if they simply keep it in cash at a bank in their country, it will need either to have a banking license in the reserve currency country or be a correspondent with one of its banks. And that correspondent agreement will be subject to reserve currency country law. If the foreign party would rather hold securities, the foreign party again has to be mindful of the integrity of securities regulation and the oversight of brokers and exchanges.

Ironically, the US model of highly efficient markets with investors having extremely weak governance rights helped support the US as reserve currency. The US could tolerate having foreign investors in public US companies so long as they did not buy a stake in a perceived-to-be-important player big enough to give a foreign owner influence. The US does meddle if that looks likely to happen.

The Euro was once seen as a potential competitor to the dollar, but its protracted post Global Financial Crisis banking/sovereign debt crisis, which was never fully resolved, put paid to that idea.

The Chinese renminbi is the logical successor to the dollar, but China does not seem willing to take the steps to have that happen. In the post-Bretton Woods regime, a country wanting to have its currency serve as a vehicle for transactions outside the country (as in independent of bi-lateral transactions with the country) needs to get in circulation outside its borders. That means running trade deficits. No way, no how is China willing to do that, since a trade deficit1 is tantamount to exporting jobs. Wage growth and high levels of employment are imperative to the legitimacy of the regime.

China would also need open capital markets, transparent regulation, credible measures to prevent bad practices like front running and insider trading, and at least a reasonable prospect that foreign investors who got into disputes with their bank or broker would be treated not much worse than locals when seeking recourse (as in officials and courts need to realize that giving foreigners too much of the short shrift is bad for business). But China has leaky capital controls for domestic investors and its less than fully open capital markets helped dampen capital flight when the dollar spiked after the Ukraine war started (admittedly the renminbi is also viewed more favorably than in the last capital flight episode in 2015-2017, when China had to intervene heavily to defend its currency.

But but but…you might say…China is going to create a petro yuan!

Really? They’ve been trying and have gotten nowhere. Yes, they might now make big bi-lateral trades with Russia and Saudi Arabia, so each wind up holding renminbi as a result of making big purchases from state-affiliated companies. Those big bi-lateral transactions do not suddenly turn the renminbi into a reserve currency.

The logic of this 2018 Forbes article, Why The Petro-Dollar Is A Myth, And The Petro-Yuan Mere Fantasy still holds. Key sections:

China’s recent introduction of yuan-denominated oil futures has attracted some fairly extensive press commentary….It is widely thought, for example, that oil somehow underwrites the global financial system and guarantees the U.S. dollar’s hegemonic status.

Let’s stop right there. Did you even know there were yuan oil futures? That means for the last four+ years, oil has been priced in yuan! In practice, has this made an iota of difference? No!

Back to the article:

But we should be clear: the Petro-dollar does not exist, and really hasn’t done in any meaningful way since the 1970s,2 therefore the “Petro-yuan” has no future. This is not to say that oil will never be traded in yuan, that is likely, but it is to say that trading oil in yuan will not suddenly transform the currency into the global reserve many claim is inevitable…

Since the 1980s, the dollar has been consolidated as the global reserve currency because of the strength and dynamism of the U.S. economy, and oil exporters have demanded to be paid in U.S. dollars because that’s the currency they prefer to hold on to. To do otherwise is to take on exchange risk. Exporters can, and routinely do, accept payment in whatever exchange medium they wish — tanks, planes and construction services — but their central banks demand dollars for reasons entirely unconnected to oil. Because the U.S. dollar is a hard currency, easily exchangeable, underwritten by the U.S. taxpayer, and founded upon decades of broadly consistent macro-economic policy management….

One can imagine another currency challenging it at some point in the future, but only on the basis of the openness of its underlying economy, and the depth of the capital markets denominated in it. And if the euro can’t do it yet, why does anyone imagine the yuan is up to the job?

Confirming that the receptivity to the use of the renminbi as a foundational currency is not remotely proportionate to the importance of the Chinese economy, in 2018, the renminbi represented only 1.1% of foreign exchange reserves held globally. China was trumpeting that its use had spiked by the end of 2021…to 2.79%. That still rounds to zero. If we see continued strong increase as a result of the US sanctions against Russia, then there might be reason to think the rise of the renminbi might be more than a glimmer in China’s and anti-globalists’ eyes. But the worries in China in early 2022 about capital flight suggests otherwise. Wake me when it happens.

The bad behavior of the US government in going sanctions-crazy against Russia, and its current inflation mess, as many can see clearly, has greatly increased the motivation to move away from the dollar. But despite its now many warts, it’s gone way up in value, reaffirming its attractiveness as a perceived safe haven currency for many users. So the dollar is still the winner in the beauty contest between Cinderella’s ugly sisters.

But what about some sort of joint currency? Please tell me how this does not wind up being Son of Euro.

The reason the dollar system works is that its payment systems players all connect, via agreements under US law, to US regulated institutions, with the intra-day payments that get closed out at the end of the day backstopped by the Fed.

For the Euro to have been created, you first had countries who had agreed to have the European Court of Justice be the final adjudicator. States agreed to fund solely in the Euro, which made them subordinate to the Eurozone since they could no longer issue their own national currencies.

That amounts to a big loss of national sovereignity. Pray tell, how do they go about setting up a new legal/regulatory regime to oversee the operation of this new currency regime and settle disputes? Remember, it would have to take precedence over national law with respect to dealings that involve regulated financial institutions in the new currency system. That seems to run afoul of the key aims of the new “fair world order” multipolarity project.

One might argue for having the new joint currency sit alongside national currencies. Ask Argentina or Russia circa 1998 or any country that was substantially dollarized how that works. If the new currency becomes well accepted, it may become preferred by locals to your currency, risking destabilizing capital flight at the worst moments. It could also become preferred for commercial and retail borrowing, again with the high odds of eventually producing a financial crisis when the home currency falls against the joint currency.

So the most likely outcome is we have to wait either for a monster dollar crisis,3 which BTW does not mean any successor regime will be ready for prime time, or for China to be willing to accept the cost of having at least a somewhat financialized economy (reasonably deep and active trading markets). I don’t see that happening soon.

We’ll turn to operational issues tomorrow.


1 Technically, it’s the current account deficit determines if and how much currency a country sends abroad. But trade and services are the largest component of the current account. Turning the mike over to Investopedia, “It is, in fact, possible for a nation to have a current account deficit when it does not have a trade deficit, but that is highly unusual.”

2 The article’s recap of 1970s deal is not accurate. The US was concerned about US purchases of Saudi oil and did not have the Saudis impose requirements on other countries. Because the riyal did not have any meaningful float outside the Kingdom, it would wind up initially holding dollars as a result of US oil buys (even if the US had to go through the form of acquiring riyals to tender, it could get enough only through the Saudi central bank, either directly or an in-country bank, and the result would be dollars in the Saudi banking system and oil to the US). The US worry was the Saudis might dump dollars and buy investments in other countries, further weakening the dollar and intensifying the energy and inflation crises.

3 China finally having its long-anticipated big blowup is possible too. No major economy has gone from being export/investment led to consumption-driven without having a major financial crisis. With either a big US or Chinese implosion, the next phase is likely to be a Depression-level collapse in trade and scramble to fix/regulate key institutions. The immediate focus would be domestic, to preserve savings and growth. So any concerted effort to implement a new international system would be likely to go on the back burner.

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  1. Lex

    Like war with Iran, the end of dollar hegemony is always right around the corner. I don’t understand economics enough to comment at a high level (one of the reasons I appreciate NC so much is that it helps improve that understanding). That said, I guess I would expect a slow transition that’s less replacement than parallel. More trade in local currencies between nations. Both Russia and China seem to be on board with that. The end effect being not to replace the dollar but do as much outside as possible.

    Perhaps that’s smart? The erosion of dollar power is likely to come from using it as a weapon too aggressively. Is the recent rise in dollar value because of something intrinsic or at the expense of say the Euro? How stable is the US at a macro economic level? The rising dollar and rising interest rates creates some potential global economic crises related to nation level debt, right? Possibly good for the US, unless poor countries simply can’t pay and don’t.

    I’ve got a lot more questions! But I’ll refrain. For now I’m holding to my first sentence and trying to more fully understand.

    1. Yves Smith Post author

      I may not have made a key point clearly enough here, although I have mentioned it in earlier posts (the perils of blogging, one addresses bits at a time rather than writing a grand and potentially patience-taxing Integrated Theory of the Case and therefore unduly expects readers to follow the plot).

      There can and pretty certainly will be a ton more trading outside the dollar, as in bilateral trades (China paying Russia for oil and gas in renminbi).

      But in particular, Russia as the big commodity player in a world of resource scarcity is likely to wind up holding a lot of other currencies. If it’s also not allowed to hold big stakes in local companies, it is at the mercy of the other countries’ economic policies and Shit Happens (earthquakes! typhoons! nasty bad volcano eruptions! destabilizing regime change) as to what all of these currency balances (beyond what Russia can spend in the other country to minimize its holdings) are worth. The surplus country does not want to wind up holding chits that devalue too much over time.

      Now with China specifically, there may be tech for Russia to buy, and perhaps also consumer good (car parts!), but China does not want to sell its best stuff nor does Russia want to become technologically dependent on China. But there’s a lot of more mid level tech like cell phones and telecom infrastructure that may not be as sensitive.

      Russia may also be willing to run a big surplus with Turkiye despite high odds of the lira depreciating big time because having Turkiye be beholden, to the extent Erdogan can admit to that. But what about a surplus with India? Brazil? South Africa? Russia gains leverage up to a point but what is the point of maximum advantage? And of course if there is a big global recession, commodities crash and Russia is not in as good a position. Russia is also moving up the value added chain big time in the arms business but I don’t have any idea how important those sales are or might be v. commodities.

      Shorter: a lot of non-dollar business will be done but it will be messy and much will be bespoke. I don’t see a new grand system to rival the dollar regime coming into being any time soon. But Lilliputs with persistent effort can tie down Gulliver (I do not mean the players are Lilliputs but they are presently constrained as to the boldness of what they can do near and perhaps intermediate term).

      1. Lex

        Thank you, Yves. Multipolarity will be somewhat messy on all levels. I certainly agree that there will be no grand unified system to replace the dollar. 20 years ago I was prone to believing it could happen, but it’s been 20 years and none of those predictions I was willing to believe have come true.

      2. Kouros

        All this leads one to think that the US will try to do more destabilization of other (third parties) countries’ economies to hit at the surplus economies seen as enemies…

      3. Jay

        Shorter: a lot of non-dollar business will be done but it will be messy and much will be bespoke.

        If this happens enough, won’t people look for some way to simplify it? Maybe a pseudo currency backed by a basket of commodities? Oil is too bulky and the price isn’t stable enough, but perhaps some sort of hybrid of precious metals might work. Eg Switzerland holds rhodium for China and Russia, the Chinese order Russian oil and some rhodium gets transferred to the Russians? And then if you replace rhodium with a mixture – an accounting one not an actual one – of rhodium, platinum, and gold, you might smooth out jumps in individual commodity prices?

        1. NotTimothyGeithner

          Yes, but Switzerland, China, Russia are the ones swapping in these scenarios. How does Yuri buy/sell Toyotas for his dealership is one of the twin values of the dollar? The Nguyan brothers want to import Turkish rugs. How do they do this? The dollar will always be taken in one hemisphere where the US can be a one stop show for every need.

          The Euro has done well, but its connected to European industrial output, not the one stop shopping venue of the US.

          The reason the dollar system works is that its payment systems players all connect, via agreements under US law, to US regulated institutions, with the intra-day payments that get closed out at the end of the day backstopped by the Fed.

          Yuri, Juan, Vinh, and so forth can run their businesses via dollars. The Manifest Destiny stuff in the US wasn’t just unhinged genocide. The point was to run a continent where the dollar always had value even if there was no international trade, and as for international commerce, they had to play by certain rules. The Pound was everywhere but the US, so much so, the Canadians had to match the US currency and drive on the right side of the road during decades when the Sun never set on the British Empire.

        2. digi_owl

          Keynes’ old bancor suggestion?

          That said, the IMF operates with something called Special Drawing Rights that some, China in particular, has suggested turned into such.

          1. spud

            i never thought the bancor could work. just another currency that could be manipulated.

            tear up all of the free trade agreements, reindustrialize, reform your agriculture sector to feed yourself, capital controls, work towards some sort of currency exchange system between countries, with no outside third party meddling, buy what you must, sell what you can.

            use the currency of the other side of the trade right away if you can.

            i am sure india has some things in large volumes that russia needs, vice a versa.

            so you do not need to hold the currency for very long.

            maybe work, maybe not, maybe needs tweaking, who knows. we are in uncharted times.

            other wise to do nothing means the fascists win.

        3. Yves Smith Post author

          This is still the Euro problem. You still need a legal regime that everyone submits to to set procedures and settle disputes. And look now how no one can get their gold from the US, point to the problems re custody.

          And the gold standard is widely accepted as a bad idea. Deflationary and participants cheated anyhow (revalued v. gold).

      4. Stephen

        I think that is right. I posted the below in response to a comment about oil prices that the west’s test of its monopoly power on oil insurance and trading is similar to the way that the dollar monopoly is being tested by sanctions and asset seizures.

        Agree fully that the dollar status is far more sticky.

        However, if Russia and China end up being driven into a mutual autarky that does not trade / exchange assets with the U.S. / dollar world then that could be a way that the dollar might start to unravel as global reserve currency.

        However, I fully agree with Yves that this will not happen tomorrow, or even ever. But Cold War 2.0 changing the fundamentals of trade flows and the dynamics of cross country asset holdings would be a way that this might happen. Not just playing around with the currencies used for existing trade flows, which ultimately just get converted back to dollars if that is what sellers want to hold.

        And a Russia / China autarky would still need any deficits to be financed via holdings of a reserve currency of some form. Which takes us back to square one.

        I guess we need to see what Cold War 2.0 really brings from a structural perspective. So far, my autarky example is more extreme than seems to be on the cards. But one could see the Dollar World gradually shrinking over time, depending on the decisions that now get made. As you say, unlikely to be a new all singing replacement system but a mosaic of arrangements nipping at the heels of the dollar.

      5. Jams O'Donnell

        How secure and well-founded is the US economy? We all know that much US infrastructure is weak, wobbling and sometimes crashing. Similarly, education and public health for the 90-odd% is very poor. The armed forces are finding it difficult to recruit enough fit and healthy educated young people. Industry consists of a few key items such as chips (10% of the market?) and the weapons supply chain. Even that, although very(!) profitable, turns out second rate machines – ultra sophisticated but ultra fragile. Politically the culture is split between two twins who hate each other deeply, and who are composed in many cases of people who have had no meaningful job experience. I’m not saying it’s going to collapse overnight, but, how long can this hold up? Or am I completely wrong?

        1. Tet Vet

          “America will never be destroyed from the outside. If we lose our freedoms it will be because we have destroyed ourselves from within” – Abraham Lincoln.

          I agree with you that it is important to also consider internal factors that may hasten this process

          1. jsn

            Debt limit coming up!

            Let’s default to “Let’s go Brandon” and see what that does for dollar demand.

            It’s the stupidest thing I can think of, so I expect it.

      6. Stefan Demetz

        Many arguments are true, especially about size of liquid financial market, but the USD has a highly synthetic value with QE, unlimited debt, everything leveraged and derivatives. So what is overly blown up, gets deflated eventually.
        There are several signs the dollar demise could be sooner:
        – Central Banks around the world are starting to have huge losses; Japan 212 bn, Switzerland 140 bn, BoE 70 bn. FED is carrying up to 15% paper loses on 8.6 trillion of assets.
        – MENA oil states are shifting their surplus to home and Asia, instead of putting them into Western financial markets
        – Commodity exchanges are moving East: Moscow will start a new commodity exchange within 2 months, where no paper trades can be done, one real trades with delivery, and NO dollars or euros allowed
        – Russia is winning the war in Ukraine against NATO
        – Countries are rushing to create CBDCs to replace their currencies

        Countries outside the West have themselves no interest in blowing up the dollar quickly, as I could create huge instability, including wars. But the demolition will need to be controlled and slow enough for them to get away as painless as possible.
        Still, its coming, nobody knows how long it’ll take.

        1. Yves Smith Post author

          Central banks do not have to have positive equity:

          Central banks may operate perfectly well without capital as conventionally defined. A large negative net worth, however, is likely to compromise central bank independence and interfere with its ability to attain policy objectives.

          A commodities exchange where you can’t do “paper trades” as in hedge, is close to useless. Commercial users on a widespread basis, from airlines to farmers, put on trades that are not connected to an intent to take or deliver the physical commodity to hedge their business risks.

          CBDCs have no impact on the use of a currency in trade. They are meant to increase surveillance of their populations and prevent tax evasion. See Nick Corbishley’s extensive writings on this topic.

      7. Skip Intro

        As you demonstrate, a “new grand system to rival the dollar regime” is unlikely in the extreme. I think we can look at blows (many self inflicted) to USD hegemony as blows to globalism itself. If exporters won’t hold lots of shaky currency, and they can’t use dollars, then the world resource markets will have to contract, and the efficiency of global trade will be disrupted. If Russia can’t own a reserve currency or import enough value to compensate their exports, then they will presumably move more towards autarky, and reduce exports. Without massive import dependencies, their needs for a large resource export economy seem limited.

    2. Paul Damascene

      Yves, I had the impression you were setting this up to discuss a second set of options–for not having a world reserve currency at all, but rather a BRICS-type facility for currency swaps and transactions in national currencies. Wouldn’t dispense with USD but greatly reduce demand (price?) for it, and more importantly permit a full range of transactions out of the reach of the US Treasury surveillance / sanctions regimes.

      1. Yves Smith Post author

        You are assuming can opener.

        Only the central bank that issues a currency can ultimately provide a currency swap. No country is going to cede central bank powers to a third entity. The only alternative is the one I mentioned before, creating a new currency, which results in enormous loss of national sovereignity (per the Euro).

        1. Debi

          I don’t understand this point. A currency swap involves two currencies so two central banks, but you talk of only one . Which one? Why can’t either bank do the swap if they either hold the other currency, or want to?

          1. Yves Smith Post author

            Help me. One party to the swap provides currency that the other bank wants. Only the US can provide dollars as the fait currency issuer. You are thinking of routine currency trading, not in the sizes needed in the case of central bank interventions.

            The US extended massive dollar swap line to the ECB, Bank of England, National Bank of Switzerland, and Bank of Japan. The banks in their banking system needed dollars because they could not roll over dollar loans to fund the (now crap) dollar assets they held. The only way to get dollar to them was for the US to provide dollars via currency swap lines to the central banks and then those central banks could “lend” dollars to the banks they supervise via extending say a Euro loan with the dollar swap provided by the Fed. This became very controversial during the crisis because the US was taking the currency risk that when the currency swap was unwound, the terms of trade would have changed (as in the FX rate between the currencies would have changed) yet the Fed did not take interest or other compensation. Remember that central banks ARE supposed to be paid for bailouts. The Bagehot rule is “Lend freely, against good collateral, at a penalty rate.” The penalty rate idea went out the window in the crisis, even to the extent of trying to fully or partly recoup any costs incurred by the Fed in extending the currency swap.

            Similarly, even for mundane currency transactions, only a bank that can trade dollars can do the dollar side of a swap. That ultimately entails getting it from the Fed, either by being a US licensed entity or a having a US law-governed correspondent bank relationship with a US licensed entity.

            1. Debi

              I see, your earlier comment refers only to a swap where one party requires USD. l was referring to swaps not involving USD.

              As Paul said, in a (probably greatly enlarged) BRICS+ the number of such swaps may be the vast majority. So I don’t see how you have answered his point.

  2. SeventyTwoTrillion

    While I remain hopeful for some alternative to the dollar, I can’t really argue against your conclusions.

    Is it impossible to implement a system in which there’s no reserve currency and every country just trades with each other in their own national currencies? Or is there simply an unshakeable tendency towards the establishment of a single currency being used for everything in the current system?

    And what do you (and others here) make the efforts by BRICS and others to create currency alternatives? E.g. this Multipolarista article from a week ago, “Latin America’s plan to challenge US dollar with new currency and ‘regional financial architecture’”? Just words that show the desperation of countries to be free from the dollar without actual concrete proposals or something more?

    1. Yves Smith Post author

      I hope I somewhat addressed your questions, which are valid, in the long comment above. There will be accelerating movement away from the dollar outside the Collective West. But I don’t see a grand new competitor system coming into being any time soon.

      1. Wukchumni

        Devil’s Own Advocate:

        When our collapse comes it’ll be at a quickened pace, their collapse was before the internet, think of how fast everything moves now compared to back in the USSR.

        Consider the worldwide financial panic to ensue as for all the reasons you’ve stated, none of them would work as a reserve currency to replace the dearly departed formerly almighty buck.

        Not that it would stop them from trying, with dismal results.

        Meanwhile, world trade drops to a trickle, with gang green gone, the glue that held it altogether since Bretton Woods.

        Sooner or later everyone sits down to a banquet of consequences.

        Robert Lewis Stevenson

      2. ChrisPacific

        I was going to ask this as well: could there be a third option in which dollar hegemony collapses without any replacement at all? You’ve described how it would work, with balkanized financial systems in currency silos and messy currency surpluses that require management.

        It would obviously be massively less efficient than what we have now, which would flow through to pretty much everything on the planet that touches the financial system, but I do feel like it’s still a possibility if the US either abuses its position sufficiently or ceases being regarded as a safe haven in currency terms.

        1. John k

          As somebody said, creating a currency is easy, the problem is getting others to accept it.
          Monopoly* games start with all players getting a certain amount of money. If row did this, the big exporters would end up with all the money. The game can continue only if trade is balanced. Perhaps countries could gain export credits by importing, and import credits by exporting, something that would force all countries into balance.
          *. The odd thing about monopoly is the ‘bank’. It doesn’t make loans, it bequests to all a large amount of money at ‘birth’, it does pay salaries, and it owns a large amount of real assets that are sold for fixed prices rather than market prices. A better name for this entity might be ‘gov’, and a benevolent one at that.

  3. Thuto

    While the contours to a post dollar world are certainly not in view, and the obstacles between there and here are multifold and enormous as per the post, I believe the march towards it is nevertheless inexorable (could the replacement be parallel systems instead of one grand currency replacing the USD? I can’t crystal ball gaze on this one unfortunately). The pace of transition will be stymied by the technical and non-technical challenges outlined in the post, but US abuse of the system, which I expect to increase as its hegemony is increasingly challenged, will push the inmates of the dollar’s reserve currency status to their “give me liberty or give me death” moment. How long this takes is anybody’s guess really, the transition may be glacial for a long time then suddenly switch to lightspeed.

  4. FlyoverBoy

    Gold funds as hedge against de-dollarization: good or bad investment idea? This article seems to imply they’re less useful than previous commentaries in this space did.

    1. Louis Fyne

      (lately) Gold is more (inversely) correlated with the direction of real interest rates.

      If one is *really* worried about de-dollarization, hydrocarbons/hydrocarbon companies are a better hedge given oil’s inelastic demand (barring oil hitting $200).

      IMO, making investment decisions based on “de-dollarization” is “Waiting for Godot” or being a prepper waiting for the next 9.5 LA earthquake. And there is a cottage industry of grifters who feed off the de-dollarization ecosystem peddling their “advice.”

      Make investment decisions on net present value of cash flow. Or just be an index investor and cross-fingers that the next 30 years will be like the past 30 years…low inflation, calm geopolitics, low interest rates (which obviously is a big assumption).

    2. Alan Roxdale

      I don’t think there is a replacement reserve currency to the dollar. I think the main reason the dollar and pund before it were reserve currencies was due in large part to the guarantee that your money was safe in London/NY banks. No matter how many millions you starved, or hundreds you beheaded, or thousands of industries you looted, your money was sacrosanct and only a court case could remove it from your possession. Your account had no smell. All that is gone now.

      There’s no replacement reserve currency now. Nowhere your money can be trusted long term. Deposits anywhere — Switzerland included — can now develop smells at any time and are subject to confiscation and reallocation. #OligarchyWorldProblems yes, but like it or not their deposits were a large part of what made the reserve currencies tick.

      Again, I don’t think we will have reserve currencies anymore. I expect what this will mean is every more complex and diversified webs of portfolio management, among oligarchs and tycoons alike. I have no idea where it ends, but don’t expect a dollar to buy a nickel’s worth abroad in 10 years or so.

  5. Will

    The other comments and Yves’ helpful responses I think makes clear that the debate needs to be reframed. Namely, that instead of talking about what will be the next global reserve currency, it would be more fruitful to ask what a multipolar world will look like. Or at least a bipolar* world since the US is actively working to end its global hegemony by cutting off large parts of the globe from the dollar system.

    Perhaps most fascinating will be to watch the high-wire act of intermediary states (Turkey? India?) that try to keep a foot in both worlds and profit as they can from inter-system exchange across their borders. Then again, I may be projecting too straight a line into a future where no neutrals are allowed.

    * bipolar is probably not the right world but I leave it to polisci/IR experts to correct my terminology.

    1. John k

      Imo turkey and India will have to choose. Seems likely turkey will pick the east, India will be torn between west and east. However, seems to me Africa and Persian gulf are going east, India would be isolated if they went west… and they see how us is treating eu. If they reflect on Kissinger’s thought regarding us partners, the decision is easy. It might help if China resolves the border disputes with India as Russia did with china a few years ado.
      Russia resolving the Ukraine in its favor (if they do)might affect both turkey’s and India’s decision.

  6. Mikel

    “…No way, no how is China willing to do that, since a trade deficit is tantamount to exporting jobs. Wage growth and high levels of employment are imperative to the legitimacy of the regime….”

    Indeed. China has too many revolutions in recent history and memory. They have to tread carefully.

    1. John k

      The us has an enormous deficit and basically full employment, granted fed is trying to change that.
      China could have full employment with no trade surplus if they consumed what they make, but they prefer to consume less and save for old age. To change this China might tax exports and use that revenue to fund worker retirement and Medicare, encouraging workers to consume more/save less. China might like the current trade surplus which allows them to make belt/road investments, however imo it is likely they will eventually move in this direction.

  7. Fer

    What’s the meaning of the word “reserve” in a currency reserve? It is something akin as having some kind of certainty than in future you can use this currency to buy anything you need or pay your debts. And I think that after the demise of Bretton Woods system, the US deindustrialisation and the not very big success of the US military adventures in the last decades, having dollars as a reserve gives now no other real guarantee to serve to buy other things in future than dollar denominated assets in a sort of Ponzi scheme. Without an anchor in gold, real goods or sheer military force that can be used to impose or back its use in trade and finance, any international financial system based in a national paper money is inherently inestable because mere confidence is prone to catastrophic (in the mathematical sense) changes. So I am not so sure on the dollar prospect even in medium term

    1. Robert Hahl

      “Reserve” seems like PR during high inflation, since no currency is really safe. Yes, you need some ready money for daily needs but if you have more than that, put it into something tangible. Even countries must do this (see: BRI).

      But the dollar will certainly continue in a big way for the following reason: whiskey’s for drinkin, water’s for fightin, dollar’s for speculatin.

  8. Michael Hudson

    Given the problems that Yves points out in holding other national currencies as an international reserve currency, the line of least resistance would seem to be gold. It worked until 1971. It is already a component of many countries’ monetary reserves. And it’s something that all countries once agreed on as being an asset without a liability in the form of a financial claim on (= loan to) another country.
    That in fact seems to be the path that Russia and China are taking in part, building up their gold reserves as a cosmopolitan non-nationalist asset.

    1. David in Santa Cruz

      This is my lay-person’s reaction as well. As I understood the world, reserves weren’t much held as currency prior to the 1970’s. Reserves were held in commodities, in particular gold. I still vividly recall watching the heist-caper The Italian Job back in 1969, when it was an accepted plot device that the Chinese would fly an airplane full of gold bars to Turin in order to pay for a Fiat factory.

      Today “trade” is in commodities and foodstuffs exchanged for manufactured goods (labor). With a global population of 8 billion straining the commodities/foodstuffs end of the equation, we may be returning to an era in which a “reserve currency” is superfluous.

      Above my education and pay-grade, but I suspect that this is what the “multilateral” world might look like.

    2. John k

      I wonder what price gold would be to fund international trade… 10k/oz? Higher? Such high prices would get humans to digging up the planed, using large amounts of energy to do so. Seems a poor permanent solution.
      Perhaps China;s recent 300ton purchase is more a hedge, maybe mostly on account of reluctance to hold $ while running out of belt/road investments? And I read they mostly got it from Russia, perhaps Russia has a current use for $ on account of the war? If my quick calc is correct, it’s just $20B, lelatively modest for these guys.

      1. Yves Smith Post author

        You still need a legal regime and gold is deflationary.

        And under the gold standard, private ownership of gold as an investment asset was illegal, at least in the US and likely other countries.

        1. Keith Newman

          Gold being deflationary: when I took a monetary economics course with Marc Lavoie 15 years ago I believe he indicated the gold standard could work if bonds are freely issued as needed AND no-one asks to convert their currency holdings into gold bullion. I think economic expansion in the West in the 1950s was based on that. I’m afraid I don’t remember much else about it any more and what I do might not be entirely correct. I should note that Marc was not a fan of the gold standard by any means.
          In light of the disadvantages of holding US dollars for many countries and wealthy individuals it could be interesting to find out from an honest specialist what would be needed to get the gold standard to work in today’s world, if it’s even possible.
          Legality of holding gold bullion as an asset: definitely legal in Canada and France in the 1960s and later years. Probably legal earlier too but not 100% sure.

        2. David in Santa Cruz

          You still need a legal regime

          How about calling it the Rules-Based International Order?

          Just ask the Cubans, the Venezuelans, the Afghanis, or the Russians how that’s working out. Because you can always trust Americans to Do the Right Thing. For themselves. S/he who Rules, gives the Orders.

          I’m of a mind that the CPC’s Zero-Covid line is about throttling-back on being forced to hold reserves by dialing-back production in a way that the masses can be convinced is their patriotic duty. Then they can re-jigger their trade profile toward a system of multi-polar barter with commodity producers in exchange for manufactured goods such as phones, cars, and electrical grids. The only question will be whether BRICS+ can agree to a dispute resolution regime.

        3. Wukchumni

          And under the gold standard, private ownership of gold as an investment asset was illegal, at least in the US and likely other countries.

          The only other place private ownership was verboten was all of the Communist countries, back in the day.

          Private ownership in the USA was a little tricky in that you couldn’t own it in bar or ingot form, but ownership was perfectly ok in pre-1933 dated coins of any country, as coin collectors made a push for US coins to be allowed in the late 30’s, and the law was codified. Ownership of gold jewelry in the USA was legal as well. All of this became a moot point on January 1, 1975 when you could own anything you’d like, be it a jewel encrusted 18k swizzle stick or 400 oz bar.

          Its worth noting that there aren’t really many gold coins that were struck after 1933 anywhere in the world as everybody was off the Au standard, so there was an ample supply of older coins to fill the need.

          In the 1960’s in the Numismatic Scrapbook monthly magazine, typical buy/sell spreads on $20 gold coins with 97/100’s of an ounce was $42-45. There was mucho business going on, but you wouldn’t have known this if you weren’t in the trade, and those not in the know thought it was illegal, a common refrain.

          This also caused a number of foreign countries to restrike older dated coins, to get around the law. Some of the efforts were interesting, Turkey struck gold coins dated 1923 and below that date were a couple of numbers such as 43, which indicated the coin was struck in 1966, as you added it to 1923 to get the correct year of issuance.

          Lets back up a little though…

          In 1933 as FDR revalued all that glitters to $35 per ounce from $20, the Wall*Street banksters of the time managed to buy up i’d guess a majority of primarily $20 & $10 gold coins @ face value, as suddenly they were worth $34 & $17 @ the melt down value, but you had to export them as ownership of any guise was illegal then, so the banksters sent them all to Europe, and when I plied my trade there in the 80’s & 90’s, it was always the happy hunting ground for these coins, and in comparison to the USA, you almost never saw little old ladies or men with older USA gold coins they wanted to sell, it rarely happened.

        4. michael hudson

          I was referring to the gold EXCHANGE standard for settling balance-of-payments deficits — keeping gold in international reserves, NOT the loathsome “gold standard” for domestic money.
          The US deficit came from war spending. this would have stopped it, unless the US Treasury was willing to see all its gold flow out to payments-surplus economies.

    3. Yves Smith Post author

      Gold is deflationary. For someone who is opposed to debt peonage I am shocked to see you advocate it, since debt is particularly crushing in deflationary times.

      The gold standard broke down in WWI due to the inability to ship gold. There are fears now that if someone is so stupid as to attack Russia in a way that it seems is a declaration of war, Russia’s subs could interfere with trade far more effectively than the old German U boats.

      There was also a lot of cheating under the gold standard, with countries devaluing and/or setting their currency price in gold “too low” so as to accumulate gold, which is systemicaly destabilizing (France doing that in the late 1920s-early 1930s made them the big kahuna in the international bond markets, and their withdrawal of support for Germany when it was starting to get on its feet when Germany also declared it was going to pursue a customs union with Austria led to the Creditanstalt failure. Excellent paper by Peter Temin and Tom Ferguson on this).

      Bretton Woods was a quasi dollar standard with all the post WWIII US created institutional architecture at its heart. The reason Nixon could get rid of the gold standard and not cause a systemic crisis was the architecture was more important than the gold.

      1. Wukchumni

        Gold is deflationary.

        A British Sovereign worth 1 Pound had pretty much the same weight and purity from 1489 to when they were last minted for circulation in the UK in the 1920’s, with the value of the £ not really wavering against other currencies over 400 years, i’d call that stability.

        On the other hand, paper money…

        There were a few episodes of hyperinflation early on in the mad money printing era, and the USA was party to 2 of the instances.

        Continental Currency was the Bitcoin of its day, backed by nothing and it ended up being worth nothing (in the 1790’s it was decreed that $1,000 in Continental Currency could be exchanged for $1 of specie) and Confederate Currency was backed mostly by England ($60 million in Confederate Bonds was sold by auction in the UK for $500k in 1987, they finally gave up after 122 years) and early in the war when they were doing well, it was accepted as payment, but when their fortunes turned, so did it’s value which became worth a fraction of the Federal $, on its way to having no value at all. The other instance of hyperinflation was the French Assignats of the 1790’s, before and during the French Revolution.

        We have to go to the early 1920’s for the next hyperinflation in Austria & Germany, and then things are stable until the world goes off the Au standard and hyperinflation is all over the place since then, with probably in excess of 50 countries currencies so effected if not more.

  9. Phoenix

    To think the dollar will be replaced is fantasy. Even the GBP was not and (until recently) many assets and reserves were kept in GBP even if the USD is the (current) world reserve currency.

    This is will be a short comment that might look like hand-waving but the reasoning for the end state I believe we end up with is path dependent, complex, and exactly uncertain. Short answer though: there will be no “world” reserve currency.

    A common “currency” based on national currencies of the founding members, with the national currencies still used locally will be formed. International trade will be executed in this “currency”. Creation based on fair launch Tokenomics with a predetermined inflation rate that cannot be changed (kinda like bitcoin). The component national currencies relative value fluctuate based on some measure of national economic strength, political stability, current foreign reserves, etc.

    Payment, trading, and accounting systems are being built and interconnected right now.

    This will NOT replace the dollar but break TINA – which is the most important goal. As network effects take place (through convenience, necessity, stability) and the barriers to exit are naturally formed, in addition to the clear motivation to move away from the dollar, will put a check on the abuse of the dollar power and allow the emergence of a “fair-competition world order” with less abuse of power and meddling.

    So a great reduction in dollar dominance and by extension US power, but not a complete replacement. I think USG is aware of this end state which is why they are working hard to absorb and subordinate the EU in preparation for the upcoming competition, with the goal of “We (US) will wreck it (EU) before letting you have it”

  10. New reader

    Great article! It’s unlike the narrative on most financial/geopolitical sites and very refreshing. There’s a lot of talk about the imminent demise of the dollar and the detractors need to be called out. I think for every 100 people that say the dollar is doomed 99 of them don’t have any idea how it would be replaced.

  11. juno mas

    Where else on the Web does a discussion of reserve currency with both professional and proletariat (me) insight occur? Nowhere!

    Thanks ALL for the discussion.

  12. NL

    Some notes:
    1. Our money are private — and that’s why a central bank digital dollar is not happening; yuan seems to be public — and therefore, a central bank digital yuan is an easy thing. Public money may not need our style capital markets, etc.

    2. To consider the fate of the dollar, perhaps we should look from the side of international investment and especially debt. What is the currency of the largest share of international debt — dollar, right? Hence the need for dollar reserves to protect against what we call in relation to China ‘debt trap’. Our conflict with China is a capital conflict. China has accumulated large amounts of capital that now wants to go international, where it encounters our dollar lending. In the interim between the Soviet Union collapse and roughly the appearance of the Belt and Road Initiative, there was no alternative to our lending and the IMF, now there is and it is Chinese capital. You can go the western banks and IMF or you can go to China. In several instances, it seems the Chinese paid off the dollar debt and lent in yuan instead. Trade is not as critical, two countries can always have currency swaps to facilitate trade.

    So, the fate of the dollar may stem from our position as a lender to the world. If China becomes a major lender and then pursues our approach, the countries would have no choice but to accumulate yuan reserves. The best outcome would be a competition among the lenders.

    3. Finally, China and us are very different in values and motivation. Therefore, to expect that China would follow our ways and just swap dollars for yuan is probably not reasonable. As I point about, their money are public, ours are private — already a huge difference. When Ant Financial wanted to introduce a quasi-private money, it was shut down. So, the system that China will develop will be a system with Chinese characteristics, and it will serve just as efficiently for their needs, as the dollar system serves for ours.

    1. New reader

      Hi NL, you seem pretty smart and I like a lot of your reasoning. Will you please describe what you mean by private money versus public money?

      1. NL

        Private money are issued by private banks, while public money are issued by public/state banks. Our government can’t issue money, it has to sell debt (bonds) to private banks. The FED then can buy this debt from the private banks. The latter seems like a formality, but it is not. Private banks can decide not to buy government debt. The FED can not buy government debt direct but can issue money directly to companies and banks, which what happened at the onset of the pandemic and led to an explosion of M2 and inflation. This is discussed some times under the heading of “bond vigilantes”. Recently in the UK, bond vigilantes refused to buy government debt that the Truss administration wanted to issue, thus precipitating her ushering out of the office and the change of economic course to austerity. We, the US, used to have public banks capable of issuing money. The last one was disbanded during the Eisenhower administration.

        Private vs public money — whichever is better is a long debate. We believe that private money will deter the government from overspending, etc, etc pretty standard stuff, please Google.

        Issuing a FED digital dollar would amount to quasi-nationalizing our currency (since FED is under the control Congress to some extent). Allowing a private entity to issue a digital dollar does not sound right either — thus no digital dollar is happening.

        1. ex-PFC Chuck

          Re: ” Our government can’t issue money, it has to sell debt (bonds) to private banks.”
          As I understand MMT, there’s no inherent reason it has to be this way. The notion a government has to sell debt to balance government money spent is a fossil of the superstition that is embedded in law because “governments that issue fiat currencies are just like households.”

          1. NL

            Making money public would be revolutionary. Our principles are that private means efficient and responsible, while public is profligate and featherbrained. We need private supervision of public finance. Making money a public utility would also deprive the banking industry of income.

  13. Shom

    Isn’t trust the main pillar that holds up any reserve currency? Most countries and their bureaucrats (e.g. EU, India, SE Asia) inherently trust that the US govt will play fair by its declared rule-set, even if decades of precedents show the fallacy of this belief. US stealing Russia’s dollar reserves does not seem to have shaken third country’s trust too much, and I don’t see anyone doing more than implementing Russia’s “deposit Euro with our central bank directly” plan as a precaution, if that.

    As long as this trust holds, why would China or Russia push too hard against this inertia to come up with an alternate implementation of the same system? The current system has added more cost-of-doing-business for them now, but as long as their citizen’s lives continue to improve, even flourish, why would they not let US and its bureaucrats impoverish its own society in holding up this dollar dominance system to the very end?

    They are patient players, and so happy to wait for us to make all the mistakes we will surely make in pushing the world into distrusting us before they put in any serious work in defining a new system. May not happen in my lifetime, but inevitable in historic timescale.

  14. John k

    Granted, it’s hard to replace the dollar as a reserve currency given us markets. To me, however, the question is, what do central banks need reserves for, and will those needs continue?
    It seems to me the need is greatest for those with a trade deficit; those countries might need reserves to protect their currencies. However, the correction for them is to export more/import less, I.e. do what would have been better all along.
    Does China, with massive surpluses, need large reserves? Certainly not as much as Argentina.
    Us has massive deficits… it’s only because they have a currency others value for reserves that this has not been a problem.But first, some countries with trade surpluses are not accumulating $. China’s reserves are declining in spite of maybe $500B trade surplus with us; I’ve been assuming they’re spending those reserves into other countries thru belt/road projects, though I just read they acquired about 300ntons of gold, a modest $20B.
    So other countries are still willing to add $reserves even as the big guys allow theirs to decline.
    What if China runs out of belt/road projects? It’s past time to tax exports to pay for better benefits like SS/Medicare, which will encourage workers to spend and consume more of their own production rather than save for retirement.

  15. elkern

    Thank you, Yves, for this ongoing thread. I’m glad you have been doling out in bite-sized chunks, rather than monetizing it in a Tome! As an amateur Economist (BA Econ, whoo-whoo!), I have long expected the US’ disinvestment in Infrastructure, outsourcing of industry, and disfunctional political system to undermine the Dollar’s status as Earth’s Reserve Currency. Your argument – that it’s not gonna happen fast – is convincing.

    Much as many of us here look forward with schadenfreude to the End Of The “Rules-Based Order”, it’s prolly good news for a few billion people that it’s more likely to happen slowly (for now, at least, though it could easily turn into another case of “gradually, then suddenly”).

  16. kemerd

    Why should there be an issuer of the common currency? the problem as I understand is store of value and easy exchange aspects. What if government debt were used in trade all with 0 coupons denominated in a fictitious common currency; sure the credibility of issuer would enter into equation in some cases and perhaps some discounts might be demanded for some issuers but it seems to solve both problems.

  17. What Do I Know

    There could be an alternative currency on following lines:
    There is a monetary unit, say Goldy, one unit of which is equal to an ounce of gold. All currencies participating in this monetary system will have an exchange rate against Goldy based on how many units of these can buy an ounce of gold.
    All trade among participating countries will happen nominally in Goldys, but settled in local currencies, their exchange rate based on Goldy. A recipient country of these local currencies may hold them in reserve, use them in trade with other countries or even ask the issuing country of that currency to change it for physical gold.
    If system operates well actual gold transfers could be minimal, resorted to in exceptional circumstances of loss of trust in some currency or some country having too much of it.
    A common Central Bank would also be set up entrusted with fixing and tweaking exchange rates, managing reserves on behalf of countries and be a settler of claims and disputes. This bank will have a board whose members will be representatives of the Central Banks of the member countries.
    Above is a layman’s view. Experts can fine-tune and develop/elaborate various details of the system.

  18. Shemp

    You’re making this way too complicated. Currencies serve 2 purposes: trade, store of value. Trade can be accomplished by bilateral agreements (lira for rubles for Russia to Turkiye trade, for example). Just because your bank estimated 3 years to get the job doesn’t mean all computer programmers are incompetent. Consider that ChapGPT program that everyone is talking about. Now that is impressive programming. Fixing bank software to handle bilateral agreements is child’s play. Put enough pressure (money offered to programmers who can make things happen) and the job can be done in a week, with testing and final rollout in a matter of months.

    Store of value is trickier. IMO, the path forward is towards equity instruments replacing debt instruments as the primary store of value. For example, instead of holding Saudi rial, you would hold commodity futures backed by next years Saudi production of oil. Instead of rubles, own stock like certificates backed by Russian state natural resources (timber, land, minerals, real estate ). Equity instrument values fluctuate, but then do so currency exchange rates, and at least equity is safe from Turkish/Argentine style inflation. Cut risk by diversifying, as will be necessary anywsy for countries with multiple trading partners, and in the long run it all evens out. All this would be impossibly complicated to do by hsnd, but it’s trivial with computers. As with bilateral trading, maybe a week for good programmers to implement, several months to test and final rollout. Stop thinking in terms of those boobs with bad incentive structure at your old bank and think of guys who wrote things like ChatGPT, or that guy who wrote the Apollo moon landing code in the 1960s in 4K bytes of Forth. Top programmers are amazingly competent.

    1. Yves Smith Post author

      Please see our post tomorrow. With all due respect, you have NO idea re the magnitude of the coding issues when you have systems that are not retail/business junk but have to run enormous transaction volumes at high degrees of accuracy and for legal/tax reasons, you have to preserve current databases and routines.

      This is the sort of reasoning that if it were applied to the military, I could invite Andrei Martyanov in to do his prototypical long form vitriolic dismissal. Your remark embodies a similar level of MBA-policy maker ignorance of operational realities that he regularly derides.

      1. ChrisPacific

        I particularly liked the implication that ChatGPT was thrown together by one his mythical ‘competent’ programmers who just got up that morning and decided to build it, rather than the culmination of worldwide research on learning systems and neural networks going back decades.

        (The actual ‘code’ part of it is probably boilerplate and just a simple structure to invoke the model, as in the example in Links today).

  19. Clark Landwehr

    The economic system that will replace the current one is of course the “null economic system.” That is no economic system. All this technical wrangling over socially constructed programming that has no relationship to our predicament…I don’t get it.

    1. Yves Smith Post author

      Please read the first paragraph. It requires another Eurozone, a “supranational” system.

      The bancor was a supranational currency that John Maynard Keynes and E. F. Schumacher[1] conceptualised in the years 1940–1942 and which the United Kingdom proposed to introduce after World War II. The name was inspired by the French banque or (‘bank gold’).[2] 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.

      That means as even this bit points out, new institutions that sit above national governments, a body of law and adjudication bodies to set rules and sort out disputes.

      It has the authority to force economic policies upon national governments:

      For chronic debtors, this would include obligatory currency depreciation, rising interest payments to the ICB Reserve Fund, forced gold sales, and capital export restrictions.

      It is also a quasi gold system with fixed, not floating rate currencies.

      And how do countries settle up? Keynes assumed gold. How do you settle up if the currency is deemed to be overvalued? You can see a huge row over what price to use.

      1. KD

        Isn’t everyone in the WTO already anyway? Doesn’t that already undermine sovereignty? Wouldn’t it make sense if China spearheaded the effort as it would lead to greater economic integration with China. There are also IT issues, but if China has a enough money to land on the Dark Side of the Moon, presumably they can devote some resources to developing the IT necessary for clearing. Further, bancor is not a currency union like the EU, it creates a non-currency to facilitate clearing between currencies, like gold.

        1. Yves Smith Post author

          The fact that a country has surrendered some sovereignity to gain commercial advantage does not mean it will be willing to cede more, since particularly in China’s case, the bancor is hostile to its economic priorities.

          As you can see, bancor requires all trade transactions to be reported to the currency clearing entity. That is a hell of a lot of reporting.

          It also imposes strong controls on the conduct of trade (as in level of surpluses and deficits) which are at least as binding as the Eurozone fiscal restriction. It further requires fixed exchange rates, which will cause problems with a lot of financial instruments currently outstanding, yet can force changes in those rates.

          It imposes significant losses of sovereignity without the advantage of having fewer currencies (Iess FX friction/cost, remember the bancor currencies are subject to revaluation).

          Why is this project to China’s advantage? China has the most to lose from a bancor. The bancor is meant to stop sustained trade surpluses. China is wedded to them because trade surpluses amount to importing jobs. You use other countries’ demand to employ more people at home than you would based on your own domestic demand. That is why countries prefer to run mercantilist policies. High employment and wage growth is popular politically. They are even more important in China, since the legitimacy of the regime depends on rising standards of living, which means real wage growth and high levels of employment.

          1. KD

            Do you put any credence in China’s claim that they want to increase the domestic standard of living and increase internal consumption and move away from an export driven economy? Further, if China did head a bancor-type system, wouldn’t it give them a good deal of soft power that might be worth the trade off?

            [Part of Keynes motivation for bancor is that if you have these liberal economies and they don’t want to run deficits or redistribute or otherwise conduct fiscal policy, the only politically acceptable solution to stimulate the economy becomes trying to run export economies (especially if interest rates are at zero), but that creates a vicious circle of protectionist measures, which is part of what contributed to the Great Depression. It is likely that neoliberalism is also going to revert, and bancor may be able to prevent the vicious circle. Bancor would clearly require leadership and is not without risk, but that doesn’t make it feasible if results in more stable international balance of trade.]

  20. truly

    So above my pay grade….
    But here is what I am wondering:
    Is it possible that dollar hegemony becomes dollar universality? The dollar remains universal but rather than it being a tool that USA lords over all others, it becomes a burden that USA must continue to do the banking for the world OR ELSE.
    I think the rest of the world wants to break TINA. It shouldn’t be a problem that the dollar is universal, it is a problem that it is used as a weapon.
    Maybe one day the balance of power is inverted/reversed and USA becomes a slave rather than a master? Other nations decide how we will do our monetary policy and who it will benefit primarily?
    What you can not control will come to control you.

  21. Dick Burkhart

    Suppose there were to be a longer term project of creating a digital global reserve currency run by a UN agency in cooperation with the current global financial system, effectively backed by the global economy?

    Does this look feasible to you? Or what would be its fatal flaws?

    1. Yves Smith Post author

      No, there is no “current global financial system”. There are various systems that operate in connection with central banks that issue currencies. The closest we have to a global system is the dollar system and that is the one a lot of the world does not like any more.

      And the UN has never been in the money business.

      The digital part is also not relevant to any solution. Nearly all transactions take place over computer systems. Getting rid of cash is not

  22. tindrum

    Fiat money (or gold) only has value as long as people are willing to take it in exchange for real things like bread, water, coal, oil, metal, i.e. the stuff we humans need to survive. In a world where these things become less available the willingness to accept paper or digital bits for these commodities may just not be so great.
    I.e. having a store of gold or USD is only useful in a world where there is a permanent surplus of “stuff” and hence there is a very high chance that I will, at sometime in the future be able to swap my UDS for real stuff. Once this is no longer the case, then a reserve-currency becomes irrelevant and there is only trade of real stuff.
    The financialised “hedged” world in which we live is not real and is only possible because of our use of fossil fuel energy that allows us to build machines that work for us and abstract away reality. It won’t last for ever, maybe even not for long.

    1. KD

      Really? Everyone I know pays their taxes with fiat currency. Everyone I know pays taxes. I think as long governments continue to demand taxes in fiat currency, people will continue to accept fiat currency so they can pay their taxes.

  23. Fred

    The Forbes article on the Petro-Dollar does not have much significance since it is simply conjuring the stability and dynamism of the US economy and making that the decisive fact in global confidence in the US currency while suggesting that the vast oil business between the US and the Saudis is just minor factor in the game. It deliberately witholds the key fact of the Petro $ – that the US basically forced the Saudis to recycle the dollars which had flown in the oil business out of the US by buying US Debt in form of trasuries just so US currency would not flow back into the US but stayed outside the country, which enables the US to print money without much risk of currency devaluation and inflation. The Petro dollar has been a cornerstone of US global monetary policy and one of the main pillars on preserving the status of the US Dollar as the world’s reserve currency.

  24. James

    Eurodollars darn it!

    I don’t understand why BRIC countries cannot set up a system where their banks issue and trade eurodollars. This would mean that the “dollar” would remain the world reserve currency but would allow countries like Russia and China to set up a parallel SWIFT and related ecosystem.

    I see this as an analog to the “embrace & extend” strategy that Microsoft successfully used to embrace existing standards and then effectively hijack them. The trick is to do it gradually.,_extend,_and_extinguish

    1. James

      And according to ‘The Euro-Dollar Market: Some First Principles’ by Milton Friedman:

      “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.”

      Don’t China and Russia have pretty much the same motivations today?

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