Can DedollarisationEnd Pax Americana? Significant international trade bypassing the dollar sets off huge debate

Arshad Shaikh studies the recent trend of countries led by the BRICS nations to trade in other currencies by moving away from the US dollar. Will this dedollarisation accelerate the end of Pax Americana? Will the greenback lose its status as the world’s reserve currency? What impact will it have on the American and global…

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Arshad Shaikh

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Arshad Shaikh studies the recent trend of countries led by the BRICS nations to trade in other currencies by moving away from the US dollar. Will this dedollarisation accelerate the end of Pax Americana? Will the greenback lose its status as the world’s reserve currency? What impact will it have on the American and global economy? Some view these questions as more hype than reality. Others see it as the beginning of the end of a unipolar world that began after the collapse of the Soviet Union. The current numbers show that the dollar has significant dominance over all the parameters that make it the international currency of choice. However, that dominance is being challenged. How serious that challenge proves, is a trillion-dollar question.

According to the WTO, the size of international trade in goods (not including services) was around $22.8 trillion in 2021. According to the International Energy Agency (IEA), in 2021, global oil demand was around 96 million barrels per day (bpd), and the global oil market was worth approximately $1.7 trillion. What if most of that trade international trade happened in one currency? The country owning that currency would benefit enormously, wouldn’t it? Besides increased demand that offers the currency a higher valuation, it would lead to lower borrowing costs (as investors see the country as a safe haven for their money due to a lower perceived risk of lending to that country).

Conversely, this also bolsters the country’s purchasing power and ability to print more money without facing the same inflationary pressure as others would have. No prizes for guessing that country and its currency with the dedollarisation gathering steam in the media. The US dollar’s virtual monopoly as the world’s reserve currency is in jeopardy, as other nations start seriously challenging the greenback, leading to some frightening scenarios for the American economy and Pax-Americana.

THE RISE OF THE PETRODOLLAR

A reserve currency is a foreign currency that is kept by central banks and other monetary agencies in significant numbers to bolster its foreign exchange reserves (money to fund its international trade and investments). The pound sterling was the world reserve currency for most of the 19th century and the first half of the 20th century.

As Great Britain weakened considerably and the United States came out virtually unscathed after two World Wars, it was clear that the pound could no longer carry the burden of being the king of currencies. The Bretton Woods Agreement (1944) saw the crowning of the US dollar as the new global reserve currency, pegged to gold at a fixed exchange rate of $35 to an ounce. By the 1970s, convertibility into gold was no longer viable as the United States ran a huge trade deficit and consequently became heavily indebted.

In 1971, President Richard Nixon ended the convertibility of the US dollar to gold, effectively terminating the Bretton Woods system. In 1973, the United States made an agreement with Saudi Arabia that all of its oil sales would be conducted in US dollars. The Saudis would invest their surplus income in US securities. The US would look after and guarantee the defence needs of the kingdom.

This meant that any country that wanted to purchase oil had to exchange their currency for US dollars first. This arrangement created the petrodollar. It became the dominant currency for international trade, especially in the oil industry. This ‘dollar hegemony’ yielded immense dividends to America for geopolitical dominance and bankrolling its enormous and ever-increasing national debt.

THE CHALLENGE LED BY BRICS

Since the last 80 years, the US dollar did not face any stern contest to its status of being the best currency to hold and trade. Many countries, led by the BRICS nations (Brazil, Russia, India, China and South Africa) are trying to reduce their dependence on the US dollar for international trade, and their central bank reserves. There is talk of creating a new currency (that will be backed by gold and will operate within BRICS) and competing with the dollar.

Dedollarisation received a fillip after the Russian invasion of Ukraine. The US and its allies froze almost half of Russia’s foreign exchange reserves amounting to $300 billion. They kicked out Russian banks from the SWIFT network (international payment system) in a bid to debilitate Russia’s economy and bring it to its knees.

This weaponization of the dollar was a rude wake-up call for countries that wanted to avoid becoming sitting ducks before American sanctions and financial strangulation. Last year itself, China and Russia announced that they would emphasize the use of “local” currencies for trade. Russia is moving towards changing its reserve currency from the dollar to the Chinese Renminbi (Yuan) and entering into trade agreements with India to sell oil in other non-dollar currencies. China and Brazil also agreed to trade in their respective currencies. Brazil and Argentina are thinking of launching a common currency. Saudi Arabia is in active talks with China to sell oil in Yuan.

According to the IMF’s Currency Composition of Official Foreign Exchange Reserves (COFER) survey, the share of US dollar reserves held by central banks fell to 59 percent, its lowest level in 25 years, during the fourth quarter of 2020. An IMF working paper attests that “the decline in the dollar’s share has not been accompanied by an increase in the shares of the pound sterling, yen, and euro, other long-standing reserve currencies. Rather, the shift out of dollars has been in two directions: a quarter into the Chinese renminbi, and three quarters into the currencies of smaller countries that have played a more limited role as reserve currencies.”

DEDOLLARISATION – A PIPE DREAM

Despite these remarkable developments, many sceptics do not subscribe to the gloom and doom scenarios of dedollarisation. They feel that it is more hype than reality. They point out that over 80% of all global foreign exchange transactions and over 50% of all trades and payments still happen in the greenback. The peerless $20 trillion US treasury market attracts all central banks to keep their money “safe and liquid.”

Add to it – zero capital controls and a strong functioning democracy, and you have a financial system that is trustworthy and reliable. In addition, we have nearly $12 trillion of dollar-denominated debt accumulated by various countries outside the United States. Deleveraging this gigantic debt will be a tall order for any country. For these dedollarisation-cynics, the US dollar losing its position as the planet’s reserve currency is nothing more than a fairytale.

THE AGE OF UNCERTAINTY

There is no doubt that the burgeoning dedollarisation marks a watershed moment in history. It may well lead to the beginning of the end of Pax-Americana. The dawn of a multipolar world is nigh. In an interview, monetary expert John Rubino prophesises, “We are not guaranteed a peaceful transition from a unipolar world to a multipolar world. It could be very bloody and chaotic. We just have to pray that the transition is reasonably peaceful and that it is not a financial catastrophe or a geopolitical catastrophe in the next five years.”

Allah says in the Qur’ān (2:251), “…And if it were not for Allāh checking [some] people by means of others, the earth would have been corrupted…”

This is a universal principle by which God governs the nations as a part of the Divine system. He permits nations to attain power and strength within certain limits. But when a nation begins to commit wrongs and exceed reasonable limits, God brings forth another nation as a counterweight. Were the dominion of one nation or party to endure forever, and were its capacity to perpetrate wrongs granted in perpetuity, God’s earth would become full of corruption and wickedness. Pax-Americana will end. It is all part of the divine decree.