22 April 2022
22 April 2022
The American assault on the American dollar
The Nobel Prize winning economist, Ronald Coase argued in 1960 that, if property rights are defined, secure and transferable, individuals will ensure that resources will go to their highest valued uses. Professor Daniel Benjamin, from the Property and Environment Research Center based in Montana, drew on Coase, in 2006, to reason vigorously that clear, enforced property rights are fundamentally important in shaping prosperity.
A pivotal aspect of modern property rights is that they must be protected against any irregular expropriation by government, according to Benjamin. This is a widely accepted view across the developed world and well beyond. The right to be protected from the improper taking of property by government is enshrined in the US Constitution as it is in the Australian Constitution. Here in Hong Kong, property rights are protected under two separate articles in the Basic Law: Article 6 and Article 105.
Property can be fixed and tangible, like real estate, moveable and tangible, like a TV set, or intangible, like the ownership rights to a TV program. Money can be used to buy property – but money is, itself, also property. It is the primary store of wealth used by everyone to cover ongoing expenses, to accumulate capital for future use and to help respond to potential crises. It is used in these ways by both people and institutions - and governments.
The Investopedia Website explains how, during World War II, the US was a primary supplier of weapons to the Allies fighting Nazi Germany and Japan. Many of these purchases were paid for in gold. Under the 1944 Bretton-Woods agreement, the US dollar was selected as the outstanding candidate to become the global reserve currency, post-war, backed by the world’s largest gold reserves. After President Nixon removed the then gold-standard backing the dollar, in 1971, it still remained the world’s reserve currency. Modern economies depend hugely on having reliable access to a reserve currency which offers a stable trading regime - and against which the value of other currencies can be gauged. Such a currency also needs to provide a trustworthy store of wealth. There is still no established currency which can be used to take over this pivotal role played by the US dollar.
Despite the insistent championing, dating back centuries, by the West of the paramount importance of property rights, there is deep and growing concern that Washington has now begun an assault aimed at the very foundations of this hallowed regime. There are two primary facets of this ambush: the way in which the US Dollar is being openly exploited; and the more direct attack on the core security expectations associated with property rights. In both cases, this recklessness is aimed at securing certain fervently-framed, political ends.
Many commentators have looked askance, over the last several years, at how Washington has rashly and increasingly misused the immense economic power that comes from running the world’s established international currency.
Curiously, flagship financial media outlets like the Wall Street Journal, the Financial Times and the Economist, have not been headlining these bleak developments. Rather, they have remained surprisingly unruffled, perhaps because they avidly support certain, related political ends advocated by Washington and its allies.
In his first interview after the war in Ukraine began, Jim Rogers, a renowned American investment commentator, said, bluntly, that the US Dollar is now being used as an instrument of war - and it is set to die. Around the same time, Anthony Rowley, a veteran journalist specializing in Asian economic and financial affairs, castigated the Western world for what he argued was a resort to frenzied, vengeful sanctions, many dollar-related, in response to the same war.
As the terrible conflict in Ukraine has developed, an intense rash of property confiscations related to very wealthy Russians living in the West, has unfolded. Around the world, property seizures, for the reasons set out above, normally need to follow detailed, sequential legal procedures. These owners are guilty-by-association, however, and those otherwise esteemed procedures are fearlessly bypassed in the name of applying swift justice. The end justifies the means.
But let us return to investigate how the role of money, as a primary store of wealth, is now consciously being undermined. Consider two recent examples of rash, currency-based political leveraging which show what Washington thinks is acceptable, today, once it “unfriends” certain governments.
In February this year Washington commandeered US$3.5 billion, or about half of all Afghanistan public reserves held in the US, to help families of victims of the September 11 terror attacks. This astonishing confiscation was legalized by using a White House Executive Order. The Taliban Government in Kabul, meanwhile, is still denied access to the other US$3.5 billion, while wretched, mass misery in Afghanistan has reduced families to selling their children in order to secure food.
Next, according to the Financial Times, Russia’s foreign exchange reserves of over US$600 billion were recently largely rendered useless (a positive development, apparently) following the imposition of currency-related sanctions by the US and others, as the war in Ukraine began.
As Jim Rogers notes, the world’s reserve currency is no longer what we thought it was, that is, a neutral store of value – it has been put to work as a weapon of war. The core aspects of property rights specified by Coase, definition, security and transferability, no longer apply, without reservation, to all owners of US Dollars. Certain owners may now abruptly discover that their rights have been gravely compromised because they fall into a denounced category, solely determined by Washington.
Imagine the unholy uproar if certain foreign governments holding Renminbi deposits in Chinese banks were abruptly told by Beijing that access was now denied and confiscations may follow. “Unmitigated authoritarianism” is one of the more polite accusations we could expect to hear. Yet the US assumes that the rest of the world will go along with its own extraordinary, currency-based, imperial behavior, and will tolerate whatever may follow. Other states have already been advised (or threatened) that similar highhanded sanctions may be applied if they, too, are precipitously downgraded by the White House. Meanwhile, discussion is already underway about draining those Russian reserves to repair Ukraine.
We should briefly note, too, how Washington has used the status of the US Dollar not just to borrow cheaply but also to borrow massively increased amounts: when you lend to America you lend to a borrower already burdened by eye-watering, increasing levels of debt.
The US is progressively confirming that it is an untrustworthy steward of the world’s reserve currency. For now, though, there is no choice but to live with the dominant international standing of the US Dollar. The incentive to work on substitutes has, however, been hugely amplified. Various experiments are already afoot, including: potential direct currency swaps (India and Russia, for example); and the further development of sovereign-backed digital currencies. People are also studying the creation of new ratings agencies.
The Renminbi, as the currency of the world’s largest trading economy, is almost certain to play some role in this coming transition, especially once it becomes fully convertible. One primary lesson to be learned from this alarming, politicized use of the US Dollar is that any future replacement needs to be robustly managed as a neutral global currency.
How long before we see change? Sooner than expected, says Jim Rogers. This suggests how one of Churchill’s prominent observations can be adapted and applied. We still cannot sharply perceive the end of the international dominance of the US Dollar. And the beginning of that end is not yet clearly in view. But we are most probably witnessing the end of the beginning of this decline.