Global Economics vs the United States

To most of the rest of the world, particularly our major “allies,” the United States is no longer a trustworthy economic power. Given Donald Trump’s abrogation of major treaties – from the six-nation Iranian nuclear accord, the Paris climate change accord, his rejection of NAFTA, pullback from the Trans-Pacific Partnership – his instigation of trade wars with nations from China to Canada, his use of tariffs to force his political agenda, his cozying up to traditional enemies (Vladimir Putin and Kim Jong-un) and supporting murderous autocrats and outliers (Saudi Arabia’s Muhammad bin Salman, Philippine President Rodrigo Duterte, Hungary’s Viktor Orban, Brazil’s Jair Bolsonaro, etc.) – there is a growing global consensus that the U.S.’ economic power must be contained.

Under the guise of his national security powers, Donald Trump even went so far as to impose tariffs on Canadian steel and aluminum imports. “Canadian Foreign Minister Chrystia Freeland said the US decision to slap tariffs against Canada on national security grounds was ‘absurd’ and that her country was moving forward ‘more in sorrow than in anger’ with retaliatory tariffs.

“Speaking in Washington, Freeland also offered some pointed words when asked about insults that senior White House staffers have hurled at Prime Minister Justin Trudeau: ‘The government of Canada does not believe that ad hominem attacks are the right way to go about foreign policy, to go about foreign relations, particularly when it comes to foreign relations with your close allies and neighbors.’

“She noted that the Canadian Parliament unanimously backed a resolution condemning the language and observed, ‘It's very nice to represent a united country.’” CNN.com, June 12th. Freeland noted that if a U.S. president can use the national security justification to tariff Canadian products, he could effectively impose tariffs on any product from any country without genuine justification. That simple fact has undermined global trust in allowing Washington to continue to exercise seemingly unfettered economic power.

To Europe, the United States has abused that power, which now needs to be limited. The U.S. dollar has been the major global reserve currency since 1944, that uniform monetary standard by which most global transactions have been measured. But the conversations about creating a new monetary standard – a blended reserve currency in which the dollar would just one component – are happening even among our purported closest allies.

“In 1944, delegates from 44 Allied countries met in Bretton Wood, New Hampshire, to come up with a system to manage foreign exchange that would not put any country at a disadvantage. It was decided that the world’s currencies couldn’t be linked to gold, but they could be linked to the U.S. dollar, which was linked to gold. The arrangement, which came to be known as the Bretton Woods Agreement, established that the central banks would maintain fixed exchange rates between their currencies and the dollar. In turn, the United States would redeem U.S. dollars for gold on demand. Countries had some degree over the currencies in situations where their currency values became too weak or too strong relative to the dollar. They could buy or sell their currency to regulate the money supply.” Investopedia, 10/1/18. 

Not that the U.S. is or has to be the sole reserve currency, but there is absolutely no question that it is the dominant currency on earth. No other currency remotely has the clout of the dollar; the euro comes in as a poor second. Ah, but a virtual currency, that blend of many currencies including the dollar, does not have that second-class status. And that possibility is being discussed all over the world. 

A new virtual currency might be the biggest threat of all. On June 18th, “Facebook unveiled plans for a new ‘global currency’ called Libra. Developed in collaboration with a slew of top players from the realms of technology and finance, including Visa, Mastercard, Uber and Spotify, Libra, depending on whom you ask, could challenge the world’s banking industry, replace the dollar as the international reserve currency of choice, help turn other cryptocurrencies like bitcoin into everyday features of life, or just make it a lot cheaper to send money to your family overseas. 

For Facebook, it represents an opportunity to leverage its dominant status in the personal lives and information diets of its 2.38 billion users into a similarly dominant position in their financial lives, insinuating itself into every transaction, even those that take place outside the confines of its apps, which include Instagram, Messenger and WhatsApp.” Los Angeles Times, June 19th. Or simply undermine many nations’ control over their economies.

Even as national control of currency is being challenged by these extraterritorial cryptocurrencies, the dollar is also facing its own set of international attacks. Thanks to Trump’s policies, the world increasingly believes that what was once intended to stabilize global trade, reliance on the U.S. dollar as the major reserve currency, has effectively been turned into a political weapon that is being abused by the United States. And has destabilized international trade. This has been China’s position for a while, and while the European Union has suggested that it too would like a change, recent developments are moving that possibility to the fore.

In his recent visit to Tehran, German Foreign Minister Heiko Maas hinted to his Iranian counterpart, Mohammad Javad Zarif, that the days of the dollar’s remaining as the dominant global currency reserve may be numbered, suggesting an interim structure that could avoid dollar-driven transactions.  

Particularly disturbing is Washington’s use of sanctions and tariffs to force compliance with U.S. foreign policy directives. “U.S. leaders are demanding the rest of the world recognize economic sanctions and stop buying Iranian oil. The U.K., Germany, France, Russia, China, and India are among the nations who don’t fully support the sanctions and would rather not pay higher prices for oil elsewhere.

“American officials more and more often resort to delivering ultimatums, both to adversaries and allies alike. Nations that do not follow orders stand to lose access to the U.S. financial system and could face trade sanctions of their own. That is a serious threat.

“The huge majority of international trading is underpinned by U.S. banks and the dollar. Other currencies and banking systems cannot offer the same level of liquidity and convenience…

“[So, the] Europeans are launching a system call Instex. It works by coordinating local importers with local exporters on each side of the border… For example, a German company can export cars to Iran. The Iranian car importer sells the cars locally for rials, then makes payment in rials to an Iranian exporter of oil headed for Germany. The German oil importer receives the oil and makes payment in euros to the local car exporter – closing the loop.

“The system was designed specifically to end-run U.S. sanctions. Since rials never leave Iran and euros never leave Germany, U.S. banks and dollars are never involved. American officials cannot claim restrictions have been violated… But that hasn’t stopped U.S. financial powers from trying to impose their will.

“Sigal Mendelker, Undersecretary for Terrorism and Financial Intelligence at the U.S. Treasury Department, sent a sternly worded letter to the EU on May 7th… Anyone, from business owners to government officials and their staff, who participate in Instex could be subject to U.S. sanctions… The Treasury Department issued this statement: ‘entities that transact in trade with the Iranian regime through any means may expose themselves to considerable sanctions risk, and Treasury intends to aggressively enforce our authorities.’… 

The U.S. posture is that Europeans aren’t allowed to use dollars for trade with Iran. And the U.S. is now prepared to punish countries for trading without dollars.” TheDailyCoin.org, June 4th. Too many nations are beginning to question that dependence on dollar-denominated trade. Banks tend to load up on the major reserve currency, because that is the likely driver of most of their international transactions; it what they need to have on hand for their international clients. Dollars.

“In order to accumulate foreign exchange reserves, central banks buy assets (mostly government bonds) denominated in the currencies of other countries. In this case, we have foreign central banks buying billions and billions of dollars worth of US government securities. This causes the US to run a financial account surplus. (A financial account surplus means foreigners buy more USD-denominated assets than US-based investors buy in foreign assets.).” Marshall Gittler, FX strategist on the April 15th Quora.com.

Should the dollar lose that status, economists almost uniformly agree that the dollar’s relative value will plunge and selling our deficit bonds overseas would cost us more in global interest rates. We would import less and export more, perhaps prompting more U.S.-based jobs, but many expect that the U.S. would experience a deep “corrective” recession. Effectively, the United States would lose significant global power and influence. There’s nothing new in these global discussions. What is new i

s how quickly this issue is becoming a major international focus.

What is also new is that Iran has announced that if the remaining powers to the nuclear accord don’t find a way around the U.S. sanctions, Iran will breach that accord (the one that Trump abrogated) and exceed its uranium enrichment limitations effective June 27th. Warnings from the U.K., France and Germany followed. One way or another, U.S. influence wanes. Will Trump risk another unpopular Middle Eastern war with Iran? 

              I’m Peter Dekom, and the long-term economic risks to American power and influence by rogue economic policies are indeed severe.