The dollar in a multipolar world

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By MICHAEL ROBERTS*

The heavy military and financial dominance of the US and its allies is being sustained through increasingly weak bases.

Christine Lagarde, head of the European Central Bank (ECB), in the form of “keynote“, delivered an important speech last week at the US Council on Foreign Relations in New York.

It was important because she analyzed recent developments in global trade and investment and assessed the implications of moving away from the hegemonic dominance of the US economy and the dollar in the world economy, and thus the move towards a “fragmented” world economy and “multipolar” – where no economic power or even the current imperialist bloc of the G7-plus will manage to dominate global trade, investment and money flow.

Christine Lagarde explained: “The global economy is going through a period of transformative change. In the wake of the pandemic, Russia's unwarranted war on Ukraine, the weaponization of energy, the sudden acceleration of inflation, as well as a growing rivalry between the United States and China, the tectonic plates of geopolitics are shifting more rapidly."

One might not agree with the causes Christine Lagarde offers for this shift, but she concluded that “we are witnessing a fragmentation of the global economy into competing blocs, with each bloc trying to get as close as possible to the rest of the world to its respective strategic interests and values. shared. And this fragmentation could very well coalesce around two blocs led, respectively, by the two largest economies in the world”.

So there is fragmentation and coalescence in a battle between a US-led bloc and a China-led bloc. This is the concern of Christine Lagarde, as well as the US-led imperialist bloc – they fear a loss of global control and a fragmentation of global economic power not seen since the period between the two world wars, especially in the 1920s and 1930s. .

Christine Lagarde spoke nostalgically of the post-1990 period following the collapse of the Soviet Union, which supposedly heralded the coming of a period of global dominance by the US and its “alliance with willing countries”. Here's what he said; “After the Cold War, for a time, the world benefited from a remarkably favorable geopolitical environment. Under the hegemonic leadership of the United States, international rules-based institutions flourished and global trade expanded. This has led to a deepening of global value chains, and as China has joined the world economy, there has been a massive increase in the global supply of labor.”

Yes, these were the glory days of the wave of globalization, increased trade and capital flows; the dominance of the Bretton Woods institutions, as well as the IMF and the World Bank: it was they who dictated the terms of credit on the world stage. Above all, there was the expectation that China would be placed under the imperialist bloc after having joined the World Trade Organization (WTO) in 2001.

However, things didn't work out as expected. The wave of globalization came to an abrupt end after the Great Recession and it was noted that China had not unchecked opened up its economy to Western multinationals. This has forced the US to shift its policy towards China from “engagement” to “containment” – and with increasing intensity in recent years. And then came the Russian invasion of Ukraine and the renewed determination of the US and its European satellites to expand its control eastwards and thereby ensure that Russia fails in its attempt to exert control over its bordering countries. They want to permanently weaken Russia as an opposition force to the imperialist bloc.

Christine Lagarde comments on the economic implications of this: “But this period of relative stability may now be giving way to a period of lasting instability, resulting in lower growth, higher costs and more uncertain business partnerships. Instead of more elastic global supply, we could face the risk of repeated supply shocks.”

In other words, globalization and the easy movement of supplies, trade and capital flows that so benefited the imperialist bloc (see article The economics of modern imperialism written by me and Gugliemo Carcheci) came to an end.

The response has been an intensification of protectionist measures (increased tariffs, embargoes, etc.); control of trade, particularly in technology and attempts to reverse globalization through the repositioning of capital (i.e. “restoring" or "friendshoring“), which previously flowed to all parts of the globe without major problems.

As Christine Lagarde put it: “Governments are legislating to increase security of supply, notably through the Inflation Reduction Act in the US and the strategic autonomy agenda in Europe. But that, in turn, could accelerate fragmentation as companies also adjust in anticipation. Indeed, in the wake of the Russian invasion of Ukraine, the share of global companies planning to regionalize their supply chain has nearly doubled – to around 45% – compared to a year earlier.”

Do these developments mean that the imperialist bloc is losing control of extracting surplus value from the world's workers? In particular, is the US dollar's role as emperor of currencies under threat from other currencies in trade and investment? As a fact and as a trend?

Christine Lagarde commented: “Anecdotal evidence, including official statements, suggest that some countries intend to increase the use of alternatives to the main traditional currencies to invoice international trade, such as the Chinese renminbi or the Indian rupee. We are also seeing increased accumulation of gold as an alternative reserve asset, possibly driven by countries with closer geopolitical ties to China and Russia.”

It is undoubtedly true that the imposition of economic sanctions on Russia, measures employed by imperialist governments in the West – prohibition of energy imports; seizure of foreign exchange reserves; closure of international banking settlement systems – accelerated the move away from holding the dollar and the euro.

However, Christine Lagarde added the caveat that this trend is still far short of drastically changing the global financial order. “These developments do not point to any imminent loss of dominance for either the US dollar or the euro. So far, the data does not show substantial changes in the use of international currencies. But they suggest, however, that the status of the international currency should no longer be taken for granted.”

Christine Lagarde is right. As I have shown in previous posts, although the USA and the European Union have lost ground in the share of production, trade and even world transactions and monetary reserves, there is still a long way to go before declaring a “fragmented” world economy in that sense.

The US dollar (and to a lesser extent the euro) continues to be dominant in cross-border payments. The US dollar is not gradually being replaced by the euro, or the yen, or even the Chinese renminbi, but by a host of smaller currencies.

According to the IMF, the share of reserves held in dollars by central banks has fallen by 12 percentage points since the turn of the century, from 71% in 1999 to 59% in 2021. But this drop has been accompanied by an increase in the share of what the IMF calls “non-traditional reserve currencies”, defined as currencies other than the “big four” of the US dollar, euro, Japanese yen and British pound, namely the Australian dollar, Canadian dollar, Chinese renminbi, Korean won, the Singapore dollar and the Swedish krona. All this suggests is that the shift in international currency strength after the Ukraine war will not be West versus East bipartition, as most argue, but towards a fragmentation of currency reserves.

This fragmentation worries Christine Lagarde since she occupies an important position in the representation of the US-European Union global hegemony. Here is what she proposed: “To the extent that geopolitics leads to a fragmentation of the global economy into competing blocs, this requires greater political cohesion. Not compromising independence, but recognizing the interdependence between policies and how each can best achieve its objective if aligned behind a strategic goal”.

What does she mean by that statement? It means that the great powers must work together with similar fiscal and monetary measures to ensure that “fragmentation” fails and the existing order is maintained. But this will be very difficult in a world economy that is slow in real GDP and investment growth and, above all, where the return on capital remains around historic lows.

“The US dollar and its hegemony are not yet under threat” – says Christine Lagarde – “because 50-60% of short-term US assets held abroad are in the hands of governments with strong ties to the United States – which means they are unlikely to be alienated for geopolitical reasons.” It can be seen that even “anti-US” China continues to strongly commit its foreign exchange reserves to the US dollar (see chart below). China has publicly reported that it reduced the dollar share of its reserves from 79% to 58% between 2005 and 2014. But China does not appear to have changed the dollar share of its reserves over the past ten years, even if a 20-point drop was observed between 2006 and 2011.

Furthermore, the multilateral institutions that could be an alternative to the existing IMF and World Bank (controlled by the imperialist economies) are still tiny and thus very weak. For example, there is the New Development Bank created in 2015 by the so-called BRICS (Brazil, Russia, India, China and South Africa). The Shanghai-based NDB has now named Brazil's former president, Dilma Rousseff, as its head, a character with a notorious left-wing background.

There is a lot of noise about the possibility that the NDB could provide an opposite pole of credit to the imperialist institutions of the IMF and the World Bank. But there is a long way to go in this regard.

A former Reserve Bank of South Africa (SARB) official commented: “the idea that BRICS initiatives, the most prominent of which so far has been the NDB, will supplant Western-dominated multilateral financial institutions is a pipe dream. ”. To begin to think about the problem in its real dimension, it should be noted that the BRICS are very diverse in terms of population, GDP per capita, geographically and in commercial composition. And the ruling elites in these countries are often at odds (China versus India; Brazil versus Russia).

As Patrick Bond recently said: “the saying 'talk left but walk right' characterizes the role of the BRICS in global finance. He not only gave vigorous financial support to the International Monetary Fund during the 2010s, he did more than that. As recently as last March, the BRICS New Development Bank – supposedly an alternative to the World Bank – declared a freeze on its Russian portfolio, as it would otherwise not have maintained its Western credit rating of AA+. And Russia is a shareholder with around 20% in the capital of the NDB.

But, returning to Christine Lagarde's “keynote”, it reads: “the most important factor that influences the use of international currency is the strength of the fundamentals”. In other words, on the one hand, there is a tendency for the economies of the imperialist bloc to weaken; it has had very slow growth, interspersed with sharp declines over the last decade; on the other hand, one observes the continued expansion of China and even India.

This means that the heavy military and financial dominance of the US and its allies is being sustained through increasingly weak foundations in terms of productivity, investment and profitability. And that is a recipe for fragmentation and the outbreak of global conflict.

*Michael Roberts is an economist. Author, among other books, of The Great Recession: A Marxist View.

Translation: Eleutério FS Prado.

Originally published on blog The Next Recession.


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