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De-dollarization: World faces threat of economic catastrophe

NewsDe-dollarization: World faces threat of economic catastrophe

Global use of the US dollar as a currency may decline further to 40-45% within the next 2-3 years.

March 2023 brought an economic bloodbath in the United States. One of the most prominent American banks, the Silicon Valley Bank, which was counted as one of the top 20 banks in the US with over $215 bn in assets, collapsed. The bank suffered a massive loss of $1.8 bn due to the interest hike on US Treasury securities. Days later, New York-based Signature Bank, with over $110 bn in assets, collapsed because its deposits exceeded the maximum permissible limits of the US Federal Deposit Insurance Corporation, while the share price of First Republic Bank, with over $215 bn in assets, had fallen by 67%, and that of Western Alliance Bancorporation had fallen by 90%. Not only this, the credit ratings of almost every prominent private bank in the United States have been downgraded. Prior to all this, Silvergate Bank, another institution dealing in cryptocurrency, also failed because of liquidity issues in the first week of March 2023. The way American financial institutions are falling one after another predicts a kind of economic doomsday for the Western superpower.
All these banks have a single story for their failure, which is directly linked to the interest on US Treasury bonds. As the demand for the US Dollar is decreasing in the world, these bonds are also falling, and in order to make them float, banks have no solution but to offer higher interest rates, which burn holes in their liquidity. And when Renowned economist Dr. Nouriel Roubini, also known as ‘Dr. Doom,’ who predicted the global recession of 2008 with utmost accuracy, is not only predicting another global economic collapse but also cautioning that this time, problems are going to last long, maybe a decade or more. One of the main reasons for this upcoming recession would be de-dollarization. The American dollar, once considered the only currency for global trade, is losing its shine and being replaced by other currencies. Naturally, it is going to impact the American economy in a big way and can trigger an economic catastrophe for the topmost superpower of the world.
Let us try to understand what de-dollarization is all about.
Traditionally, the value of any currency depends upon the assets held by the country issuing that currency. Until about 100 years back, the most sought-after global currency was the British Pound, not the US Dollar. Post World War I, America, which was relatively unscathed as the war was not fought on its land and received the largest chunk of wartime gold reserves, started replacing the pound as a currency of global trade. The US went on to execute the Bretton Woods Agreement in 1944, promoting bilateral trade between countries in US dollars. Surprisingly, by the late sixties, holding US dollars was considered more profitable than holding stocks or gold. Hence, its hoarding was common not only among individuals but also by countries.
By 1970, the Bretton Woods Agreement was almost nullified after the London Gold Pool was dissolved, and Asian economies started to grow again. On the other hand, the US was facing a negative balance of payment crisis due to massive expenditures on the Cold War and Vietnam War. In 1971, President Nixon cancelled the convertibility of the US dollar into gold, thus de-linking it from the value of assets of his country. Thus, the value of the US dollar was now dependent on its global demand and not on the assets held by the American government. The introduction of ‘Petro Dollars’ helped raise the demand for the greenback, and to fulfil the demand, the US started printing more and more dollars.
Since America was the biggest contributor to global agencies such as the IMF and the World Bank, all its disbursements were also in US dollars. As a result, developing or underdeveloped countries were forced to trade with other countries in US dollars. By the late nineties, nearly 90% of global trade was happening in US dollars. Hoarding increased, and more dollars were printed to cover up this demand. Today, as opposed to nearly $500Bn of US gold reserves, they have issued hard currency worth nearly $4 trillion and US treasury bonds worth another $38 trillion, which is nearly 80 times the total assets of the US Treasury.
The US thought that, since the demand for its currency is high in the market, it would continue to sail on its artificial bubble. In the last several years, it created war-like situations across the world, compelling countries to procure more arms, fuel, and other items from the global market, thus promoting trade in US dollars. The Information Technology (IT) boom of the nineties further strengthened the demand as most of the top IT companies were American, and almost 80% of the IT industry was based in the US itself. Bilateral currency swap agreements between countries were also dealt with by American sanctions to discourage trade in other currencies.
Since 2014, when the US imposed economic restrictions on Russia and created roadblocks in its trade into US dollars, countries started thinking of alternatives to avoid the use of the US dollar. The introduction of the Euro also helped countries break the monopoly of the US dollar. Over the last eight years, more and more countries executed bilateral agreements to avoid a situation like Russia’s. Russia and China developed their own payment gateway, and India and Russia also went into a similar agreement linking the Reserve Bank of India and Russia’s Sistema Peredachi Finansovykh Soobscheniy (SPFS). Meanwhile, countries like Brazil, China, Australia, Argentina, Egypt, the European Union (EU), Iran, Japan, Saudi Arabia, the UAE, and Turkey also executed bilateral agreements to avoid the monopoly of the US dollar.
As a result, not only has the total circulation of the US dollar in the world declined significantly, but also the stocking of greenback. According to an estimate, the global trade of the US dollar has declined by over 20% in the last four years alone. This can be reflected in the statement of the International Monetary Fund’s foreign currency assets, where the share of the US dollar has been reduced from 71% in 1999 to just 57% in 2021 and is further on the decline.
The net cascading effect will be on the global circulation of the US dollar. It is expected that the global use of the US dollar as a currency may decline further to 40-45% within the next 2-3 years. The Euro, which used to trade below the US dollar, is now having an upper hand. Russia is trading in Ruble against its cheap oil, while countries are dealing in Chinese Yuan, Japanese Yen, Saudi Riyal, and UAE Dirham too. India is also trading with over 44 countries in the Indian Rupee itself.
Major Amit Bansal is a retired Army officer.

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