The US dollar based financial system is the greatest tax haven of them all and it is favoured parking place for the money privileged World Majority elites wish to hide and/or use for speculation or predatory lending abroad rather than productive investment domestically, writes Radhika Desai.
Adversity concentrates the mind. It is no wonder that Russia – the most sanctioned country in the world, whose sequestered foreign exchange reserves make the headlines as various western powers vie to come up with ideas of how to dispose of them to aid Ukraine, and which is expelled from the dominant international payments system – even more than the rest of the BRICS, has been in the forefront of thinking about the limitations of the dollar system and the need to replace it. What has been the fruit of this endeavour, the advances and the limitations, if any?
If two major reports, the Russian Ministry of Finance and Bank of Russia’s Improvement of the International Monetary and Financial System (hereafter the official report) published on the eve of the Kazan BRICS Summit and recent the Valdai Club Report, Beyond the Dollar: BRICS Initiatives for a Multipolar Financial System by Paulo Nogueira Batista Jr, are anything to go by, the advances are considerable. However, there are also limitations.
Both reports recognise many ills of the existing IMFS. The Batista report concentrates on the recent weaponization of the dollar-based financial system and the ructions caused in it by President Trump’s erratic policies. The official report contains an extensive analysis of the limitations of the dollar system:
The existing IMFS has been characterized by frequent crises, persistent trade and current account imbalances, elevated and rising public debt levels, and destabilizing volatility of capital flows and exchange rates. The current IMFS is primarily serving interests of AEs underpinned by collective reliance on legacy mechanisms that have failed to adjust and ultimately resulting in a growing economic imbalance between AEs (Advanced Economies) and EMDEs (Emerging Market and Developing Countries), lagging SDG (Sustainable Development Goals) progress, and fragmenting GFSN (Global Financial Safety Net).
And both also propose similar solutions: cross border payments systems based on existing currencies or a basket of them to facilitate trade and investment independent of the dollar based system.
However, both reports also suffer from a major certain limitations. Both tend to focus on recent difficulties of the dollar system, its weaponization and the Trump-induced turbulence, entirely ignoring its long-standing structural problems that lie at the root of some of the most important ills of the IMFS. According to the official report, for example, until recently, all was fine with the dollar system. Recent decades were characterized by globalization - liberalization of trade, flexible exchange rates and increased capital mobility. The US government securities market became the largest single-asset capital market in the world, coupled with gradual deregulation that started in the 1980s, and has been fueled with capital inflows at an enormous scale. At the same time, the global economy has witnessed explosive growth especially with regards to the emerging markets, which, as of 2023, account for 50.1% of global GDP, and 66% of global GDP growth over the past 10 years. BRICS countries have grown from representing 22% of global GDP (in terms of PPP) in 2006, to 32% as of beginning of 2024 (and 36,2% including the new joiners).’
The Batista report, for its part, seems to naturalise the dollar system with its references to ‘US hegemony’ and statements like ‘Confidence in a currency depends on confidence in the fiscal, monetary and financial arrangements of the issuing country’. It also insists that while the US economy may be weakened, ‘it is still the major superpower … [with] the undoubted capacity to inflict considerable damage to any country’ including through ‘its links, sometimes very strong, to powerful domestic constituencies in other nations’ with whose use ‘Governments can be toppled or intimidated into compliance’, including governments of all BRICS countries, even China.’
From the point of view of the analysis of the dollar system I have developed since my 2013 book, Geopolitical Economy: After US Hegemony, Globalization and Empire and further elaborated and updated in a 2020 Valdai Paper, ‘Beyond the Dollar Creditocracy: A Geopolitical Economy and a 2023 book, Capitalism, Coronavirus and War: A Geopolitical Economy, there are at least five things wrong with the reports’ assumption that the dollar system worked well in the past or even that it was stably anchored to the strength of the US economy.
First, they fail to investigate the dollar system’s real political economy. Secondly, therefore, they either, like the Batista report, fail to discuss its long-standing ills of the dollar system or, like the official report with its impressively comprehensive analysis of these ills, fails to explain how such a system could have worked so well and beneficently and then suddenly become subject to these ills. Thirdly, therefore they end up locating the dollar system’s foundations in US miliary power or economic health, missing its real, volatile financial, foundations. Fourthly, they misidentify the obstacles to replacing it. Finally, they miss the real reasons why it is urgent to replace it. Let us take each of these in turn.
First, there is absolutely nothing natural in the currency of any country being the currency of the world, even the most powerful country. Keynes had recognised this when at Bretton Woods, he proposed bancor, a multilateral currency, the currency of no nation, which would be used exclusively to settle accounts between central banks while national currencies remained in place, and an international clearing union to issue and operate it. He knew, better than most, having worked at the India Office in his youth and been member of commissions on the Indian currency, that the sterling system worked because it was not a national currency but an imperial one, able to transform colonial surpluses into the famous capital exports on which the sterling system operated.
Secondly, without surpluses to export, the dollar system, which provides liquidity by running deficits, was and remains prone to the Triffin dilemma – the size of the deficit puts pressure on the value of the dollar. It led to the break with gold in 1971 and since then the dollar system has relied not on reserve accumulation but on a series of financializations – expansions of purely financial activity in dollars – which generates vast demand for dollars and thus counteracts downward pressure on the dollar US deficits put. The result has been a series of asset bubbles in recent decades and their painful bursting as well as the litany of profound problems which the official report recognised, as noted above, including ‘frequent crises, persistent trade and current account imbalances, elevated and rising public debt levels, and destabilizing volatility of capital flows and exchange rates.’ Incidentally, Keynes’s proposals involved the exact opposites: Capital controls and financial repression to prevent financial crises, the promotion of balanced trade and investment flows, balanced international debt, controlled financial flows and stable exchange rates.
Thirdly, the real foundation of the system is not US military might, whose long list of failures to date would have ended the dollar system long ago. Rather, it lies in the vast expansion of financial activity, primarily in dollars, which has plagues the world, unleashing a storm of low growth thanks to low productive investment, skyrocketing inequality between classes and nations, vast financial imbalances, volatility, crises, and pro-cyclical, short-term capital flows into World Majority countries which serve not to expand productive activity but only to suck away value from households, businesses and governments.
Fourthly, while the Batista report is right to identify pro-US and pro-Western elites in World Majority countries as critical supports of US power which it can use to in regime change operations, their real connection to the US is not ideological, but financial. The US dollar based financial system is the greatest tax haven of them all and it is favoured parking place for the money privileged World Majority elites wish to hide and/or use for speculation or predatory lending abroad rather than productive investment domestically. It is their attachment to this system that constitutes the greatest obstacle to creating alternatives to the dollar system. This is the real reason to be pessimistic about the prospects for creating them, not the number of countries in the world who would have to agree as the Batista report avers. For, to work, any alternative will have to impose capital controls, at least to the extent of preventing the flow of funds from participating countries into the dollar system, which is what really keeps it going, not as often assumed, the comparatively miniscule reserves accumulated by foreign governments.
Finally, in addition to the long-standing problems of the dollar system, recently compounded by its weaponization and Trump’s erratic policies, the countries of the World Majority have a deeper reason for establishing alternatives: its longevity is put into question not by any alternatives they are creating, progress towards which both reports admit is slow, but by its own contradictions which have today ripened to the point of threatening its demise. One of the critical supports of the dollar system was the suppression of inflation through the imposition of income deflation on the Third World through neoliberal policies generally and Structural Adjustment Programmes particularly. Their ability to do so has been declining, however and the current resurgence of inflation puts the dollar system in a quandry. Having gone from attracting funds into the dollar system through high interest rates until about 2000 to attracting funds by inflating asset bubbles through easy money policies, the Federal Reserve is not caught on the horns of a new dilemma: dealing with inflation by raising interest rates beyond a point is not an option as it would prick the financial bubbles on which the dollar system and the wealth of the US elite today rest. Not doing so incurs the danger that inflation will eat away at the dollar’s value. Worse, notwithstanding the reluctance of the Federal Reserve to increase rates beyond their current plateau, the sheer incredibility of the current rise of asset values may, in any case, lead to the crash out of which it will be unable to rescue the dollar’s world role.
When this happens, unless the World Majority countries have already built alternatives, if they have not already compelled the detachment of their elites from the dollar system, they will be left scrambling.
