[A-List] WSWS - Signs of the US dollar’s demise

["james daly" <james.irldaly@xxxxxxxxxxxx>]

WSWS

Signs of the US dollar’s demise

By John Chan
19 October 2009

An article by veteran Middle East journalist Robert Fisk in the British 
Independent on October 6, entitled “The demise of the dollar”, is credited 
with adding to the recent weakness of the US dollar and the rise of gold 
prices.


The exclusive report revealed that finance ministers and central bankers 
from the Gulf States, China, Russia, Japan and France had held a series of 
secret meetings to plan an end to the use of the US dollar for oil trading 
by 2018. The replacement would be a basket of currencies, including the 
euro, the Japanese yen, the Chinese yuan, gold and possibly a new currency 
issued by the Gulf Cooperation Council.


If true, such a move would be an economic and political bombshell. An end to 
the use of the US dollar for trading in such a vital commodity as oil would 
be a further blow to its pivotal role since the end of World War II as the 
world’s reserve currency. With no obvious solid replacement, the demise of 
the dollar would be a recipe for the emergence of antagonistic currency and 
trade blocs. For the US, it would end its ability to readily fund its huge 
debts by selling bonds denominated in the world’s reserve currency.


An unnamed Chinese banker told the Independent that the plans to remove the 
dollar from the Middle East oil trade would fundamentally change the face of 
international financial transactions. The meetings were clearly highly 
sensitive, as they involved a number of close US allies—Japan, Saudi Arabia 
and the Gulf States—and all parties would be concerned about Washington’s 
reaction.


As the same Chinese banker explained: “America and Britain must be very 
worried. You will know how worried by the thunder of denials this news will 
generate.” Indeed, Saudi Arabia and other Gulf oil producers, as well as 
Japan and Russia, denied any such meetings had taken place. Fisk did not, 
however, resile from his report, writing on October 7 that Saudi denials 
were simply regarded “as a normal part of Gulf politics”.


The reaction of the markets indicated that the story was not implausible. In 
fact, there has been a growing discussion in financial circles about 
replacing the US dollar. Financial turbulence and the massive growth of US 
government debt that stands at nearly $US12 trillion as a result of falling 
tax revenues and astronomical bailouts to Wall Street, has created 
considerable nervousness about the dollar, particularly among governments 
holding huge dollar reserves.


The Gulf Cooperation Council of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia 
and the United Arab Emirates holds over $2 trillion in dollar reserves. 
China has currency reserves of more than $2.27 trillion, mostly in US 
dollars. A long-term decline in the value of the dollar would result in huge 
losses for these countries. At the same time, any rapid withdrawal from the 
dollar threatens to trigger a panic that would magnify losses by sending its 
value plunging even lower.


As the Independent pointed out, China has been the “most enthusiastic” power 
pushing for an alternative to the dollar for oil trading. It not only 
imports huge amounts of oil from the Middle East, but is also a growing 
exporter of manufactured goods and an increasingly large investor in the 
region.


Beijing is well aware of the dangers involved in a protracted decline in the 
dollar. Not only would an ongoing slide affect the value of its 
dollar-denominated assets, but would impact on Chinese exports to the US. 
China’s purchases of US bonds have been aimed at maintaining the existing 
exchange rates between the dollar and the yuan, which underpin China’s huge 
export trade to the US.


At the same time, China has begun to explore alternatives. Beijing has 
signed currency swap agreements with Russia and a number of Asian and Latin 
American countries to settle trade in their own currencies, rather than the 
US dollar. Brazil has discussed similar agreement with China. Moreover, 
Beijing is increasingly using its currency reserves to buy overseas minerals 
and industrial assets, rather than to purchase US Treasury bills.


In March, Zhou Xiaochuan, head of the Chinese central bank, published an 
essay calling for the replacement of the US dollar with International 
Monetary Fund (IMF) Special Drawing Rights—in effect a basket of currencies. 
During his trip to China in June, US Treasury Secretary Timothy Geithner 
assured Beijing that the Obama administration would make the necessary 
savage cuts of social spending and the living standards of the American 
working class to rein in US debt and maintain the dollar’s stability.


Former Chinese central bank adviser Yu Yongding told Bloomberg News before 
he met Geithner: “I wish to tell the US government: ‘Don’t be complacent and 
think there isn’t any alternative for China to buy your bills and bonds’. 
The euro is an alternative. And there are lots of raw materials we can still 
buy.”


Writing on October 13, Financial Times commentator Martin Wolf played down 
talk of the “dollar’s death” as exaggerated. “Unless and until China removes 
exchange controls and develops deep and liquid financial markets—probably a 
generation away—the euro is the dollar’s only serious competitor. At 
present, 65 percent of the world’s reserves are in dollars and 25 percent in 
euros. Yes, there could be some shift. But it is likely to be slow. The euro 
zone also has high fiscal deficits and debts. The dollar will exist 30 years 
from now; the euro’s fate is less certain,” he explained.


In fact, the lack of any alternative to the dollar as the global reserve 
currency does not preclude its “demise”. It simply means that the 
consequence would be the formation of rival currency blocs and a descent 
into currency and trade conflicts.


Others, like World Bank head Robert Zoellick, recognise the dangers. In a 
speech in late September, Zoellick warned: “The United States would be 
mistaken to take for granted the dollar’s place as the world’s predominant 
reserve currency. Looking forward there will be increasingly other options 
to the dollar.” He added: “One of the legacies of this crisis may be a 
recognition of changed economic power relations.”


The dominant role of the dollar was bound up with the overwhelming 
industrial predominance of the US following World War II. Washington 
effectively dictated the terms of the post-war global economic order 
encapsulated in the Bretton Woods agreement under which the US dollar, 
backed by a fixed exchange rate with gold, functioned as the world’s reserve 
currency.


As Japan and Europe recovered, however, the relative decline of the US was 
expressed in the decision by US President Nixon to end the gold backing for 
the dollar in 1971. The turn to the exploitation of cheap labour through 
globalised production in the 1980s and 1990s led to a hollowing out of US 
industry and the vast financialisation of the American economy. Those 
processes accelerated after the collapse of the Soviet Union and the opening 
up of China and India as vast reservoirs of low-paid labour, and ultimately 
led to last year’s catastrophic financial meltdown centred on Wall Street.


According to the Independent, the US was aware of the meetings over dollar 
oil trading and “sure to fight this international cabal”. The article cited 
Beijing’s former special envoy to the Middle East, Sun Bigan, who wrote in 
an official journal that “bilateral quarrels and clashes [with the US] are 
unavoidable” over the energy interests in the Middle East. “This sounds like 
a dangerous prediction of a future economic war between US and China over 
Middle East oil—yet again turning the region’s conflicts into a battle for 
great power supremacy,” the Independent commented.


Competition over energy supplies lies behind the present US-led 
confrontation with Iran. Using Iran’s nuclear programs as the pretext, 
Washington has been pushing for harsh new sanctions against Tehran that 
would impact on its oil and gas trade. China, which is one of Iran’s largest 
trading partners and importer of Iranian energy, has resisted a new round of 
sanctions.


At the meeting of the Shanghai Cooperation Organisation (SCO) meeting in 
Beijing last week, Iran, which is a SCO observer state, backed the creation 
of a new unified regional currency, an idea proposed by Russia. The SCO was 
formed by Russia, China and several Central Asian republics in 2001 to 
counter the US influence in the region. Iran replaced the dollar with the 
euro and yen as its trading currencies three years ago, due to intensifying 
US-led pressure.


Competition over raw materials is also taking place in Africa. In Ghana, the 
Chinese state oil company CNOOC is competing with the US Exxon Mobil’s $4 
billion bid for Jubilee, one of the largest oilfields in Africa. China 
International Fund and oil giant Sinopec are setting up a $7 billion Guinea 
Development Corporation to build infrastructure, mining and energy projects 
for the Guinea regime, which is facing Western sanctions. The fund is more 
than twice the size of Guinea’s entire GDP. Guinea has the world’s biggest 
reserve of bauxite, as well as large quantities of gold, diamond, uranium, 
iron ore and potentially oil.


A recent Lex column in the Financial Times linked Sino-US competition for 
African oil to the weak dollar. Referring to the size of the Chinese bids, 
the article noted: “The more China’s leaders perceive their pile of 
greenbacks to be a wasting asset the more it makes sense to pledge or spend 
them today. Overpaying is in the eye of the beholder if such dollar 
anxieties are vindicated.” In other words, China is translating at least 
some of its dollar reserves into energy and mineral assets, contributing to 
the weakening of the US dollar.


In this context, high-level meetings about the long-term replacement of the 
dollar in Middle East oil trading may well have taken place, despite the 
subsequent denials, pointing to deepening tensions and rivalry between the 
major powers, particularly over vital energy supplies.

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