DEDOLLARISATION - WHAT IS THE MOTIVATION?

This is a three-part post on the march towards dedollarisation. This first part looks at the motivations for dedollarisation. The follow-up posts will look at the geopolitics vs macroeconomics and then second guessing what BRICS+ new currency system may be.

The US Dollar has served well as a major reserve currency since 1944. Its developed financial and capital markets has been pivotal in supporting the reconstruction and explosive rate of development of countries all over the world after WWII. As the biggest economy in the world, and the shrewd maneuvering of the use of the petrodollars, the US lived off the strength of the dollar for decades. Uncle Sam grew accustomed to, and believe as owner of the world's money-printing press, the good life never ends.

The three heads of the American bald eagle of neoimperialism, fiscal irresponsibility, and the weaponisation of the USD is now fueling the march towards dedollarisation.

The use of USD as world reserve currency has given US the financial power to build unparalleled military might. Weaponry superiority has pushed US military adventurism for decades in ways they self-justify in their role as policemen to the world. The US has been involved with regime change all over the world to set up governments aligned with their world view.

Neoimperialism is the domination over others, primarily by sheer economic power and cultural influence. More than military power, American soft power of USAid that covers financial, humanitarian, technical, technological, military assistance, as well as some defence umbrella arrangements, and access to trading opportunities, has kept mendicant countries in line. The allure of US globalist trade policies in Obama years is a pull factor of export-oriented countries to their orbit, such as Singapore. This stranglehold of neoimperialism forces many dependent states to align foreign policies with US and Western dictates on the world stage, such as in the Russo-Ukraine war, response to the pandemic, and climate change fear mongering.

American fiscal irresponsibility has the world on edge to the risk of holding vast USD reserves and assets in the long term. Since WWII the US have never had a budget surplus except for Clinton's second term. After the abolishment of the gold standard in 1973, US budget deficits became progressively more pronounced. In 2009 it hit then record US$1.4T under Obama, driven by socialist spending policies. The budget deficit hit record high of US$3.1T under Trump due in large part to massive corporate tax rate cut to stimulate the economy, strengthening the military ignored in Obama years, and pandemic financial assistance programmes. Trillion dollar budget deficits continued with Biden due primarily to the pandemic and the Ukraine war effort.  

There is a misconception that US prints money for its spending spree. In reality, the US borrows to fund its budget deficit. The world's appetite for USD allows the US to go on a borrowing spree. From a national debt of US$35B in 1973, representing 33% of GDP, it has now exploded to US$34.7T in May 2024, which is 125% of GDP. Most economists think the 70% level is when to get worried, and a 100% level is definitely a red flag.

The US is technically bankrupt.  At which point a country will start to unravel and crumple under the weight of its national debt like Argentina and Zimbabwe, depends on the convergence of various factors. These include a  high debt level, rising debt servicing costs, low economic growth, loss of market confidence, and political instability. All these factors are present today in US. 

Distrust of US policies in the context of the dollar as reserve currency have been around for decades, but kinetic resistance to change has meant a status quo persisted. What finally pulls the plug on the sinking vessel may well be the weaponisation of the dollar. The US unilateral sanctions on Russia, forcing SWIFT to kick Russia off the payment platform, and confiscation of Russian oligarchs' US assets, have not gone down well with most non-Western countries. This overreach of US power holds governments to ransom for actions perceived to be against foreign policies of the White House. 

Those that take lightly a trespass on US policies might want to pay attention to the Indo-Iranian co-operation on the Chabahar port. The two countries have signed a contract for India to manage the port for a term of ten years. The US has indicated this a violation of their sanctions, which is ludicrous considering Obama has returned billions of long frozen dollars to the Iranians and Biden sees no interest in continuing the negotiations on the inspection of Iran's nuclear programme. Chabahar, however, is a port of interest. The US sees an economic threat in the development of this port by the Indians. An increase in capacity and improvements in port operations will pave the way for a new distribution route for Russian exports southwards through Chabahar to India and beyond. The Western countries will lose leverage over Russian trade to and from Southern and Eastern regions. The US has indicated it may take sanctions against New Delhi for the Iranian port project.  This is a developing story.

 

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