Image: Henry CK Liu – courtesy You Tube
By Charles F. Moreira, Editor
An article entitled ‘Dollar Hegemony’ by Henry C K Liu appeared on Asia Time Online on 11 April 2002.
The Hong Kong-born Liu, now based in the United States, is an independent critical political-economic analyst and commentator on international relations and chairman of the New York-based Liu Investment Group.
As the saying, “necessity is the mother of invention” goes, about 16 years later, with the looming threat of trade war and of economic sanctions, we are witnessing initial moves by some countries to escape dollar hegemony along somewhat similar lines to what Liu proposed.
In his 2002 article, Liu argued that economic textbooks promote a myth that foreign-exchange rates are determined by supply and demand based on market fundamentals, when in reality, economics tends to dismiss socio-political factors that shape market fundamentals that affect supply and demand.
“The current international finance architecture is based on the US dollar as the dominant reserve currency, which now accounts for 68% of global currency reserves, up from 51% a decade ago. Yet in 2000, the US share of global exports (US$781.1 billon out of a world total of US$6.2 trillion) was only 12.3% and its share of global imports (US$1.257 trillion out of a world total of US$6.65 trillion) was 18.9%. World merchandise exports per capita amounted to US$1,094 in 2000, while 30% of the world’s population lived on less than US$1 a day, about one-third of per capita export value,” wrote Liu.
“Ever since 1971, when US president Richard Nixon took the dollar off the gold standard (at US$35 per ounce) that had been agreed to at the Bretton Woods Conference at the end of World War II, the dollar has been a global monetary instrument that the United States, and only the United States, can produce by fiat. The dollar, now a fiat currency, is at a 16-year trade-weighted high despite record US current-account deficits and the status of the US as the leading debtor nation. The US national debt as of April 4 was US$6.021 trillion against a gross domestic product (GDP) of US$9 trillion.”
World trade is now a game in which the US produces dollars and the rest of the world produces things that dollars can buy. The world’s interlinked economies no longer trade to capture a comparative advantage; they compete in exports to capture needed dollars to service dollar-denominated foreign debts and to accumulate dollar reserves to sustain the exchange value of their domestic currencies.
“To prevent speculative and manipulative attacks on their currencies, the world’s central banks must acquire and hold dollar reserves in corresponding amounts to their currencies in circulation. The higher the market pressure to devalue a particular currency, the more dollar reserves its central bank must hold. This creates a built-in support for a strong dollar that in turn forces the world’s central banks to acquire and hold more dollar reserves, making it stronger.”
“This phenomenon is known as dollar hegemony, which is created by the geopolitically constructed peculiarity that critical commodities, most notably oil, are denominated in dollars. Everyone accepts dollars because dollars can buy oil. The recycling of petro-dollars is the price the US has extracted from oil-producing countries for US tolerance of the oil-exporting cartel since 1973.
“By definition, dollar reserves must be invested in US assets, creating a capital-accounts surplus for the US economy. Even after a year of sharp correction, US stock valuation is still at a 25-year high and trading at a 56% premium compared with emerging markets.”
Concluding his long article, Liu proposed:-
“To save the world from the path of impending disaster, we must:-
Promote an awareness among policy makers globally that excessive dependence on exports merely to service dollar debt is self-destructive to any economy;
Promote a new global finance architecture away from a dollar hegemony that forces the world to export not only goods but also dollar earnings from trade to the US;
Promote the application of the State Theory of Money (which asserts that the value of money is ultimately backed by a government’s authority to levy taxes) to provide needed domestic credit for sound economic development and to free developing economies from the tyranny of dependence on foreign capital;
Restructure international economic relations toward aggregate demand management away from the current overemphasis on predatory supply expansion through redundant competition; and restructure world trade toward true comparative advantage in the context of global full employment and global wage and environmental standards.
This is easier done than imagined. The starting point is for the major exporting nations each to unilaterally require that all its exports be payable only in its currency, so that the global finance architecture will turn into a multi-currency regime overnight. There would be no need for reserve currencies and exchange rates would reflect market fundamentals of world trade.
As for aggregate demand management, Asia leads the world in both overcapacity and underconsumption. It is high time for Asia to realise the potential of its market power. If the people of Asia are to be compensated fairly for their labour, the global economy will see its fastest growth ever”, Liu ended.
Escaping dollar hegemony
Amongst these initial movers are Russia and China, which according to Russia’s Ministry of Economic Development on 18 October 2018, were working on an inter-governmental agreement whereby both countries would use ruble and yuan in mutual trade settlements.
“The document is currently being prepared, the process is not easy,” said Deputy Minister of Russia’s Economic Development Sergey Gorkov, as quoted by TASS. “Russia and China have had some experience of using national currencies in bilateral trade.”
According to Russia Today of 19 October 2018, Gorkov added that Russia and China had been successfully implementing the terms of ruble-yuan currency swap agreement, reached in 2014 to boost trade using national currencies and eliminate dependence on the dollar and the euro. The deal was extended at the end of 2017, though Gorkov gave no indication as to when the new agreement would be signed.
Trade between the two countries had grown significantly over the recent years, with the latest data from China’s General Administration of Customs showing the volume of mutual trade having increased by 30% to reach US$77 billion between January and September 2018.
China is Russia’s largest trading partner, accounting for 15% of Russia’s international trade in 2017. Both countries expect bilateral trade to hit US$100 billion in 2018 and plan to steadily boost mutual trade between them to US$200 billion by 2024.
In 2017, 9% of payments for supplies from Russia to China were paid in rubles, whilst Russian companies paid 15% of Chinese imports in yuan, up from 2% and 9% respectively three years earlier.
Also, China and Russia had created a Russian-Chinese investment fund worth 68 billion yuan (some US$10 billion) to develop mutual trade, economic investment, and scientific cooperation.
Meanwhile in a bid to enable Russian companies to circumvent economic sanction, Russia has been working on the development of its own money transfer messaging system – System for Transfer of Financial Messages (SPFS) as an alternative to SWIFT (Society for Worldwide Interbank Financial Telecommunications) messaging system currently used by most banks and some corporations worldwide to send money transfer instructions.
The Belgium-based SWIFT is a membership-based organisation which enables cross-border interbank financial messaging between over 11,000 financial institutions in over 200 countries and territories worldwide.
It’s board includes executives from US banks and with US federal law allowing the US administration to act against banks and regulators across the globe, this has been a cause of concern for some countries.
In 2014, Russian banks had been concerned that they could be excluded from SWIFT, after the European Union and the United States had introduced the first round of international sanctions against Russia over her alleged involvement in the Ukraine crisis and the reunification of Crimea with Russia.
Whilst SWIFT had said that it remains neutral in the political conflict and whilst in principle, this is true, however there have been reports that despite such claims, the US has enough power to block transactions through SWIFT.
For instance, in 2012, Danish newspaper Berlingske reported that US authorities had managed to seize money being transferred from a Danish businessman to a German bank to purchase a batch of US-sanctioned Cuban cigars. Since the transaction was made in US dollars, it allowed the US government to block it.
Thus Russia (and other countries) are justifiably concerned that their ability to make trade-related cross-border, inter-bank payments could be blocked by the US government, so its development of SPFS as an alternative, and according to Russia Today of 19 October 2018, foreign banks will soon be able to become part of SPFS.
“Non-residents will start connecting to us this year. People are already turning to us,” said First Deputy Governor of the Central Bank of Russia Olga Skorobogatova.
Skorobogatova had earlier said that SPFS would enable foreign companies to do business with Russian companies which are affected by sanctions.
As of September 2018, 416 Russian companies had joined the SPFS network, including the Russian Federal Treasury and large state corporations including Gazprom Neft, Rosneft, and others, according to Russia’s Central Bank.
Meanwhile, the European Union is also working on an alternative to SWIFT and the project, being promoted by Germany, will help EU member countries to bypass US sanctions against countries such as Iran.
Still, most Asian countries, including Malaysia have not yet demanded payment for their exports in their respective national currencies, such as ringgit in the case of Malaysia; which would enable them to escape dollar hegemony and hopefully grow faster and prosper more than they currently do, with their currencies and economies free of dollar hegemony.