In FRFI 294 we reported on the growing trend of countries seeking to find alternatives to the dollar with the share of the US dollar in global currency reserves dropping from 73% in 2001 to 47% in 2022. Red warning lights continue to flash for the US economy. As US debt to GDP reaches 130%, more countries are selling off their US treasury bonds – with China selling off $174bn last year alone. Selling treasury bonds is a principal mechanism for the US government to fund budget deficits and secure access to cheap imports. Compounding the problem, foreign investors have been further shaken by the collapse of a string of US banks and the ‘debt ceiling’ crisis which saw the US government debt surpass its previously agreed $31.4 trillion limit in early 2023. Congress scrambled to agree to lift the debt ceiling until 2025, postponing the crisis. Though the ceiling is a self-imposed limit, it has been raised over 100 times since its establishment in 1917, and indicates a growing balance of payments deficit. Only the primacy of the US dollar in global finance can allow such levels of debt to be sustained without seriously downgrading the US credit rating and therefore the value of its bonds. With the writing clearly on the wall, on 7 June, the US congress held a bi-partisan hearing entitled ‘Dollar Dominance: Preserving the US Dollar’s Status as the Global Reserve Currency’.
Republican Representative Blaine Luetkemeyer, chairing the session, spelled out the ‘exorbitant privilege’ the dollar affords:
‘The US dollar has been the preferred global currency since the end of World War Two, providing our nation inherent economic advantages, as well as responsibilities. Today, an estimated 88% of all currency transactions by value are conducted in US dollars. Among other things, this limits the risk of a balance of payments crisis, which inherently lowers our exchange rate risk. The dollar’s position also allows the United States and Americans to borrow at rates such as 50 to 60 basis points lower. Our currency strength not only benefits the United States government, but also helps American consumers by lowering the price of imported goods, resulting in an estimated $25 to $45bn a year in savings.’
Tyler Goodspeed, Chair of the Council of Economic Advisers under former President Trump added:
‘First, foreign demand for reserves of US dollars raises demand for dollar-denominated securities, in particular United States treasuries. This effectively lowers the cost of borrowing for US households; US companies; and federal, state, and local governments. It also means that, on average, the United States earns more on its investments in foreign assets than we have to pay on foreign investments in the United States, which allows the United States to import more goods and services than we export. Second, foreign demand for large reserves of US dollars and dollar-denominated assets raises the value of the dollar, and a stronger dollar benefits US consumers and businesses that are net importers of goods and services from abroad. Third, large reserve holdings of US currency abroad, in effect, constitutes an interest free loan to the United States worth about $10 to $20bn per year.’ Straight from the horse’s mouth!
Yet the dollar has also been honed as a weapon. Democrat Representative Joyce Beatty championed its use in enacting crushing sanctions on nations that step out of line: ‘The dominance and supremacy of the currency affords the United States numerous benefits, from reduced borrowing costs, to increased financial stability, to influence over global financial markets. It also allows us to leverage economic measures against those that seek to threaten our national security and foreign policy.’ 39 countries with more than a quarter of the world’s population live under US sanctions. Far from ‘non-lethal measures’ US and British sanctions on Iraq in the 1990s killed half a million Iraqi children due to lack of food and medicine. By 2018, US sanctions on Venezuela had killed over 40,000 due to their impact on health care. This is the horror that Beatty defends.
These sanctions, particularly against China and Russia, are now driving de-dollarisation. Political scientist Daniel McDowell, addressing the hearing, argued ‘The more that the United States has reached for financial sanctions, the more it has made adversaries in foreign capitals aware of the strategic vulnerability that stems from dependence on the dollar’. Furthermore, because around half of global debt is dollar-denominated, every time the US Federal Reserve (central bank) hikes up interest rates, local currencies are devalued, making debt repayments even harder. This too is driving countries to trade in alternative currencies. Facing ever-expanding IMF debt and a shortage of dollars for imports, Argentina agreed a currency swap with China earlier this year, allowing it to trade with China using the yuan instead of the dollar. Similar agreements are already in place with Pakistan, Sri Lanka and Laos. Recognising this development, Republican Young Kim fretted ‘We should all be troubled by the increase of central bank swap-line agreements deployed by the People’s Bank of China [PBOC]… it has swap facilities with 40 countries, with a combined capacity of almost 4 trillion yuan, or about $570bn dollars…is there anything that the United States can do to slow down the PBOC’s currency swap lines?’ Predictably, lifting criminal sanctions and cancelling odious debt, much of it owed to the US and its global financial institutions, was not on her agenda.
Facing a deep economic crisis and widening inequality, it is imperative for US imperialism to maintain the dollar as the global reserve currency, essentially a licence to print money.
Its massive military complex floats on a sea of dollars and in order to defend its global position the US is increasing its military spending to $886bn, more than the next ten countries combined. This ‘king of all currencies’ is the backbone of US imperialism, without it living standards would plummet. Battle lines are being drawn.
Sam McGill
* Credit to Ben Norton’s Geopolitical Economy Report for transcript: US Congress plots to save dollar dominance amid global de-dollarization rebellion – Geopolitical Economy Report
