Regime change?


The evolution and weaponization of the world dollar

The centerpiece of shock and awe of the West’s economic response to Russia’s invasion and bombardment of Ukraine was the freezing of Russia’s central bank assets. In the March 7 edition of his Global Money Dispatch newsletter, the Credit Suisse investment strategist Zoltan Pozsar writes that the G7 seizure of Russia’s foreign exchange reserves marks a regime change in the global monetary system. Pozsar pronounces this new regime Bretton Woods III. He anticipates that Asian sovereigns, fearing that their dollar- and euro-denominated foreign reserves are at risk of expropriation in the event of future foreign policy disputes, will park their surplus funds outside of the reach of Western financial authorities. For Pozsar, this heralds the rise of “commodity-backed currencies in the East” and spells the denouement of dollar hegemony.

In a follow-up piece published on March 31, Pozsar speculates that recent developments will drive China to replace the West as the buyer of last resort of Russian oil. As a result, oil tankers will have to be rerouted from the quicker East-West route via the Suez to a longer passage (one requiring ship transfers) from Russia to China. Geopolitics will shape the reorganization of real infrastructure networks, slowing down supply chains and increasing the cost of credit. Pozsar predicts that this rearrangement of global commodity and money flows presage a new world economic order, one in which China will replace the US as the monetary hegemon. The petrodollar, he envisages, will be replaced by the petro-yuan. 

Pozsar’s analysis—as well as Adam Tooze’s response to it—appreciates the asymmetry in the world economy: between advanced economies that dominate global finance, and developing countries that produce the majority (about sixty percent) of world GDP. Asia may be the center of gravity of world manufacturing, but European and North American firms still command the bulk of the profits embedded in global supply chains. This tension in the global economy is unlikely to resolve anytime soon, but it has become increasingly fractious. The weaponization of trade policy by the previous Republican administration has only been reinforced by the current Democratic one. Treasury Secretary Janet Yellen’s recent speech advocating “the friend-shoring of supply chains”—wherein the US strengthens trade ties with those it shares strategic interests and “core values,” while severing the rest—captures the new mood. (In her speech, Yellen also calls for revitalizing Bretton Woods based on her view that the dollar-based economic order “benefits us all.”)

Understanding this emergent world economic order requires complementing Hyun Song Shin’s famous “matrix of balance sheets” approach to financial globalization, with a lens that sees the global dollar system as a matrix of monetary, military, and legal dominance. We are witnessing the waxing of a new chapter in this system—if we are in a new era called Bretton Woods III, it is the most weaponized form of the global dollar system yet. 

Bretton Woods I

From 1952 to 1973, Bretton Woods I enforced the subjugation of other currencies to the dollar. Getting gold required converting other currencies, say pound sterling or french franc, into dollars, which were alone convertible into gold. Dollar dominance thus hinged upon a stable exchange rate between dollars and gold. This meant limiting the supply of dollars—easily printable compared to producing gold, a scarce commodity. A rising demand for dollars in the late 1960s made maintaining a fixed parity between dollars and gold increasingly difficult. In August 1971, fearing a dollar crash, President Nixon delinked the greenback from gold. No longer could holders of dollars go up to a bank window and exchange them for gold. De facto, the international monetary order known as Bretton Woods was over.

Nixon’s decision to remove the dollar from its gold peg was coupled with the threat of trade sanctions unless the Europeans appreciated their currencies, making US exports cheaper and more attractive to the world market. To his G-10 foreign counterparts, Nixon’s Treasury Secretary John Connally infamously declared: the dollar “is our currency, but it’s your problem.” The United States’ abandonment of its management of the world dollar made for more than a decade of economic disorder marked by high inflation and unemployment.

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