Latest update April 19th, 2024 12:59 AM
Oct 25, 2018 Letters
DEAR EDITOR,
As American economist Barry Eichengreen stated: “It costs only a few cents for the Bureau of Engraving and Printing to produce a $100 bill, but other countries had to pony up $100 of actual goods in order to obtain one”.
This is the main reason the United States of America is a super power. It can afford over 150 military bases globally and has the largest budget for defence of any country in the world. In 1945, the U.S. Treasury held 17,848 metric tons of fine gold, which at the time represented around 66% of official global gold reserves. The gold-backed Dollar offered the world a trustworthy and stable reserve currency. However, the Bretton Woods system began to disintegrate, as US export surpluses began to drop after 1960.
To finance the space race, to spend on domestic social programs, the wars fought in Korea and Vietnam, the US borrowed huge amounts of money. The country began to live on credit and banks worldwide were engulfed with US dollars. These dollars represented gold claims on the United States. The United Kingdom, France, Germany and other countries started to demand gold for their US dollars.
In 1971, the US “temporarily” suspended convertibility of the Dollar into gold, and announced that the dollar would be devalued to USD 38.00 per ounce. Saudi Arabia agreed to price oil only in US dollars for US Military protection. This ensured that the US dollar was in demand globally. By 1975, all of the oil-producing nations of OPEC had agreed to price their oil in dollars, and to hold their surplus oil proceeds in U.S. government debt securities in exchange for US protection. Everyone had to buy oil in US dollars.
Oil is no longer bought only in US dollars – other currencies are being used. In January 2016, India and Iran agreed to settle their oil sales in Indian rupees. In 2014, Qatar agreed with China to be the first hub for clearing transactions in the Chinese yuan. In December 2015, the United Arab Emirates (UAE) and China created a new currency swap agreement for the yuan. Both steps strongly indicate that the Gulf States are taking measures to reduce their dependence and exposure to the US dollar.
The dollar’s dominant role in the global financial system, and thus U.S. sanctions power, is driving the search for replacements. In a sign of how serious the rupture between Europe and the United States is during the Trump period, senior officials in France and Germany are increasingly planning ways to sidestep U.S. financial dominance and the global sanctions power that goes with it.
German Foreign Minister Heiko Maasin August called for Europe to achieve financial independence from Washington to restore its freedom of maneuver in foreign policy, and other German officials are reportedly pondering ways to minimize U.S. dominance of the global financial system, which enables it to impose sanctions on banks and individuals almost anywhere in the world.
French Finance Minister Bruno Le Maire in a speech in August, called for the creation of “totally independent financing instruments” outside U.S. control. “I want Europe to be a sovereign continent, not a vassal,” he said.
France and Germany have initiated an alternative global bank-payment system outside the reach of U.S. influence, and a European fund that could allow continued trade with sanctioned countries, regardless of opposition from Washington.
Igniting European rage is U.S. President Donald Trump’s decision to withdraw from the Iran nuclear deal and impose economic sanctions on Tehran, even though Iran was complying with the 2015 pact. U.S. measures include threats to sanction any European companies that do business with Iran—essentially coercing Europe to disregard its own policy on the issue.
In recent years, countries such as Russia, Venezuela, and China have all encountered U.S. financial dominance and the sanctions power that goes with it. Russia has experimented with cryptocurrencies and its own payments system; China is taking some steps to reinvigorate the use of the renminbi as an international currency with its US$6 trillion One Belt One Road project denominated in Renminbi. Venezuela wants to create an oil-backed pseudo-cryptocurrency outside Washington’s reach to escape sanctions. North Korea has also sought to use cryptocurrency to evade U.S. sanctions.
Today, the kind of evasive tactics usually employed by rogue states are being embraced by vital U.S. allies—a sign that the country once relied upon to be the anchor of stability in the global system is now seen as a cause of unpredictability.
The United States has dominated the global financial system since World War II. In that time, the U.S. dollar has been the world’s dominant currency, making the US the leader of the world. Most countries and companies do business in dollars, and those dollars eventually flow through U.S. banks under American supervision—giving Washington the unique ability to sanction any country or individual that threatens its hegemony. That position has allowed the United States to sometimes abuse its power.
Beginning in the 1990s, Washington began to rely more and more on financial sanctions as a key means of foreign policy, a way to pressure regimes from Russia to North Korea without resorting to war. The use of financial sanctions only increased after the attacks of Sept. 11, 2001, and became an excessively used tool for both the George W. Bush and the Obama administrations.
“This has been a fear of the U.S. government for decades, and critics of the sanctions tool long argued that it was being overused,” said John E. Smith, who stepped down as head of the U.S. Treasury Department’s sanctions arm, the Office of Foreign Assets Control (OFAC), this spring. That fear became important after the United States levied sanctions on Moscow over its 2014 annexation of Crimea, sparking disagreements with many countries in Europe that trade heavily with Russia.
The separation only became obvious after the Trump administration withdrew from the nuclear deal with Iran and threatened European companies with huge penalties—for implementing their own government policies on doing business with Iran.
“What’s different today is that the U.S. is imposing sanctions contrary to the foreign policies not just of Russia and China, which have long chafed against the sanctions tool, but against the fundamental foreign policy of our closest allies in Europe and elsewhere,” Smith said. “That is what has brought us to this situation.”
In Feb 2011, the International Monetary Fund (IMF) called for a U.S. dollar alternative. The United Nations has also called for a new global currency to replace the U.S. dollar. This is all directing to a global currency reset that the IMF leader spoke of in the past. Clearly, they want to remove the U.S. dollar as the world’s reserve currency.
Also, the petrodollar will be destroyed. On March 26, 2018, China launched its oil futures priced in yuan and the Chinese oil futures contract priced in yuan is growing in such a way that by the end of 2019, at the current pace of growth, this contract will present a real challenge to the petrodollar.
China and Brazil have signed agreements to only conduct trade in their local currencies. Moving away from the U.S. dollars. China and Australia have signed agreements with each other. South Korea, Turkey and Kazakhstan have agreed to conduct trade in a currency swap in their own respective currencies. China and Japan have signed agreements to conduct trade in yuan and yen. There will be no U.S. dollars in their trade between the two countries. Iran and Russia have replaced the U.S. dollar between the two countries.
It took decades for the United States dollar to become the world reserve currency and the currency of international business, and it will take decades to be replaced.
My prediction it will be replaced in the second half of the 21st century by the IMF SDR, Chinese Renminbi, the Euro and more business being done by currency swap.
The United States is a major trading partner of Guyana, and Guyana has US dollars held as foreign Reserves. The US dollars not being used by other countries will eventually come back to the United States and cause inflation. This inflation will be passed on to other countries like Guyana, that trade with the United States. The main reason the US Federal reserve is raising rates is to keep inflation under control. The effects of reduced global use of the US dollar is already being felt and accentuated by quantitative easing, global debt and the US trade war.
Brian Plummer
Please share this to every Guyanese including your house cats.
Apr 19, 2024
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