And Now for Something Completely Different: the Dollar Challenged

Treasury Secretary Steven Mnuchin's signatures is seen on new dollar bills, Wednesday, Nov. 15, 2017, at the Bureau of Engraving and Printing in Washington. The new Mnuchin-Carranza notes, which are a new series of 2017, 50-subject $1 notes, will be sent to the Federal Reserve to issue into circulation. (AP Photo/Jacquelyn Martin)
Jacquelyn Martin/AP

While the country’s attention is riveted on Florence, Kavanaugh’s confirmation and Manafort’s plea deal, certain other developments around the world may in the end prove more significant. At a meeting earlier this month in Vladivostok, Russian President Vladimir Putin and Chinese leader Xi Jinping agreed to bypass the dollar and use their own currencies in commercial relations.

This month, officials from France, Germany, and the UK have begun planning with China and Russia a special payments channel that would allow these countries to defy new American sanctions against any company doing business with Iran. This payment channel would bypass the American-dominated international banking system and the dollar.

Much of American economic and global power rests on the universal use of the dollar as the settlements and reserve currency of choice. It allows the United States, among other things, to run huge trade and budget deficits and to impose crippling economic sanctions on other countries. If the American dollar became overnight a exotic national currency like Turkey’s Lira, then in order to balance its accounts and pay for its deficit, the U.S. would have to raise interest rates to attract foreign currencies, even if that meant crippling business and home finance. If the dollar were to cease being a global currency, that would weaken the American economy and damage international trade. The moves by Russia, China, France, Germany, and the UK to begin to decouple themselves from the American-dominated monetary system could come to nothing but these could also lay the basis for a greater challenge down the road to American dominance.

It’s happening largely in response to Trump’s Hobbesian diplomacy, which sees the U.S. engaged in a zero-sum battle against its longtime allies as well as against competitors like China and also by his fiscal policies that promise huge deficits in years ahead. My friend Taggart Murphy, who wrote the definitive study of U.S.-Japan economic relations, The Weight of the Yen, says of Trump’s effect on the global economy:

Trump is doing everything he can to bring on the end of the days when the US can borrow whatever it wants in whatever amounts it wants. To be sure, there is no recipe book. The dollar is now so entrenched as the world’s money that if your assignment were to bring the curtain down on that — and thus the ability of the US to borrow whatever it wants whenever it wants — it’s not at all clear what you would do. But you’d start by doing everything that Trump is doing — pick fights with all your allies, blow the government deficit wide open at the peak of an economic recovery, abandon any notion of fiscal responsibility, threaten sanctions on anyone and everyone who seeks to honor the deal Obama struck with Iran (thereby almost begging everyone to figure out some way to bypass the US banking system in order to do business), throw spanners into the works of global trade without any clear indication of what it is precisely you want for a country that structurally consumes more than it produces and thus by the laws of accounting MUST run trade and current account deficits.

Murphy says of the Chinese, Russian, and European efforts, “They are building the groundwork for the day when they can overthrow the hegemony of the US dollar. The day that happens is the day the American imperium ends.”

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