Article published by José Alberto León Alonso in the October 2018 issue of La Gaveta Económica.
In 1944, representatives of 44 countries meeting at Bretton Woods regulated the financial and monetary system that was to govern the world after the Second World War. From that agreement, institutions emerged that still survive today, such as the International Monetary Fund (IMF) and the World Bank (WB), and the dollar emerged as an international currency of exchange and reserve.
Almost 75 years later, the time seems to be approaching to redefine design and put an end to the, until now, unquestionable supremacy of the dollar. During these 75 years, global trade exchanges have been carried out in dollars, and that currency has served as a primary form of reserve for central banks around the world. For the United States, at least since the abandonment of the convertibility of the dollar into gold in the 1970s, the advantages of this system have been and are enormous. While the rest of the world must obtain dollars through a positive current account balance (that is, “entering” more dollars than it spends in its international exchanges), the United States only has to “print” them. No less important, your currency becoming the reserve asset ensures enormous demand for dollars in the form of government debt from international corporations and governments around the world, allowing your country to borrow almost unlimitedly by having the demand for your debt covered.
The policy of the American Federal Reserve (RF) has set the pace of the world economy for the last 75 years. If it lowered interest rates, the enormous low-priced liquidity moved around the world in the form of American debt, incentivizing less developed countries to borrow in cheap dollars instead of their own expensive currency. Once the RF raised rates, like now, countries indebted in dollars were unable to pay the interest in the now expensive dollars, which led them to bankruptcy.
But this situation is beginning to change. On the one hand, the size of the American public deficit under Trump's expansionary policies is so gigantic that, for the first time, they are beginning to have problems finding foreign plaintiffs to cover it. Furthermore, debt needs will only increase with the gradual aging of the American population. On the other hand, the “Trumpian” policy of breaking with all ties to multilateral agreements and institutions, and excluding its international political enemies from the international payments system (American, of course), is encouraging many countries to stop using the dollar as an international payment currency. Trump's objective is none other than to end the American current account deficit with almost all countries in the world, but that objective would lead, by definition, to the rest of the world entering a deficit and to the economic contraction of all other countries, a pattern of "no growth" that already occurred during the depression of the 1930s with the competitive devaluations of all countries against all. An American trade surplus would repatriate dollars from the rest of the world and, sooner rather than later, there would be no dollars to pay the debt.
China, its great present and future rival, is being the most active in this task. It has reached agreements with Japan, Russia, Brazil, India and Iran to use national currencies in their bilateral exchanges. At the same time, it has created a futures market where its currency and debt can be traded, backed by gold as collateral. Their motto for the Chinese yuan is “as stable and secure as gold.”
Russia has not been left behind. It has sold on the market most of the American debt it held as reserves, hoarding gold instead. But even Europe, the traditional American ally, is now considered “almost as diabolical as China” by the American President, and personalities as unrevolutionary as Merkel and Juncker have declared that the United States is no longer trustworthy and that European trade exchanges cannot depend on the dollar as they do now, promoting the use of the euro for their purchases of raw materials.
The process of abandoning the dollar as an international reserve currency and for exchanges will be gradual, but, once it advances sufficiently, the final phase will be rapid and, probably, traumatic. The fall of the dollar would cause hyperinflation in the United States as American debt returned en masse to foreign hands, and even the first bankruptcy in its history, as it would be unable to finance its deficit, but the monetary turbulence until a new international monetary and financial order was established would affect trade and the world economy.
What that new monetary and financial order would be is difficult to predict. I point out some possibilities:
- It could be built around a basket of currencies (dollar, euro, Chinese yuan), instead of just one, but that would not prevent the unilateral action of one of these blocs from unbalancing the new order.
- Another option would be to promote the Special Drawing Rights (SDR) that the IMF has already created. The President of the Central Bank of China already proposed it in 2009. The IMF would thus act as the World Central Bank and would be governed multilaterally. But the United States has enough power in the IMF to prevent this process from taking place, so it seems difficult for it to allow it.
- A sufficient group of countries could meet in a new Bretton Woods and implement the old Keynes proposal, the banker, rejected in 1944 due to political criteria (from the United States, of course). Technically it is the most complete to avoid lasting trade imbalances, since it would be a currency that would not exist on paper nor would it be created by any Central Bank, but rather a mere intermediary in commercial transactions that would be created and destroyed in a clearing house between countries and that would distribute burdens symmetrically not only between countries with high trade deficits, but also between those that maintained lasting trade surpluses, so that all countries would be responsible for maintaining a certain balance in their exchanges. If the imbalances were not corrected over time, there would be a devaluation of the currencies of the countries with a deficit and/or a revaluation of the currencies of the countries with a surplus. By restricting devaluations to those countries in current account deficits, competitive devaluations would be impossible and the entire system would tend toward long-term rebalancing.
- Return to a kind of gold standard, although correcting the dysfunctions that forced it to be abandoned. It seems complicated by the conflicting passions that even among economists entails the mere mention of the golden metal.
- A temporary chaos that would end up leading to one of the previous solutions or to the return to the dollar or another currency as a reserve currency.
In China, to wish your enemy the worst, you say “I hope you live in interesting times.” Well that.
