By Joe Montero
One of the consequences of the current global political and economic climate, is that the position of international trade by the American dollar as the international medium of exchange and payments is under threat.
The period of American hegemony, which had begun after World War Two, and its currency replaced the gold standard on 15 August 1971, is now under threat.
Gold as the standard came to and end, because of a rapidly rising global debt crisis (mostly owed to the United States), the slowing down of the domestic post war economic growth period, and the spiraling out cost of waging war on Vietnam.
it was possible to put the American dollar in the dominant position, since the United States emerged out of world War two as the overwhelmingly dominant economy, and had financed the reconstruction under the Bretton Woods Agreement. This in turn, ensured a hold on emerging trade, because political conditions could be imposed in return for financing. The immediate advantage is that it allowed the ability to use the printing of more money, as a means to settle international accounts, and through this, export economic problems. They then became global problems, to be paid for by the global community.
Consequences began to assert themselves very quickly. By the time the 1970’s became entrenched, there was the OPEC crisis in 1973. On the surface, this was about oil, its price and Israel. Deep down, it was tied to a reaction against what had obviously become and seen as an uneven and unfair international trading regime. OPEC countries found that they were selling oil for almost nothing, and it was being resold at a huge mark up. They sought to even the balance to some extent.
This was a time when many countries were breaking away from colonial control, and were finding themselves burdened with the cost of building their own nations and coping with out of control debt, incurred through international financial institutions dominated by the United States, and restricting the capacity of other nations to manage their own affairs. The problem was made even worse, when a floating exchange rate regime was imposed. Weaker economies found their currencies devaluing, which meant that the cost of trading in the American dollar went up. They could not compete and their debt problem became a debt crisis.
It is not surprising that murmurs about breaking away from the American dollar began to be heard. When Libyan leader Gaddafi began taking practical measures to build a block to break away, the country was invaded and he was murdered. There is much more than a coincidence here.
The Gaddafi threat has been so serious, that it was a real threat to American dominance of the global economy, and strategists responded with a call to greater political and military involvement in the Middle East and Persian Gulf.
The American economy is particularly dependent on the global economy. Its prosperity depends on the export of investment and the import of profit. Having sufficient control over the conditions of international trade and the global monetary system is vital to maintaining superiority. Even more so, when the computer age was unleashed on the world, and the circulation of money sped up exponentially.
Unfortunately, there is now a massive over supply of American dollars in the global economy. Roughly a third is held by China ($1.2 trillion). Europe holds a similar amount. These have so a significant extent become dead reserves, because if too much is released, it would obliterate the American dollar and bring in a global depression. Dead reserves also impose a cost on those holding them, because the money cannot be put to economic use.
This leads to a drive to restore some balance through a higher volume of exports that would otherwise have been the case, and the buying up assets overseas, in order to use up a portion of the excessive American dollar reserves. The consequence has been the American trade deficit, although there is a surplus in financial transactions, which are usually officially referred to as services.
While it might bring the United States advantage through the export of its own problems, it has also been contributing factor to its own domestic economic woes and created an imbalance in the trade of commodities. The more dependent it becomes on international financial transactions, the weaker other parts of its internal economy become.
International trade agreements, for example NAFTA, and then, moves towards the TPP, became important in the arsenal to ensure, not only a dominant position in trade, but more importantly, dominance in global financial transactions.
This is important, even with Donald Trump’s recent shift from the TPP, because the problems created by American control are now so pronounced, the there is now much more reliance on the use of political means to ensure this control.
All of this has imposed greater global economic instability and increased political tensions. It may not be the only factor, but it has contributed to the growing dispute between the United States and Europe, and it is important in the rising face off against China and Russia.
Moving into an era where trade sanctions on a growing list of countries has become the new normal. It is not making the situation any better. The United States works for bilateral and unilateral agreements tied to the American Dollar. Counter blocks are taking shape in Latin American, Asia, the Caucuses and Africa. There is the European Union, which may move to shift away from the American dollar.
Calls to break away are getting louder. The was evident by the end of last year. It rose again in May this year, and once again last week. Firing this, is a will to achieve greater economic and political independence, bring about more stability and a more even share of the benefits of international trade and financial transactions.
Change will come. Whether it is gradual or sudden is going to depend on the unfolding of global politics, and on how the global economy performs in the face of great challenges facing it. A lot is going to depend on the response of the United States and how other key players react.
A rising aggressive posture towards China and Russia, coupled with growing tensions with Europe, spilling into trade wars, is not going to help. That the risk that trade war has the potential of turning into a shooting war, helps even less.
Countries like Australia are left with sooner or later having to decide, on which side best serves Australia’s interests in the long-run. Do we continue along the road of all the way with the USA, or start to build more solid and lasting relationships with other nations?