Most of the world’s trade is done in dollars, even for trade that never goes to the US.
Most of the world’s money transfers at some point go thru the western banking system, and quite often an American bank, even if both parties are not in America. This is how the US justified its’ anti-FIFA case: the bribes, though at never point involving any Americans or going to America, at some point went thru a US bank on their way to their target.
Everyone needs (or needed) dollars, and everyone needed the Western banking system. There was no real alternative, and to a large extent there still isn’t.
But that has been changing. Russia (SFPS) and China (CIPS) built their own interbank messaging and transfer systems to replace the West’s SWIFT. They have started to connect them together. Since the Ukraine war in particular, China and Russia have been encouraging countries to settle trade in local currencies, and oil has been sold in rubles and yuan (previously, with a few rare exceptions it was always in dollars.
This is called dollar privilege. It has disadvantages, but because everyone needs dollars and because a ton of world debt is denominated in dollars and because the interbank transfer system is controlled by the West (SWIFT is actually located in Europe), America has been able to command far more of the world’s resources than it otherwise would have been able to. Of course this is backed up by US and allied military power, and it was possible to create it because after WWII the US was both the greatest military power and the largest industrial power.
Still, while it was definitely abused during the cold war period, and more than once, it was after the collapse of the USSR that America really went wild with sanctions.
But the most important thing about dollar privilege is not the ability to sanction, it’s the ability to settle all debts in dollars, which everyone needs.
What happens when everyone doesn’t need them? What happens when the US actually has to pay, somehow, for what it consumes?
Though losing dollar privilege is second order, downstream from losing industrial and military dominance, and has been moved forward by the abuse (and failure) of the sanctions system, it will still be a massive blow to America. Put simply (and with some exceptions), America will have to live on what it can actually make and grown and what it can trade for with what it makes and grows. Well, and what it can steal with its still strong military.
This will be a massive blow.
It will also be an opportunity of sorts. Dollar privilege let the US command more of the world’s resources than otherwise, but it also made the dollar worth far more than it should have been, and thus increased costs in America. In principle (though hard to do in practice) the US dollar collapse caused by the end of dollar privilege would make American goods and services much cheaper overseas and improve the US terms of trade, allowing more manufacturing in the US.
In principle. In practice, the collapse in ability to command resources is likely to lead to economic collapse, and only a very savvy leadership class will be able to navigate the issue, at least in a timely manner. In the longer run, America is still a continental power and if it doesn’t split up, the country has significant advantages which may allow it to survive and even be moderately prosperous.
But when you see moves by the BRICS to create their own multinational interbanking system, and moves away from the US dollar, understand that what you’re seeing are attempts to end US hegemony; attempts which will have shattering effects on the US economy.
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StewartM
In principle. In practice, the collapse in ability to command resources is likely to lead to economic collapse, and only a very savvy leadership class will be able to navigate the issue, at least in a timely manner. In the longer run, America is still a continental power and if it doesn’t split up, the country has significant advantages which may allow it to survive and even be moderately prosperous.
When you wrote “savvy leadership” I knew we were doomed, for we have leadership that actually thinks money IS wealth (look at how we reward private equity, which “makes money” by destroying actual wealth).
The US’s biggest long-term advantage might be (alarmingly) that it will be the least hurt by climate change more so than its peers (particularly Asia, much of which might go underwater). I say “alarmingly” as this might be an actual incentive for our sociopaths in power to continue the ‘business as usual’ course in order to destroy the economic competition.
Ian Welsh
Yeah, climate change (and ecological collapse) throws a wrench into the standard macropolitical models.
I wish I could find a really good book (or that we knew enough) on the collapse of ancient civilization (not classical, ancient.)
GrimJim
What are you referring to by ancient as opposed to classical? As in the Bronze Age Collapse, Sumeria, and the Mayans being ancient and Rome and Egypt being classical?
I think overall what we’re looking arpt is a combination of the sociopolitical and economic collapse of Rome combined with the ecological and agrarian collapse of the Mayans(not knowing exact sociopolitical and economic factors there, it might have been similar to Rome).
Though of course the ecological collapse this time is global rather than regional. So too more or less the sociopolitical and economic, though at first it will hit the US and Western Europe the worst, as they depend so much on imports of all kinds.
Mark Level
Yes, the RoW (rest of the world) has by now caught on to how arrogant, cruel & corrupt the U$ “leadership” class is, even though ‘Muricans remain enslaved by a 2 party Lesser (not really) Evil Duopoly, promoted as good by the corporate MSM. (Since the Ruling Class are all Millionaires, millionaires are QED good, the rest of us are “trash” to be exploited.) We’re told that we live in an “exceptional” & the best Country (TM), but at election time you have a choice between narcissist or senile scum like Trump & Biden. Anyway, the RoW wants out from under the Euro-White yoke, & are making sure it happens.
Empires weaken thru corruption & overreach, ours is clearly hitting a wall. . . As to Ian’s question, I kind of thought that Jared Diamond’s “Collapse” may (?) have covered ancient collapses, like in the 12th century bce, as well as Rome & other examples? Actually I had seen something advertised in an old issue of Harper’s, & here’s the title, Ian– 1177 B.C.: The Year Civilization Collapsed– it even has its own Wiki page, well reviewed, link here– https://en.wikipedia.org/wiki/1177_B.C.%3A_The_Year_Civilization_Collapsed
Soredemos
BRICS already said weeks ago they aren’t aiming to replace the dollar. They’ve made explicit what plenty of people were already pointing out about the infeasibility of replacement. Dollar hegemony may eventually go away, but it won’t be any time soon and it won’t be total.
VietnamVet
This loss of financial hegemony is the specific reason why the current NATO Russia proxy conflict is in fact World War III. To agree to an Armistice and build a DMZ from the Arctic Ocean to the Black Sea to prevent a nuclear war like Korea in 1953 would place Europe and North America in a secondary position in the world; de-industrialized, resource depleted, and ruled by ideological incompetents incapable of planning for the future. If the USA, Canada, and Mexico avoid splintering apart into civil wars, a reasonable lifestyle is possible in North America with the remaining resources and manpower if there are democratic functional good governments and everyone lives within their means under the rule of law.
Otherwise WWIII will end with a nuclear war like WWII or at best an economic collapse and loss of all its overseas protectorates like Germany in WWI.
Troy
Thinking about the Canadian petro-economy. It’s barely shambling along on the petro-dollar. Even a slight disruption to that would probably shoot energy prices through the roof, as most if not all Canadian provinces have tethered energy prices to the median price rather than the lowest price.
I’m not even sure what the federal and provincial governments are subsidizing the tar sands for nowadays but I’d probably imagine it’s well over 70 billion dollars a year now simply to see Canadian energy companies profit for $5 billion a year (and this is being generous). The tar sands are on life support.
And the federal and provincial governments don’t seem to have many if any plans whatsoever in ushering in an economy that can withstand the loss of cheap fuel. Rather, it seems Canada has attached itself to the American Hail Mary pass to transition to battery power.
Which would be a fantastic idea, if most the innovations and breakthroughs in the past decade had been in the West. As most if not all have been in Korea, China, and Japan, the West is not likely to benefit much if at all unless they reshape their economies wholesale.
Kinda late now. We’re likely in for another two decades of shambling along.
KT Chong
If and when BRICS create a common currency, they should totally call it… the “universal credit”, or “credit” or “cred” for short.
Finally we all will be using “creds” just like in sci-fi.
someofparts
Based on what we can see now, it looks like leadership in Asia is factoring climate change into their plans if Vladivostok is set to become an economic hub. It seems reasonable to hope that as rising sea levels and whatnot impinge on Asia, mass migrations to survivable latitudes in Russia will be organized.
Anticipating what we can expect from Western leadership based on what we see from them now, it seems like climate pressures will lead to massive refugee camps and surviving remnants of the middle class hunkered down in walled compounds.
Purple Library Guy
The United States exercises dominance based on three things, as far as I can tell. Military dominance, financial dominance, propaganda/cultural dominance. They’re all eroding. But the financial one doesn’t have to erode THAT far in order to make a big difference.
The thing is, there are definitely countries that toe the US line because they’re afraid of the US tendency to “pick up a crappy little country and throw it against a wall just to prove we are serious”–that is, invade or bomb or otherwise militarily crush. But sanctions do about as much damage, and the US doesn’t hesitate as much to employ them. Countries are definitely afraid of being the next Venezuela. For sanctions to stop working, it doesn’t have to be true that most transactions aren’t done in dollars and/or Western banks any more. It just has to be practical to sidestep that, so that US sanctions can be prevented from crashing your economy. If the financial system moves away from US dominance just that far, a lot of countries will be a lot less afraid of the consequences of doing things their way.
Purple Library Guy
It’s often said that the US will be less affected by climate change than various other places. But there is an extra spanner in those works–at the same time climate change is causing trouble for the US, including by widespread drought, significant parts of the US that rely on fossil groundwater are running out. That could be a pretty potent double whammy.
bruce wilder
The incoherence of the quoted statement really bothers me.
I don’t want to be harsh, but this is a just hot mess. I get that you don’t want to write a dissertation. You’re writing a blog post and you need to write in a kind of short-hand, referencing larger ideas that presumably are already in people’s heads, rather than expounding from first principles. Really, I get that. But, what is already in people’s heads about economics, money and finance is often very badly wrong and trying to build an argument on that foundation just results in mush. Even as this method of exposition — using cliches as stepping stones, if you will — seems to enable you to walk along the surface of a deep pond to get to a near shore, it leaves reason handicapped, not empowered, in such a walk across the surface of ideas.
“Terms of trade” is conventionally defined as the ratio of export prices to import prices, interpreted as the amount of import goods an economy can purchase per unit of export goods — behind that ratio is the concept that resources are being allocated to production of export goods in order to obtain import goods more efficiently. The dollar’s role as a global fiat currency has given America fantastically favorable “terms of trade” as the U.S. has essentially “exported” dollar debt paper and related services in various forms, public and private, to pay for a large part of its merchandise imports. What a deal! It might be morally healthier for the U.S. to export more goods and services — products of its industry and agriculture — to pay for its imports, but if it does so only because its imports buy less abroad (the plain meaning of “much cheaper overseas”), that’s not objectively an “improvement” in its terms of trade from an American point-of-view. The U.S. would be exporting more goods to pay for its imports. Again, that might be morally better in some sense, but it is not an improvement in its terms of trade.
A lot of people let their reasoning about the way the economy works and desirable economic policies collapse into a form of just-world hypothesis. It is very common. Right-wing Chicago School economists and libertarians (propertarians) do it to promote uptake of a reprehensible ideology. But, it isn’t any more defensible a tactic for the left.
The actual economic system is institutionalized, a system of coordinating social mechanisms of which money and finance constitute a core component. Yes, the post-WWII financial order is clearly breaking down at the end of its very long life, and that bears thinking about. Thinking about the implications is challenging, not least because the dominant shared ideology / theory about how money works in the economy is empty, manipulative neo-liberal rhetoric built on a foundation of misleading and useless neoclassical theory. The toolkit of concepts we have readily available is faulty and untrustworthy.
“Dollar privilege . . . made the dollar worth far more than it should have been [worth]” — unpacking this assertion would mean trying to give a definite operational meaning to an assertion of the “true” value of the dollar. Do you mean the magnitude of the unit of account in relation to some good or “basket” of goods somewhere at some time?
I take the view that money as a set of institutions constitutes a score-keeping system so I am definitely open to the idea that the score-keeping is biased or corrupted in various ways, but I don’t think there is a “true” value of a point in a football game or a basketball game. A three-point shot may be worth more points according to the rules than a successful layup, but what’s the true value of a point?
It would be a fair observation, I think, that the U.S., through the mechanism of the Federal Reserve, is having to support the value of the dollar internationally by raising base interest rates and that policy hazards a doom cycle, because in this late stage of dollar dominance, the sheer quantity of dollar debts, public and private, has reached fantastic levels and a rise in interest rates drives down the liquid-exchange value of existing long-term assets and puts upward pressure on debt service flows — just generally creating the potential for instability and fragility, magnifying risks financially instead of dampening risks.
Financial crisis and Minsky moments and inverted yield curves — it doesn’t bring out clear thinking, unfortunately. Or, maybe the powers that be prefer propaganda that prevent clear thinking.
It would also be reasonable to question whether a multi-polar financial regime might become deflationary, depressing global trade and, indeed, global economic activity generally.
I am not willing to write a dissertation in comments either and really I am just avoiding some boring and unrewarding work obligations by writing this, so I will leave it now that I have wasted an hour of my time. I apologize for the negativity. Maybe I was born a critic.
StewartM
PLG
It’s often said that the US will be less affected by climate change than various other places.
Oh, I admit the all things you mention. It’s just compared to much of your populated area going underwater (say, China) or your ‘ricebasket’ (Vietnam) the US gets off less worse.
I also fear this could exacerbate internal US divisions. When blue NYC or Seattle floods, maybe red Midwesterners won’t care? (Florida might be another story). 40-plus years of Reaganism/Thatcherism (remember, Maggie told us that there ‘is no society’) has made framing a consensus of ‘we’re all in this together’ darned-near impossible.
Ian Welsh
Bruce,
lol. I’m not offended. I’ve written multiple articles about what money is.
If you wish to say “the terms of trade are better than the otherwise would be” I’m good with that.
My view of trade/currency rates is essentially that of Jane Jacobs and as such I view it as a bad thing when a currency’s trade value is determined by anything but the actual trade between countries in goods and (fairly concrete) services.
The US dollar’s value is FAR higher than it would be if it was just determined by trade.
different clue
@Mark Level,
Just because the ruling classes have placed the rest of us in the role of sheep does not mean that we have to be good little sheep. If we can be baa-a-a-d little sheep, we should figure out how to do at least that.
The ruling class wants us to grow virgin lambs wool for them to shear at their convenience. If we can learn to grow dirty rusty used brillo pads, we should do that instead.
Every dollar is a bullet on the field of economic combat.
Nobody owes the rich a living.
I am not my keeper’s brother.
different clue
I like what Charles Walters Jr. wrote in Acres USA several decades ago, back when a measure of autarky would still have been possible for America.
” If we did not buy anything of the foreigner, we would not have to sell anything to the foreigner in order to raise the money to buy anything of the foreigner.”
Jan Wiklund
I think the “dollar privilege” is rather similar to the “silver privilege” of Spain in the 16th-18th centuries. Spain was able to pay all its debts with silver from Bolivia and Mexico and didn’t need to produce anything. Which caused the death of the once impressive Spanish industry.
I believe it’s the dollar privilege that has caused the near-death of US industry, with the associated ruin of its working class. An end to the dollar privilege would make it impossible for the US ruling class to live on credit. They would have to start organizing production, which would be all the better for all other Americans.
different clue
About the collapse of ancient civilizations . . . there is evidence scattered all around the world of an even earlier cycle of civilizations, before the “ancient” civilizations, which also collapsed and left behind various “megalithic” stone structures. They are so challenging to mainstream paradigms that the mainstream history thinkers try to pretend that they are unaware of their existence, because they have no explanation for them.
Here is a video made up of various still photographs with a background of mildly dramatic music showing megalithic structures in a part of the southern Ural Mountains of Russia. Maybe it is just a very convince deepfake videoshop production. But my purely amateur impression is that this is real and not videofakery.
If it is real, and the stone structures depicted are real, it would be good if mainstream historians would admit to their existence and begin considering explanations for them.
Who built them and when and why? And where did the people involved go and when . . . without any trail of footprints from their time into our own? Here is the link to the video.
https://www.youtube.com/watch?v=lIBfAf3Z_sA