by E. J. Antoni and Peter St. Onge
Joe Biden is dethroning King Dollar in real time. The US dollar’s financial dominance is under siege from a uniquely bad combination of foreign and domestic policies, and Americans should be deeply concerned by the fallout if the dollar loses its 80-year reign as the world’s reserve currency.
In just the past weeks, China conducted the first major LNG sale in renminbi instead of dollars, struck a major deal with Brazil to conduct trade in their own currencies, and just announced the sale of 65,000 tons of LNG to France denominated in yuan. This dovetails with the Biden administration’s inflationary policies and ham-handed sanctions on Russia that accelerated foreigners’ flight from the dollar at the very moment the world doubts if the dollar remains a safe and reliable store of value.
Since the Bretton Woods agreement in 1944 and the petrodollar deal in 1945, the dollar has enjoyed preeminent status around the world, especially for international trade and exchange. This created huge demand for dollars abroad and allowed the US to export inflation, to spend beyond our means and leaving foreigners to soak up the extra.
As the Federal Reserve created billions for the government to spend in the 1960s, it threatened America’s gold reserves. At the time, all major currencies were redeemable for dollars, and dollars were redeemable for gold. When “guns and butter” policy led to a run on gold, President Nixon ended the dollar-gold-exchange standard with what was supposed to be a temporary measure.
Of course, it was as temporary as today’s “transitory” inflation.
Ending the dollar’s link to gold freed the Fed to create yet more money and yet more inflation. While inflation moderated in the early 1980s, it has now returned with a vengeance. Four-decade-high inflation has undermined the dollar’s stability, one of the necessary characteristics of a reserve currency.
A second critical feature of a reserve currency is its apolitical nature. Which Biden is now gutting. After both parties in Washington destroyed the dollar’s stability with inflation, now the Biden administration has chosen to wield the dollar as a weapon. Together, the message to foreigners they should get out while they still can.
In response to Russia’s war with the Ukraine, the US froze the dollar reserves of Russia’s central bank. To be clear, these were not American assets, but were dollars owned by the Russian central bank and the Russian people. The seizure was intended to cause bank runs and collapse Russia’s credit system. It didn’t work.
Instead, it exposed the Biden administration’s willingness to violate the trillions of dollars foreigners rightfully own. The danger of this precedent is difficult to overstate.
Every nation in the world must now wonder if the Biden administration will threaten their dollar assets too if they do something the administration doesn’t like. Perhaps a foreign country disagrees with Biden on “green” energy mandates, or transgender policies, or diversity quotas. Is there some ESG threshold of wokeness where your national treasury is drained without warning?
This is not a justification of Putin’s actions, this is about shooting ourselves in the foot. The Biden administration crossed the Rubicon when it weaponized the dollar at a time when it was already teetering from four-decade-high inflation and record levels of debt.
This has given China, our greatest adversary, all the ammunition it needs to launch a worldwide offensive to replace the dollar. It is now making rapid progress.
If the de-dollarization progresses what becomes of the trillions of dollars accumulated around the world since 1944?
If foreigners no longer want them for trade, central bank reserves, private wealth funds, and the official currency of about a dozen countries, all those dollars have nowhere to go but back to us in a flood like our country has never seen. This flood will compete for goods and services in the US against the dollars already here as decades of accumulated trade deficits come flooding back all at once.
At that point, hyperinflation will not be hyperbole.
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E. J. Antoni and Peter St. Onge are economists.
Photo “Joe Biden” by Joe Biden.
