Is the dollar getting dethroned? Not quite
De-dollarisation predicts the fall of the hegemony of the US, but no alternative currency currently exists.
There are some keywords that are periodically tossed around to indicate a looming crisis. De-dollarisation is the latest one that predicts the crumbling of the United States (US) global hegemony as the world moves on from the dollar. Spooking the dollar users, the narrative goes, is the American use of western financial systems to bully unfriendly countries. The narrative stops short of explaining what this new world order looks like or what the new reserve currency could be. But the chat-show-breathless narrative ignores two things. One, the US military industrial complex and its tech power are unlikely to roll over and die. Two, the yuan as a reserve currency – or the so-called yuannabe narrative – will not save the world which is still not ready to hand over the keys to a communist dictatorship.
From the yen in the 1970s, the euro in the 2000s, to the yuan in the 2020s, the doomsday prediction for the dollar has been persistent. The current de-dollarisation narrative gained momentum due to three things. One, the conscription of the dollar in economic warfare by the US. Instead of pressing the nuclear button, the US used the supremacy of the dollar to attempt to nuke the Russian economy last year as punishment for attacking Ukraine. Russia was thrown out of SWIFT, the global payment messaging system that allows trans-border financial flows seamlessly. An approximate analogy is to imagine if your bank account was derecognised by the Indian UPI system – you would not be able to use any of the payment apps to make digital transactions. In addition, over $280 billion of Russian reserves were frozen with the G-7 countries soon after the war broke out.
Two, the classic twin deficit problem in the US of a large current account deficit (import more than export) and a very large fiscal deficit (government spending larger than revenues) has got worse as the Fed doubled its balance sheet in the post-Covid period, triggering inflation. In any other country, this would have caused a run on the currency and caused a credit downgrade to near-junk levels. In fact, as the US moves towards another debt ceiling hike drama in June 2023 (something like Indian Fiscal Responsibility and Budget Management Act which imposes limits on what the government can borrow), there are indications of an imminent downgrade in the credit rating of US treasuries – the gold standard in the global store of value.
Three, the creation of the Russian and Chinese SWIFT alternatives to global currency transactions, along with the increasing number of bilateral deals for trade in non-dollar currencies such as the yuan, are chipping away at the superman status of the dollar.
These three reasons are the necessary conditions for dethroning the dollar, but are not sufficient, because of the TINA (there is no alternative) factor. The three contenders for the crown have been found unworthy of it. Gold, despite the global central bank rush to hoard in the last few months, will never become a currency peg again. Bitcoin (or some other non-fiat crypto asset) will not replace the dollar because of the taint of terror, drug and money laundering episodes over the past few years. To hand over the global currency keys to an open-source digital code is not going to happen at an institutional level. The yuan can make a dent as the global currency of transaction, but cannot take over the store of value function. If the US has militarised the dollar a few times, there is no limit to what China will do if it becomes the store of global savings flows.
Dethroning the US will mean finding a country and a currency where institutions that support free markets, growth and the pursuit of profits without rampant political interference are robust. Power cannot flow to a country that reduces its most powerful tech giant – whose CEO had a run-in with the Chinese government over his critique of the regulators – into a Japanese university professor. Additionally, the looming downgrade of US treasuries might cause global headlines, but will not have a lasting impact on the dollar’s supremacy. After the S&P downgrade in 2011, the US dollar went up rather than down.
Where does India stand in this global game? With just 1.6% of the global share of goods trade and 4.2% of the services trade, India is not a global changemaker in this story. But isn’t India cutting deals with Russia, Germany and the United Kingdom, among 18 countries, laying the pipes for a rupee trade? The use of the rupee in bilateral deals must be looked at more as a domestic inverter or a community generator service rather than the foundation of an alternative grid.
To be a significant player in the global reserve currency pecking order, India has to move from successes in the provision of basic services to its population (water, power, roads – the low hanging fruit) to much bigger heft in manufacturing and services production and export. The battles are internal, with the old order of a reluctant bureaucracy and judiciary dragging down the political will to make changes. India has a once in a lifetime chance to get this right before the demographics shift in the next 30 years, away from the young vibrancy we see today. The rah-rah narrative of the rupee replacing the dollar, therefore, needs a cold shower reality check.
Monika Halan is the author of the best-selling book, Let’s Talk Money
The views expressed are personal