Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Why President Trump Has NO Real Power - Deep State Military Industrial Complex - 8th Nov 24
Social Grant Increases and Serge Belamant Amid South Africa's New Political Landscape - 8th Nov 24
Is Forex Worth It? - 8th Nov 24
Nvidia Numero Uno in Count Down to President Donald Pump Election Victory - 5th Nov 24
Trump or Harris - Who Wins US Presidential Election 2024 Forecast Prediction - 5th Nov 24
Stock Market Brief in Count Down to US Election Result 2024 - 3rd Nov 24
Gold Stocks’ Winter Rally 2024 - 3rd Nov 24
Why Countdown to U.S. Recession is Underway - 3rd Nov 24
Stock Market Trend Forecast to Jan 2025 - 2nd Nov 24
President Donald PUMP Forecast to Win US Presidential Election 2024 - 1st Nov 24
At These Levels, Buying Silver Is Like Getting It At $5 In 2003 - 28th Oct 24
Nvidia Numero Uno Selling Shovels in the AI Gold Rush - 28th Oct 24
The Future of Online Casinos - 28th Oct 24
Panic in the Air As Stock Market Correction Delivers Deep Opps in AI Tech Stocks - 27th Oct 24
Stocks, Bitcoin, Crypto's Counting Down to President Donald Pump! - 27th Oct 24
UK Budget 2024 - What to do Before 30th Oct - Pensions and ISA's - 27th Oct 24
7 Days of Crypto Opportunities Starts NOW - 27th Oct 24
The Power Law in Venture Capital: How Visionary Investors Like Yuri Milner Have Shaped the Future - 27th Oct 24
This Points To Significantly Higher Silver Prices - 27th Oct 24
US House Prices Trend Forecast 2024 to 2026 - 11th Oct 24
US Housing Market Analysis - Immigration Drives House Prices Higher - 30th Sep 24
Stock Market October Correction - 30th Sep 24
The Folly of Tariffs and Trade Wars - 30th Sep 24
Gold: 5 principles to help you stay ahead of price turns - 30th Sep 24
The Everything Rally will Spark multi year Bull Market - 30th Sep 24
US FIXED MORTGAGES LIMITING SUPPLY - 23rd Sep 24
US Housing Market Free Equity - 23rd Sep 24
US Rate Cut FOMO In Stock Market Correction Window - 22nd Sep 24
US State Demographics - 22nd Sep 24
Gold and Silver Shine as the Fed Cuts Rates: What’s Next? - 22nd Sep 24
Stock Market Sentiment Speaks:Nothing Can Topple This Market - 22nd Sep 24
US Population Growth Rate - 17th Sep 24
Are Stocks Overheating? - 17th Sep 24
Sentiment Speaks: Silver Is At A Major Turning Point - 17th Sep 24
If The Stock Market Turn Quickly, How Bad Can Things Get? - 17th Sep 24
IMMIGRATION DRIVES HOUSE PRICES HIGHER - 12th Sep 24
Global Debt Bubble - 12th Sep 24
Gold’s Outlook CPI Data - 12th Sep 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Trump White House Accelerating Toward a US Dollar Crisis

Currencies / US Dollar Jul 31, 2020 - 05:37 PM GMT

By: Dan_Steinbock

Currencies

As US economy is heading toward its disastrous 2nd quarter results, the Trump administration is considering the expansion of the trade war to finance, which could destabilize the US dollar and derail the post-pandemic global economy.

After its failure in the COVID-19 containment and the expected -53 percent plunge of real GDP growth in the 2nd quarter, President Trump’s re-election campaign is in serious trouble. To deflect the blame, his administration has launched a series of provocative measures against China thereby fueling elevated bilateral tensions.

Worse, the White House is reportedly considering moving from a bilateral trade war to an effort to exclude China from the dollar-denominated international payment network. In Beijing, that would be seen as weaponization of US dollar.


Created in Brussels in 1973 – after the rise of US deficits, weaker US dollar and its decoupling from the gold standard – the dollar clearing and settlement system (Society for Worldwide Interbank Financial Telecommunication, SWIFT) is ostensibly a non-profit organization. Yet, its first CEO was a former executive of American Express and its data centers are in the US, Netherlands and Switzerland.

According to critics, the SWIFT’s status changed after 9/11, when the Bush administration, true to its unipolar stance on US security and defense, seized the payments network as an added tool in “coercive diplomacy.”  In the Trump era, coercive diplomacy has been expanded in US economic engagements.

The SWIFT itself is said to oppose such measures, which could cost it a huge number of clients. After all, a contract on connecting to SWIFT is signed with each major bank separately, not the country.

Trump trade hawks’ dream of Plaza Accord 2.0

In the inter-dependent global economy, international trade and finance are two sides of the same coin. Cross-border trade transactions rely on an effective international payments system and a robust network of financial institutions issuing credit.

That infrastructure remains built around US dollar, which the Trump administration would like to leverage to contain China’s rise.

In the postwar era, the Japanese yen's might peaked in the mid-1980s, when Tokyo agreed to a managed trade deal in New York City's midtown Plaza Hotel. The controversial pact led the US, France, West Germany, the UK and Japan to depreciate US dollar relative to the Japanese yen and Deutsche mark by intervening in the currency markets.

It was this exchange-rate manipulation that played a key role in Japan’s subsequent containment, by paving the way to its asset bubble in the early 1990s and the subsequent lost decades.

But China is not going to follow that path.

Diversification away from US treasury bills

Through the Trump years, China has resisted protectionism and trade wars. But as a defensive measure, Beijing may now be forced to prepare against the risks of being cut off from the US dollar payment system.

Under the US dollar payment system, China remains vulnerable to potential US sanctions.

As long as China holds $1.1 trillion in US treasury bills and large investments that remain denominated in US dollars, exposure remains high. Over time, Beijing can diversify away from some of these bills and investments, while internationalization of the renminbi would reduce reliance on the US dollar.

China is preparing for currency swap facilities as part of the Belt and Road Initiative (BRI) and in the Regional Comprehensive Economic Partnership (RCEP) with many Southeast Asian countries. Similarly, according to a recent report, sovereign wealth funds expect China to remain in the economic driving seat, despite the Trump administration’s cold wars.

Thanks to the long-term potential of Chinese economy and finance, renmibi’s role as a global reserve currency and its rising attractiveness for international transactions, the time is right for accelerated internationalization. As China is now the first major economy to defuse the COVID-19 impact and is rebounding, global demand for renminbi assets is rising.

Augmenting dollar-based payment systems

During the 2008 financial crisis, China's central bank's then-chief Zhou Xiochuan revived Keynes's idea of bancor, an international currency, while several major economies began talks about diversification away from US dollar.

In 2015, the BRICS New Development Bank proposed having 50 percent of projects financed by local currencies. More recently, several countries and groups of countries, including China and Russia, have pushed for alternative payment systems parallel to the SWIFT, as a defensive measure.

In fall 2019, India, Russia and China were reportedly exploring an alternative to the US-dominated SWIFT mechanism. Last January, after the US exit from the Iran nuclear deal, Germany, France and the UK set up an alternative payment channel with Iran (INSTEX), to help continue trade and circumvent US sanctions.  

In March 2020, the Shanghai Cooperation Organization (SCO) agreed to develop a roadmap to conduct bilateral trade, investments, mutual settlements and issue bonds in national currencies. The SCO members include China, Russia, Central Asian states, as well as India and Pakistan.

Moreover, the nascent plans for the world’s first official digital currency (CBDC) by China’s central bank foster the potential for a complementary payment infrastructure.

In the postwar era, then-France’s finance minister Valéry Giscard d’Estaing described the dollar’s role as the leading global reserve currency as an “exorbitant leverage.” Unlike any other nation worldwide, the US can print money at negligible cost and use it to purchase goods and services worldwide.

In 1971, when European ministers worried about the export of US inflation, President Nixon’s Treasury Secretary famously stated that the dollar “is our currency, but your problem.”

At the time, financial globalization was still minimal. With the opening up of global capital markets, the US has not only been able to project its exorbitant leverage over the entire world but the White House has repeatedly weaponized that power since 9/11.

Trump White House is hastening the eclipse of US dollar

Today, four-fifths of global trade remains invoiced and settled in dollars, and most transactions are cleared through US financial system. Yet, Washington can isolate or block any nation from that system for its unilateral goals. Limiting capital flows worldwide, such restrictions have far broader effects than bilateral trade tariffs.

All that’s needed to impose such gargantuan limits is for US president to invoke the 1977 International Emergency Economic Powers Act (IEEPA). President Bush seized the IEEPA against terrorism; President Obama against transnational criminal organizations.

In his “maximum pressure” foreign policy, the Trump administration has used “national emergency” as pretext for economic goals and may be moving toward the Trading with the Enemy Act (TWA), which was central to US Cold War containment policy.  

Recently, the dollar has taken a beating on Wall Street. As US national debt is $27 trillion - 133 percent of US GDP – the dollar is facing a period of elevated volatility, due to still another round of unlimited quantitative easing by the Federal Reserve.

Today, the greatest threat to the dollar-denominated global infrastructure is not China, Russia or European Union, but the Trump administration. With its unilateral use of the international payments system, it is accelerating the path toward a dollar crisis.

Dr. Dan Steinbock is the founder of Difference Group and has served at the India, China and America Institute (US), Shanghai Institute for International Studies (China) and the EU Center (Singapore). For more, see http://www.differencegroup.net/  

© 2020 Copyright Dan Steinbock - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Dan Steinbock Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in