Home' Trinidad and Tobago Guardian : October 4th 2015 Contents OCTOBER 4 • 2015 www.guardian.co.tt SUNDAY BUSINESS GUARDIAN
FINANCE | SBG13
If hegemons are good for anything, it is
for conferring stability on the systems
they dominate. For 70 years the dollar
has been the superpower of the financial
and monetary system. Despite talk of
the yuan s rise, the primacy of the
greenback is unchallenged. As a means of pay-
ment, a store of value and a reserve asset, noth-
ing can touch it.
The dollar s rule has brittle foundations,
however, and the system it underpins is unstable.
Worse, the alternative reserve currencies are
flawed. A transition to a more secure order will
be devilishly hard.
For decades America s economic might legit-
imised the dollar s claims to reign supreme.
Now, though, a fault line has opened between
America s economic clout and its financial mus-
cle. The United States accounts for 23 per cent
of global GDP and 12 per cent of merchandise
trade but about 60 per cent of the world s out-
put, and a similar share of the planet s people,
lie within a de-facto dollar zone, in which cur-
rencies are pegged to the dollar or move in
some sympathy with it.
American companies share of the stock of
international corporate investment has fallen
from 39 per cent in 1999 to 24 per cent today,
but Wall Street sets the rhythm of markets
globally more than it ever did. American fund
managers run 55 per cent of the world s assets
under management, up from 44 per cent a
The widening gap between America s eco-
nomic and financial power creates problems
for other countries, in the dollar zone and
beyond. That is because the costs of dollar
dominance are starting to outweigh the ben-
First, economies must endure wild gyrations.
In recent months the prospect of even a tiny
interest-rate hike in America has sucked capital
from emerging markets, battering currencies
and share prices.
Decisions by the Federal Reserve affect off-
shore dollar debts and deposits worth about
$9 trillion. Because some countries link their
currencies to the dollar, their central banks
must react to the Fed.
Foreigners own between 20 per cent and 50
per cent of local-currency government bonds
in places such as Indonesia, Malaysia, Mexico,
South Africa and Turkey, and they are more
likely to abandon emerging markets when Amer-
ican rates rise.
At one time the pain from capital outflows
would have been mitigated by the stronger
demand, including for imports, that prompted
the Fed to raise rates in the first place. However,
in the past decade America s share of global
merchandise imports has dropped from 16 per
cent to 13 per cent.
America is the biggest export market for only
32 countries, down from 44 in 1994, while the
figure for China has risen from two to 43. A
system in which the Fed dispenses and the
world convulses is unstable.
A second problem is the lack of a backstop
for the offshore-dollar system if it faces a crisis.
In 2008-2009 the Fed reluctantly came to the
rescue, acting as a lender of last resort by
offering US$1 trillion of dollar liquidity to foreign
banks and central banks. The sums involved in
a future crisis would be far higher. The off-
shore-dollar world is almost twice as large as
it was in 2007. By the 2020s it could be as big
as America s banking industry.
Since 2008-2009 Congress has grown wary
of the Fed s emergency lending. Come the next
crisis, the Fed s plans to issue vast lifelines
might meet regulatory or congressional resist-
ance. For how long will countries be ready to
tie their financial systems to America s fractious
and dysfunctional politics?
That question is underscored by a third worry:
America increasingly uses its financial clout as
a political tool. Policy-makers and prosecutors
use the dollar-payment system to assert control
over not only wayward bankers and sketchy
soccer officials, but also errant regimes such
as Iran and Russia. Rival powers bridle at this
vulnerability to American foreign policy.
Americans may wonder why this matters to
them. They did not force any country to link
its currency to the dollar or encourage foreign
firms to issue dollar debt.
The dollar s outsize role does affect Amer-
icans, however. It brings benefits, not least
cheaper borrowing. Alongside the "exorbitant
privilege" of owning the reserve currency, how-
ever, there are costs.
If the Fed fails to act as lender of last resort
in a dollar-liquidity crisis, the ensuing collapse
abroad will rebound on America s economy.
Even without a crisis, the dollar s dominance
will present American policy-makers with a
dilemma. If foreigners continue to accumulate
reserves, they will dominate the Treasury market
by the 2030s.
To satisfy growing foreign demand for safe,
dollar-denominated assets, America s govern-
ment could issue more Treasuries, adding to
its debts, or it could leave foreigners to buy up
other securities but that might lead to asset
bubbles, as it did in the mortgage boom of the
Ideally, America would share the burden with
other currencies. If the hegemony of the dollar
is unstable, however, its would-be successors
are unsuitable. The baton of financial super-
power has been passed before, when America
overtook Britain between 1920 and 1945. Britain
and America were allies, though, which made
the transfer orderly. America also came with
ready-made attributes: a dynamic economy
and, like Britain, political cohesiveness and the
rule of law.
Compare that with today s contenders for
reserve status. The euro is a currency whose
very existence cannot be taken for granted.
Only when the euro area has agreed on a full
banking union and joint bond issuance will
those doubts be fully laid to rest.
As for the yuan, China s government has
created the monetary equivalent of an eight-
lane highway, a vast network of currency swaps
with foreign central banks, but there is no one
driving on it. Until China opens its financial
markets, the yuan will be only a bit player. Until
it embraces the rule of law, no investor will see
its currency as truly safe.
All this suggests that the global monetary
and financial system will not smoothly or quickly
wean itself off the greenback. There are things
America can do to shoulder more responsibil-
ity---for instance, by setting up bigger emer-
gency-swaplines with more central banks. More
likely is a splintering of the system, as other
countries choose to insulate themselves from
Fed decisions by embracing capital controls.
The dollar has no peers, but the system that
it anchors is cracking. The Economist
The almighty dollar:
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