Many countries are building new payment systems. Is the US financial hegemony about to collapse?
2024-08-27
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Xu Tianqi, Deputy Director of Macroeconomic Research Department, Chongyang Institute for Financial Studies, Renmin University of China
Since the U.S. dollar gradually became the world's currency after World War II, there has been endless discussion in the world about the "de-dollarization" of the U.S. dollar hegemony.
In 1960, American economist Triffin proposed the "double peg" system of pegging the dollar to gold and other currencies to the dollar, which led to the long-term deficit of the United States in international trade and ultimately damaged the international currency status of the dollar, the "Triffin Dilemma". A few years later, former French President and then French Finance Minister Giscard d'Estaing bluntly stated that the dollar hegemony gave the United States "arrogant privileges" to borrow money from the world at low prices without worrying about not being able to make ends meet.
A few years later, Triffin's prediction came true. On August 15, 1971, then-US President Nixon suddenly announced the closure of the dollar-gold exchange window, no longer unconditionally allowing foreign governments or central banks to exchange dollars for gold from the United States. For a time, the credit of the US dollar plummeted, while the price of gold soared - in August 1971, the price of gold was US$35 per gold ounce, and a year later, the price of gold doubled to US$70 per gold ounce; at the end of 1974, the price of gold was close to US$200 per gold ounce, and the world currency status of the US dollar seemed to be at the point of collapse.
In 2008, the financial crisis caused by subprime mortgage loans broke out in the United States, and the credit of the US dollar became a hot potato again; in 2011, the saying that "the dominance of the US dollar is about to end" was widely seen in the international community, including the United States. However, according to the latest data provided by the IMF COFER in June 2024, as of the first quarter of 2024, 58.9% of the official foreign exchange reserves of countries around the world were still US dollar assets. Statistics released by SWIFT show that in July 2024, the US dollar still accounted for 47.8% of global goods transaction settlements, and the US dollar is still one of the popular international "hard currencies".
So, is "de-dollarization" a play on the story of "the boy who cried wolf"? However, judging from the attitudes and actions of various countries towards the US dollar in recent years, the "dollar hegemony" is indeed on its way to an end. Recently, there are reports that the Reserve Bank of India is negotiating with the United Arab Emirates, Russia and other countries to expand or start bilateral local currency settlement. On the 80th anniversary of the Bretton Woods Conference, to what extent has the world "de-dollarization" reached today? What is the prospect of "de-dollarization" in the world? What are the impacts? Is the dollar hegemony about to collapse?
More and more countries will take measures to "de-dollarize", and countries in the "global south" are taking active actions. Since 2014, Russia has been building its own financial information transmission system SPFS (System for Transfer of Financial Messages), which was officially put into use in 2017 and can replace the SWIFT system in the financial information transmission function of cross-border funds collection and payment. Countries with relatively small economies usually actively build regional cross-border payment systems. According to a CNBC report in July 2023, four of the ASEAN countries, Singapore, Indonesia, Malaysia, and Thailand, have built a regional small-amount cross-border payment system, which can already realize payments in each other's territory with their own currencies. Just scan the QR code to easily and quickly use your own currency to purchase goods from other countries without the need for currency exchange in advance.
The US's position in the world's currency is slowly declining, but the US economy has strong support for the dollar. Compared with the international status of the US dollar at its peak in the 1970s, the status of the US dollar has indeed declined, but the US dollar still ranks first in both trade settlement currency and international reserves. The status of the US dollar is supported by the US military and US companies. The United States still occupies a leading position in the global industrial chain. In the fields of advanced manufacturing services such as artificial intelligence, high-end chips, composite materials, innovative medicines, and software control, the United States still has well-accumulated companies and a large talent pool, which obviously supports the status of the US dollar.
De-dollarization is a long historical process, and it will not happen overnight without a sudden change in the environment. The U.S. dollar has long historically gained "first-mover advantage" and "incumbent advantage". Although there may be risks in using a single dollar, under the current production and trade conditions, the benefits of using a single international currency for settlement are also objectively present. At present, the various measures taken by the "global south" countries are more out of considerations of security and technological attempts, rather than pure economic interests.
Before World War II, the world's dominant currency was the British pound. Although the United States had surpassed Britain in GDP as early as 1890, it was a long process for the dollar to gradually replace the British pound. According to a 2014 study by world-renowned currency researcher Eichengreen, until 1947, countries still regarded the British pound as the most important foreign exchange reserve, with the British pound accounting for more than 80% of their foreign exchange reserves, and the US dollar less than 20%. By 1965, the US dollar accounted for more than 70% of their foreign exchange reserves. If there had not been World War II, if countries such as Britain had not destroyed their century-old savings in the war, if they had not owed the United States a huge foreign debt, and if they had not been forced to sign the "Bretton Woods Agreement", it would have been difficult for the status of the US dollar to rise rapidly in the twenty years after the war.
De-dollarization is more harmful than beneficial to the United States, and the United States will strive to maintain the status of the dollar and delay its decline. Although the United States also needs to pay a certain price for the dollar to assume the responsibility of the world currency, it is a drop in the bucket compared to the benefits of the dollar as the world currency. Christopher J. Waller, a member of the Federal Reserve Board, once said, "We will not ignore people's concerns about the status of the dollar"; Janet Yellen, the US Treasury Secretary, admitted that "de-dollarization is now her biggest worry." Therefore, in the future, the United States may also adopt methods such as suppressing other countries' currencies, assuming more international currency responsibilities, and ceding benefits to allies to maintain the dominant position of the dollar. If the United States loses the blessing of the dollar hegemony, it may still be a financial power, but its position as the world's financial hegemon will be significantly shaken, and it will be difficult to support its huge financial market. The dollar investment and financing environment on which American high-tech companies rely for survival will also be hit hard, and the dominant position of American high-tech will be difficult to maintain.
Of course, if a special historical event occurs again (similar to World War II, the new coronavirus pandemic, etc.), or the United States makes its own strategic decision-making errors, resulting in "de-dollarization" really happening quickly, then the withdrawal of overseas funds will most likely lead to a financial crisis in the United States. Its impact on the United States will not be as simple as a recession, and it may even be the direct fall of the empire.
Editor: Tang Hua, Jiang Xinyu, Zhang Yanling
