By Tumbul Trawally
Lately, there has been a lot of pondering about the current status of the US Dollar as the World’s Reserve Currency, mainly fueled by the BRICS nations’ (Brazil, Russia, India, China, and South Africa) desire to form a common currency, to replace the US Dollar as a medium of trade. Right now—there is no viable alternative! There is a good reason for the shared dominance of the dollar and the euro, and, to a lesser extent, the Japanese yen and British pound. First, they represent the major economic centres of the world and operate within the rule of law. Second, there is another good reason other currencies do not yet qualify. They are either too small (Switzerland), operate under totalitarian regimes (Russia and China), or allow for protectionism (India).
China has deftly managed a Dual System: Liberal Economic System, and an Autocratic Political System. Sometimes, the two systems clash! And when that happens—it is the former (Liberal Economic System) that takes a back seat! When Jack Ma of Alibaba, the Chinese equivalent of Jeff Bezos of Amazon, spoke against the Chinese government’s restrictions on freedom, he was silenced. Further, China lacks the investor protections, institutional quality, and capital market transparency required to internationalize its currency, the Yuan or Renminbi. China is ascending, no doubt about that! That is manifested in the peace deal she brokered between the Middle East’s perennial enemies: Iran and Saudi Arabia. China is also brokering a peace deal between Russia and Ukraine. Both are welcome news! The World does not need more conflicts. However, the Autocratic Political System will act as a ceiling on her economic development.
Russia has even tougher laws against individual freedom than China. Calling the fighting in Ukraine a “War”, can land a journalist in jail. Russia, a country known for cutting-edge scientific discovery, has [literally] been reduced to a [Gas Station], and an exporter of arms and mercenaries (Wagner Group), masquerading as a country, under President Putin. President Xi has done away with the Two-Term limit, and President Putin could be in power well into the late 2030s. Both actions do not inspire confidence in the economic and political systems. As a result, most Central Banks prefer to have the US Dollar as their reserve currency.
India’s protectionism and caste system are not compatible with economic progress. Prime Minister Narendra Modi’s Hindu Nationalist government policies hinder development, especially when you have a marginalized Muslim population of 195 million, 14.2 percent of the population. That is a very sizable minority that is hard to ignore. China also persecutes its Muslim Uighur population, but they are less than 2 percent of China’s population, according to their 2020 Census. People denied a sense of belonging will never perform at their optimum in national development. These 3 countries: China, Russia, and India are the most relevant members of the BRICS nations.
Even though the USA share of World GDP has declined from 50% after World War II (WWII) to around 25%, today, she still rules the Sea lanes. That ability is one of the prerequisites of being a Hegemonic Power and having the World’s Reserve Currency. However, it comes with a hefty price tag: In 2022, the U.S.A. spent 877 billion US dollars on military spending, more than the next nine top-spending countries combined, according to the Stockholm International Peace Research Institute. The ability to project military power as a criterion for having the World’s Reserve Currency is true now—and was true of the Egyptian currency during the days of the Pharaohs; or the Greek/Macedon currency during the days of Alexander the Great; or the Caesars’ Roman currency that followed—when the Mediterranean was the most important sea of the known world. The British pound became the World’s Reserve Currency when the Royal Navy ruled the Sea lanes, in the 19th century and the first half of the 20th century. I am old enough to remember when the obituary of the American economy and the Dollar’s dominance were written in the 1980s and 1990s, when the Japanese could not do anything wrong, economically. Seven of the World’s ten largest banks were Japanese. Today—there is no Japanese bank among the top ten!
The BRICS heads of states have hinted that gold would be the underlying asset supporting their currency. Pegging their currency to gold would present a fundamental weakness of the currency. Most main stream economists believe that this will constrain the expansion and growth of their economies. Gold is a commodity—and is finite. It will inhibit their Central Banks’ efforts to create money and pull their economies out of a recession. It was the ability of the Central Banks to create money that pulled the World out of the 2008/09 financial/housing crisis and that of COVID-19. What would have been the state of the World economies today—if the Central Banks did not have the flexibility to increase money supply? In the Doldrums and a potential repeat of the Great Depression of the 1930s! Some historians believe the Great Depression of the 1930s precipitated WWII. To unleash the power of the multiplier effect of increased money supply and remove the shackles of a commodity-based currency reserve (gold), to grow the economy, were some of the very reasons President Nixon pulled the USA from the Gold Standard (instituted after WWII), in 1971. As a result, American GDP increased and living standards rose. However, there is a delicate balance between increasing money supply and inflation; therefore, Central Bankers should not swing the pendulum too far on either side, in regard to interest rates.
I get it! When people say no Empire/Hegemon lasts forever! My answer to their question—this American Hegemon is different from the previous: Egypt, Greece, Rome, Mongols, or Mauryan (roughly modern India, Pakistan, and Bangladesh). America conducts elections, which can be likened to the valves on a pressure cooker. That is how American voters voted out President Trump and corrected course. Some would say, how about the British Empire? World War II spelled the end of the British Empire when the Jewel in the Crown, India, demanded independence. Further, America spends more money on research than any other country. Every graduate program (Masters/PhDs) at the universities are a laboratory for research. That collaboration between government and universities gave birth to the Internet. When it comes to government and universities collaborating on the Space Program, Columbia, Princeton, Stanford, and MIT universities come to mind. Some of the products we cannot live without today are a byproduct of the Space Exploration: Scratch-Resistance Lenses, Ear Thermometers, and Cordless Tools are examples.
Plus, no Empire/Hegemon has been such a magnet for talent. I do not see the World’s most educated (Masters/PhD holders) beating a path to China, Russia, or India. Some of the World’s most successful American companies are headed by people born on the Indian Sub-Continent. Examples are Sundar Pichai of Google, Satya Nadella of Microsoft, Laxman Narasimhan of Starbucks, and Arvind Krishna of IBM, to name a few. These are not accidental CEOs—it is attributable to India’s Education system’s laser like focus on Mathematics & Science. Elon Musk of Twitter and Tesla Motors was born in South Africa. I mentioned in a previous article the Nigerian born drone builder for the US Army, Dr. Osatohanmwen Osemwengie. Dr. Osemwengie has 3 Doctorate Degrees and 7 Masters Degrees. I feel dizzy, just by trying to wrap my mind around his academic achievements. None of these Super Intelligent, Super/High Achievers would trade being in America for being in China or Russia. Their contributions and that of the influx of other talented individuals are partly responsible for American innovation, worker productivity, which in turn are partly responsible for American Hegemony and the dominance of the US Dollar as the World’s Reserve Currency.
Last but not least, the transparency and openness of the American economic system—the stability of the political system; the size, depth and liquidity of its financial markets; the quality of its sovereign debt; the credibility of its legal system—are some of the criteria for the Dollar’s World Reserve Currency status. The major threat to that status is the political brinkmanship currently being played between the Republican controlled Congress and the Biden Administration. Defaulting on her Sovereign Debt would be catastrophic to the US economy. In a world of interwoven financial markets, the ripple effects will be felt worldwide. Threatening to default on its debt seems like a Political Rite of Passage for every Congress, when the White House is occupied by the opposing Party. One can hardly have two economists agree on anything, much less a group—not on defaulting on debt already incurred. Pure, unadulterated economics is about the efficient allocation of finite resources and the improvement of living standards. The injection of politics into the mix can be likened to dropping a lump of charcoal into a glass of milk! The less interference from politicians—the better for economic decision making!