In: Economics
How does United States of America continue to use its economic and political power to threaten countries through the dollar and the international monetary system?
United States of America continue to use its economic and
political power to threaten countries through the dollar and the
international monetary system. For Washington, the U.S. dollar is
leverage, a financial weapon to dominate the world economy, to
impose its foreign policy agendas and to secure a steady flow of
natural resources over sovereign countries who use the currency.
The dollar is a fiat currency based on “faith” which is issued by
the Treasury department and backed by the full weight of U.S.
government.
While the U.S. accounts for about 20 percent of the world’s
economic output, more than half of all global currency reserves and
trade is in dollars. This is the result of the 1944 Bretton Woods
agreement, the effect of which was enhanced when the link between
the dollar and gold ended in the 1971 Nixon shock, allowing America
to to control the supply of the currency. The
dollar’s pivotal role — an “exorbitant privilege,” in the term
coined by then French Finance Minister Valéry Giscard d'Estaing in
1965 — allows the U.S. easily to finance its trade and budget
deficits. The nation is protected against balance-of-payments
crises, because it imports and services borrowing in its own
currency. American monetary policies, such as quantitative easing,
can influence the value of the dollar to gain a competitive
advantage.
But the real power of the dollar is its relationship with sanctions
programs. Legislation such as the International Emergency Economic
Powers Act, the Trading With the Enemy Act and the Patriot Act
allow Washington to weaponize payment flows. The proposed Defending
Elections From Threats by Establishing Redlines Act and the
Defending American Security From Kremlin Aggression Act would
extend that armory.
When combined with access it gained to data from Swift, the Society
for Worldwide Interbank Financial Telecommunication’s global
messaging system, the U.S. exerts unprecedented control over global
economic activity.
Sanctions target persons, entities, organizations, a regime or
an entire country. Secondary curbs restrict foreign corporations,
financial institutions and individuals from doing business with
sanctioned entities. Any dollar payment flowing through a U.S. bank
or the American payments system provides the necessary nexus for
the U.S. to prosecute the offender or act against its American
assets.
This gives the nation extraterritorial reach over non-Americans
trading with or financing a sanctioned party. The mere threat of
prosecution can destabilize finances, trade and currency markets,
effectively disrupting the activities of
non-Americans.
The risk is real. BNP Paribas SA paid $9 billion in fines and was suspended from dollar clearing for one year for violating sanctions against Iran, Cuba and Sudan. HSBC Holdings Plc, Standard Chartered Plc, Commerzbank AG and Clearstream Banking SA have paid large fines for similar breaches.
China, Russia and increasingly Europe want an
alternative reserve currency system. The problem is that
immediate replacement of the dollar is difficult.
First, the euro, the yen, the yuan and the ruble are not realistic
options. The euro’s long-term future and stability isn’t assured,
while Japan’s economy remains trapped in two decades of torpor. The
Chinese and Russian political and economic systems lack
transparency, and the yuan isn’t fully convertible.
Second, the required change in infrastructure is daunting.
Foreign-exchange markets where the dollar is the currency of
reference would have to be fundamentally restructured. Deep and
liquid money markets to support a reserve currency can’t be
conjured up overnight.
Third, most candidates are reluctant to take on the role of a global reserve currency because of tensions between national and global economy policy. The economist Robert Triffin pointed out that the country whose medium of exchange is the global reserve currency must meet external demand for foreign exchange. This necessitates running large trade deficits, requiring fundamental changes in the mercantilist policies of Germany, Japan and China.
This means that the U.S. can continue to use the dollar to help further its trade, financial and geopolitical aims, largely outside the strictures of international laws and institutions and without the need for messy, unpredictable military campaigns.