US Treasury Secretary Janet Yellen can no longer ignore the fact that the dollar is used as a weapon to quash unwanted behaviour by rivals. It comes with risks of national interest. Imposing financial sanctions linked to the dollar’s role could eventually undermine the dollar’s hegemony, she said.
“So there is a risk when we use financial sanctions that are linked to the role of dollar of the dollar, that over time it could undermine the hegemony of the dollar,” Yellen said in an interview with CNN.
Yellen, who was previously president of the Federal Reserve, told CNN that she understands that countries like Russia are considering ways to escape US-imposed sanctions. But she noted the dollar is used as a global reserve currency for reasons that other countries cannot easily ignore.
“The dollar is used as a global currency for reasons that are not easy for other countries to find, find an alternative,” she said. “The US Treasury market is the deepest and most liquid and safest asset. Dollars are widely used. We have very deep capital markets and rule of law that are essential in a currency that is going to be used globally for transactions.”
“And we have yet to see any other country that has the fundamental institutional infrastructure that allows its currency to serve the world in this way.”
At the same time, Yellen defended the sanctions. “They are an extremely important tool, especially when we act with our allies as a coalition of partners.”
Dollar defines America’s power
In response to the war launched by Russia against neighbouring Ukraine in February last year, the United States froze Russian assets and also denied the country access to the international payment system Swift. In total, 5,000 different sanctions have been imposed on Russia, argues Gal Luft, co-author of the book De-dollarisation, the revolt against the dollar and the rise of a new financial world order. He believes the US is playing a dangerous game.
“The special status of the dollar as the world’s reserve currency is America’s main source of power in the world, more so than its military position,” said Luft. “As a result, the United States can afford a debt level of $30,000 billion, growing by $1,000 billion a year. And this is because it can easily borrow unlimited money, both from other countries and from its own citizens. Until recently, the world had confidence in US leadership, its values and its intentions. But that is now changing.”
Source: visualcapitalist.com
For instance, many countries, especially in the southern hemisphere, have refused to join the sanctions against Russia. Many countries denounce the “rule-based” system the US operates, which makes 1 in 10 countries in the world affected by US sanctions. And that is why, said Luft, who works for the Institute for the Analysis of Global Security (IAGS), there is currently a broad-based revolt against the US. This is manifesting itself in deleveraging US foreign exchange reserves and exposure to US debt securities, as well as replacing the dollar as a currency, as is the case with China, Saudi Arabia and Brazil.
Technical bankruptcy
Apart from animosity towards the United States, it is also a matter of common sense, said Luft. The United States currently has more than $30,000 billion in public debt, which amounts to $224,000 per US taxpayer. By 2026, Luft estimated, the US national debt will be as high as $40,000 billion, which will then convert to $300,000 of debt per taxpayer.
“To cut a long story short, the United States is technically bankrupt, but continues to spend money like there is no tomorrow. But unlike in the past, borrowers have become more cautious and are walking, but not yet running for the exit.”
Given the size and liquidity of the US capital market, the United States will retain its dominance as a reserve currency for now. Luft does not think the dollar will collapse or be replaced by another currency in the foreseeable future. But he does say he sees a split in the global financial system, as well as the emergence of a parallel financial system, providing an alternative to the dollar system in terms of trade, investment, finance and development. The contours of such a system are already being drawn by BRICS and others, he said.
In the new system, countries, especially commodity-exporting economies, will increasingly trade with each other in non-dollar currencies, enter into non-dollar currency swaps, make non-dollar loans and share banking data through non-Swift clearing systems. Central banks will increasingly reduce the dollar’s share of their foreign exchange reserves.
“For the US, this trend means trouble, but most US policymakers, basking in America’s greatness, are fully aware of it, just as they have rejected the idea of the comeback of inflation,” said Luft, who co-authored the 2019 book De-dollarisation, the revolt against the dollar and the rise of a new financial world order with Anne Korin.