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The dollar today is the uncrowned king of the financial world. This means that the dollar does not face much of competition from other currencies as on date. However, that does not mean that the dollar is invincible.
Economies all over the world today are tired of the United States imposing its military and financial might on the rest of them. Efforts are therefore underway to topple the dollar. This is not the stated intention, but it is an important motivation behind the creation of BRICS bank and the Asian Infrastructure Investment Bank (AIIB). Even world bodies like IMF are trying to move from a system wherein the dollar is the sole reserve currency.
IMF has created a basket of currencies called the Special Drawing Rights (SDR) which critics believe will topple the dollar.
In this article, we will study more closely what the dollar hegemony means and how toppling it would change the world.
The United States obtain what many call an exorbitant privilege from the fact that the dollar is the reserve currency of the world. A reserve currency is required by all other governments to trade for essential commodities such as oil and gold. Governments cannot buy gold with the Iraqi Dinar or the Indian Rupee. It is unlikely that the selling government would agree to deal in local currency. The exorbitant privilege is that all other countries have to work and trade to earn dollars whereas the United States can simply print it for free! Thus, if France wants to double its import of oil, it has first to figure out a way to earn twice as many dollars. United States, on the other hand, can simply print the dollars and buy as much as they want.
It is, therefore, no surprise that the United States is in control of the military prowess of the rest of the world. Money wins wars, and the United States has an unlimited supply at their disposal. Even the Soviet’s Red Army with much more boots on the ground failed to tackle the United States who simply won the war by funding uprisings in Afghanistan and other rebel countries bordering the Soviet Union.
The dollar has not always been the dominant currency in the world. Before World War-2, this was the prerogative of the British. The British Empire’s currency Pound Sterling was the de facto reserve currency at that time. The American Dollar only dislodged it after the Bretton Woods agreement.
America was able to dislodge the British from the commanding position during the Suez Crisis. It is a long story. However, the summary is that Americans cut off the funding for debt for the British government. This would have forced them to pay high-interest rates if they did not succumb to American wishes.
The US cut off the funding by threatening to dump piles of British debt on the market. They also blocked funding from American and world bodies like the IMF.
The dollar is as susceptible to a fall as the pound sterling was. However, the dollar has not seen the rise of any competitive currency as yet. The Chinese do hold a large amount of American debt. This means that they can simply dump the debt and bring about a crisis in the world economy. However, the holdings are a smaller percentage as compared to what Americans had for the pound sterling. Also, influence over IMF was a key bargaining chip for the United States. The same can be the case of a BRICS ban or AIIB which can use its influence to block funding to American debt.
America has been on a spending spree in the recent past. They need to borrow $2 billion a day just to service the interest on their past debt. Whoever has those $2 billion holds an enormous influence over American policy.
Apart from toppling the dollar, the BRICS and AIIB bank could simply increase their influence over the regional players. The bigger these banks become, the smaller the influence of IMF and therefore the United States becomes on world matters. This would be like overthrowing the American hegemony one small step at a time!
The fall of the dollar would first cause hyperinflation in the United States. At the present moment, a lot of dollars are held as reserves in other countries banks. When the reserve currency status is no more all these dollars will be flooded back into the United States. The sudden surge in the money supply of the United States will cripple its economy.
Also, America will be cut off from the free supply of oil and other essential commodities that have been available to it since the Bretton Woods agreement. This would make the normal functioning of the industry all the more difficult.
Analysts all over the world believe that the dollar is overburdened. They have no questions as to if the dollar will fall. Instead, the question is when the dollar will fall and who will be poised to overthrow Americans as being the next global superpower.
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