The world needs to find an alternative to the dollar

The US has radically increased the use of sanctions as a punitive foreign policy instrument. Now the country accumulates immense debt, leaving hapless foreigners seeking the safety and depth of its markets to finance their excesses.

The United States is happily destroying the pillars that support the dollar as the world’s reserve currency, with the latest blows coming from some powerful Americans who have questioned the rule of law following Donald Trump’s conviction.

In doing so, it is effectively challenging the rest of the world to find an alternative – and so far, it appears to be winning.

The attacks on the legal system in the wake of former President Trump’s conviction follow other moves that are seen by some as the United States issuing a challenge to the rest of the world.

The country has radically increased the use of sanctions as a punitive foreign policy instrument. And it is accumulating immense debt, leaving hapless foreigners seeking the safety and depth of its markets to finance their excesses.

Over the past three weeks, I’ve asked financial services executives, global investors and other experts in Asia and the United States how long they think Americans can keep going without a significant backlash. Several of the sources requested anonymity to speak openly about the situation.

These conversations have shown that consternation is growing, both at home and abroad, about the consequences of US arrogance. But despite trying, no one has so far been able to find a credible alternative or expect one to emerge soon, and they themselves are partly to blame.

In Asia, for example, people are asking with increasing urgency what their “America plus 1” is as they look for ways to reduce their exposure to the US and boost non-dollar trade flows.

But attempts to build such systems are slow or have failed to gain traction. And rising authoritarianism, threats to individual and property rights, and geopolitical tensions mean that even if U.S. assets are less attractive than they once were, other options are worse.

A recent survey, for example, shows that central bank reserve managers plan to increase their dollar holdings over the next 12 to 24 months as rising global geopolitical tensions and the need for liquidity draw them toward the currency. .

“Perhaps ironically, the strength of the U.S. dollar is due, in part, to its status as a nearly unchallenged safe haven,” said Steve H. Hanke, a professor of applied economics at Johns Hopkins University who served on the former Council of Economic Advisers. President Ronald Reagan. “That said, most investors don’t understand geopolitics and the dangers that lurk beneath the surface – until it’s too late.”

DOLLAR DOMINATION

At its core, the dollar’s dominant role in the world derives from the democratic principles of the United States. It is supported by the enormous size of its economy, the depth of its markets and the strength of its institutions and the rule of law.

The belief in democracy is deep. Last week, I asked U.S. Securities and Exchange Commission Chairman Gary Gensler, who has been in government since 1997, whether partisan politics had made it harder for employees like him to do their jobs. A conservative-leaning U.S. appeals court struck down one of his major initiatives that morning.

“I believe in this constitutional system that we have. It’s confusing,” Gensler said. “It’s democracy.”

However, the confusion is testing some of the fundamentals of the dollar’s global appeal.

Attacks on the US legal system increased following Trump’s verdict in a New York court. Florida Governor Ron DeSantis, for example, called it a “kangaroo court” on social media platform X, saying “the verdict represents the culmination of a legal process that was subject to the political will of the actors involved.”

A major Asia-based investor said potential threats to US institutions were also concerning. Any degradation of the Federal Reserve’s authority – as Trump’s allies are reportedly contemplating – would affect the dollar’s credibility, the investor said, adding that such a development could result in a double-digit depreciation of the currency.

Trump’s campaign for his Republican presidential bid has played down such reports about what conservative groups might be planning.

MASS OF SANCTIONS

A New York-based senior financial services executive who was traveling in Asia said he is hearing from clients who think U.S. and Western financial policy is “undermining the dollar and the Western financial system more broadly.”

He pointed to an “increasing grounds for sanctions” as one of the reasons.

And the West is going further. The finance executive said talk that the West could seize about $300 billion in Russian sovereign assets that were blocked in Ukraine undermined the safe haven status of the United States. “The West crossed a Rubicon there,” said the executive.

A Treasury Department review of sanctions in October 2021 concluded that such designations had increased to 9,421 that year, from 912 in 2000. It noted at the time that “American adversaries – and some allies – are already reducing” their use of the dollar.

An Asia-based investor said it was closely watching another court case to test the strength of the rule of law: ByteDance’s challenge to ban TikTok in the US. He is paying attention to the evidence the US government would present to support claims that the app is a threat to national security.

If no evidence is offered publicly, then “it will feel like the checks and balances, the independence of the legal system, may not exist – at least in this case,” the investor said.

But he later added that even that won’t keep him away from the United States. It’s still more independent and better than many other places, he said.

Via Reuters.