Fernando Alcoforado*
This article aims to analyze the process that is leading the dollar to its end as a world currency due to the lack of confidence caused by the lack of currency ballast, the decline of the US economy, the possibility of the explosion of the US public debt bubble and, also, for the political use of the dollar as a weapon to impose the political will of the American government, aiming at maintaining its hegemony at the global level. The dollar may be replaced by a world currency (SDR – Special Drawing Rights: a currency created by the International Monetary Fund used for payments between countries), the gold standard or a digital currency, such as the digital Yuan, which is being implemented in China.
The dollar has dominated the world for almost a century. The financial system led by the US dollar is beginning to point to an accelerated loss of confidence in this currency. In 2018, the dollar’s share of international reserves fell until 61.7%, which is the minimum level for the past 20 years, demonstrating the lack of confidence in the dollar. This loss of confidence results from the fact that the current global economic crisis shows that a monetary system like the current one based on paper money freely issued and without ballast by the United States government is something inherently unstable whose inevitable consequences of this process are artificial economic growth, the euphoria and the bad investments that such growth generates, and, finally, the depressions.
Since the United States completely abandoned the gold standard in August 1971 and established the floating paper money system in March 1973, the United States and the world have suffered the most intense, the most constant and the longest inflationary period in history worldwide. It is becoming clear that the world no longer accepts the crises generated by this unprecedented and unhindered inflation, which was brought about by the system of floating fiat currencies within itself, implanted since 1973. Looking ahead, the diagnosis that can be made for the dollar and for the international monetary system is indeed dismal. The international monetary system is continuously alternating between fixed and floating exchange rates, with each system continuing to face insoluble problems and working unsatisfactorily, until it reaches its final disintegration. And stimulating this disintegration will inevitably be the inflation of the dollar supply. The prospects for the future are of accelerated monetary inflation in the United States, followed by an international monetary collapse.
In recent years, several countries have been actively looking for opportunities to create a reserve currency and abandon the dollar. The oil trade between Russia and China is already carried out without the participation of the dollar. These countries have started to buy more gold to prepare for the collapse of the American currency. The tendency to abandon the dollar clearly indicates the diversity of world currencies capable of replacing it, such as, for example, the Euro and the Chinese Yuan. After the United States left the nuclear deal with Iran, the European Union plans to buy oil without using the dollar. After Russia and China decided to use the Yuan instead of the dollar, a wave of “de-dollarization” covered the world. Iran, Venezuela, Angola, Indonesia, Malaysia, Thailand and Pakistan have already expressed their desire to abandon the dollar or reduce its use in the oil trade and other financial transactions. Russia understands that, under the pressure of the petrodollar, its economy is in danger of being strangled.
The abandonment of the dollar as a world reserve currency is also driven by the possibility of the explosion of the US public debt bubble corresponding to 22 trillion dollars, a value higher than the country’s GDP, a historic record, which may reach 140% of GDP by 2024. With the spread of the new Coronavirus pandemic, the public debt to the United States is expected to grow further. The United States Congressional Budget Department predicted that this year’s fiscal deficit would be US$ 897 billion and, in 2022, exceed the trillion-dollar mark. These numbers will be exceeded as a result of the new Coronavirus pandemic. Experts speculate that if this situation worsens, the country will face a large-scale crisis comparable to the Great Depression of the 1930s. If the global economy is unable to digest this huge debt, the subsequent crisis will lead the world to economic depression, to mass extreme poverty, geopolitical instability, political unrest and wars.
According to the report by the Institute of International Finance, the global debt increased to 255 trillion dollars in 2019, which is a record amount three times higher than the world GDP. In developed countries, the extremely high indebtedness rate reached 390% of GDP in 2019. The world economy may not be able to resist the debt of 255 trillion dollars, further aggravated by the economic crisis generated by the new Coronavirus. Economists warn that when this multi-trillion dollar bomb planted under the world economy explodes, the crisis will be worse than that of 2008. In late 2018, the International Monetary Fund (IMF) pointed to unsustainable global debt as the main threat to the world economy. The IMF said the real machine of global debt is the United States, whose deficit has almost tripled since 2000 and now exceeds US$ 73.6 trillion, representing 106% of GDP. The global debt of the United States is a factor that is contributing to the abandonment of the dollar as a world reserve currency. The data on foreign exchange reserves show a decrease in the role of the dollar.
Looking ahead, the diagnosis that can be made for the dollar and the international monetary system is indeed bleak. The international monetary system is bound to alternate continuously between fixed and floating exchange rates, with each system continuing to face insoluble problems and functioning unsatisfactorily, until it reaches its final disintegration. The international financial system is in a process of collapse with the probable collapse of the dollar. This situation can only be changed if there is a drastic change in the US and international monetary system.
James Rickards, author of The Death of Money (Penguin Random House UK), says the end of the dollar will lead to three scenarios: 1) its replacement by a world currency (SDR – Special Drawing Rights: a currency created by the International Monetary Fund used for payments between countries); 2) the adoption of the gold standard; and, 3) social disorder. The first scenario that contemplates the replacement of the dollar by SDR as the global reserve currency is already underway. Over time, the weight of the dollar in the SDR basket in favor of the Chinese currency, the Yuan, will gradually be reduced. SDR will be pressured to stabilize the international financial system as it was done in 1979 and 2009. China’s agreement will be needed to use the SDR that insists on using it not to save the dollar as it was done in the past, but to replace the dollar as soon as possible. The transition will be inflationary in dollar terms due to its devaluation in relation to the SDR.
The second scenario considers the adoption of the gold standard, which is another alternative to the incessant impression of the dollar by the United States government, according to Rickards. James Rickards proposes to create a new globally competitive and gold-backed currency that is strong enough to overturn the dollar system. This can raise inflation to the extreme with gold restoring confidence or raise deflation to the extreme with gold reassessed by governments to raise the overall price level. The gold standard is adopted when confidence collapses. Rickards says the adoption of the gold standard associated with the dollar and the SDR is inflationary because gold would have to be revalued upwards to support global trade and finance with the current gold stock. Rickards’ third scenario is that social disorder will take the form of neo-fascism by governments in power when wage and price controls will be used to control inflation and digital surveillance will be used to combat the black market. Monetary turmoil would be crushed quickly by government action.
The digital currency along the lines of the one implanted in China, not considered by James Rickards could also be an alternative to replace the dollar. Everything suggests that in the coming decades the global economy will move from dominance of the United States and the dollar to a system in which China will have more power. Sputiniknews article under the title Mundo precisa de alternativa ao dólar após pandemia, diz Bolsa de Ouro de Xangai (World needs an alternative to the dollar after a pandemic, says Shanghai Gold Exchange), published on the website <https://br.sputniknews.com/opiniao/2020050115525352-mundo-precisa-de-alternativa-ao-dólar-apos-pandemia-diz-bolsa-de-ouro-de-xangai/>, reports that the financial center entity in China says the United States is abusing its status as a global reserve currency holder to weaken countries that do not submit to their interests. The dollar, as a pressure weapon for the United States and a source of vulnerability for other countries, can no longer function as a global currency, says Wang Zheying, president of the Shanghai Gold Exchange, and warns that the world will need an alternative to the dollar after the new Coronavirus pandemic. According to Wang, the world needs a new strong currency that is independent of any state to develop international trade.
According to Wang Zheying, gold is not an ideal medium of exchange, as its quantity is limited. Since the United States completely abandoned the gold standard in August 1971 and established the floating paper money system in March 1973, the United States and the world have suffered the most intense, the most constant and the longest inflationary period in history. worldwide. It is becoming clear that the world no longer accepts the crises generated by this unprecedented and unhindered inflation, which was brought about by the system of floating fiduciary currencies, implanted since 1973.
The problem with the dollar-dominated monetary system is that it leaves countries vulnerable to possible United States sanctions and Washington’s power to freeze a nation’s international assets in the event of a dispute, Wang noted. During the post-crisis recovery of the new Coronavirus, the dominance of the dollar will cause many problems for other countries due to the low interest rate policy of the country’s central bank. It is a weapon for the United States, but a source of insecurity for other countries, Wang said. The president of the Shanghai Gold Exchange called for the use of a new supranational currency to reduce the global dominance of the United States dollar. The currency the world chooses for world trade should not be one that favors any country or exposes others to insecurity, said Wang, who predicted a long-term fall in the dollar and a rise in the price of gold.
Jia Jinjing, director of the Chongyang Institute for Financial Studies at the People’s University of China, proposes using digital currency technologies to implement the idea of a new global currency. The People’s Bank of China launched digital currency tests. Jia Jinjing said that we can “use digital currency technology to create an international liquidity system according to real needs”. China is launching tests of the digital Yuan in four regions of the country: Shenzhen, Hunan, Chengdu and Suzhou. The digital Yuan is expected to partially replace physical money and will be introduced in two stages: from the Central Bank to commercial banks and from commercial banks to the population. The digital Yuan will have the same sovereignty as the Chinese fiat currency. In the first phase, the digital Yuan will be used more for domestic payments. The system is very similar to the electronic wallets Alipay and WeChatPay, which are popular in China. The introduction of the state digital currency will make it possible to control the amount of money in circulation more effectively and to conduct monetary policy and regulate capital movements.
In the world, digital currency is best developed in China. The Central Bank of China has registered 84 patents in the area of digital currencies. This does not mean that the digital Yuan can become a new global payment system. First, the Chinese currency is not yet freely convertible, as there are restrictions on capital flows. And, as the director of the Shanghai Gold Exchange pointed out, a currency controlled by a given state cannot perform well in the current conditions of globalization. The supranational global currency for international agreements is more likely to be issued in the form of electronic money. This would significantly reduce transaction costs and all the difficulties associated with storing and transporting fiat money. In this case, China will already have a serious technological base and competence to actively participate in the formation of a new international payment system.
From the above, it is concluded that the global financial system is in a process of collapse with the collapse of the dollar. The financial system led by the US dollar is beginning to point to an accelerated loss of confidence in this currency, which manifests itself in the fact that central banks around the world are excluding the US currency from their reserves. This loss of confidence results from the fact that the current global economic crisis shows that a monetary system based on paper money issued freely and without ballast by governments around the world is something inherently unstable whose inevitable consequences of this process are artificial economic growth, euphoria and the bad investments that such growth generates, and, finally, the economic depressions. The abandonment of the dollar as a world reserve currency is also driven by the possibility of the explosion of the US public debt bubble. The end of the dollar will lead to four scenarios: 1) its replacement by a world currency (SDR – Special Drawing Rights: a currency created by the International Monetary Fund used for payments between countries); 2) the adoption of the gold standard; 3) the adoption of the Yuan as a digital currency; and, 4) social disorder. The social disorder scenario will occur if the first three scenarios do not happen when neo-fascist governments and global financial organizations will act to control the global financial system and prevent its collapse by repressing social movements with an iron fist.
* Fernando Alcoforado, 80, awarded the medal of Engineering Merit of the CONFEA / CREA System, member of the Bahia Academy of Education, engineer and doctor in Territorial Planning and Regional Development by the University of Barcelona, university professor and consultant in the areas of strategic planning, business planning, regional planning and planning of energy systems, is author of the books Globalização (Editora Nobel, São Paulo, 1997), De Collor a FHC- O Brasil e a Nova (Des)ordem Mundial (Editora Nobel, São Paulo, 1998), Um Projeto para o Brasil (Editora Nobel, São Paulo, 2000), Os condicionantes do desenvolvimento do Estado da Bahia (Tese de doutorado. Universidade de Barcelona,http://www.tesisenred.net/handle/10803/1944, 2003), Globalização e Desenvolvimento (Editora Nobel, São Paulo, 2006), Bahia- Desenvolvimento do Século XVI ao Século XX e Objetivos Estratégicos na Era Contemporânea (EGBA, Salvador, 2008), The Necessary Conditions of the Economic and Social Development- The Case of the State of Bahia (VDM Verlag Dr. Müller Aktiengesellschaft & Co. KG, Saarbrücken, Germany, 2010), Aquecimento Global e Catástrofe Planetária (Viena- Editora e Gráfica, Santa Cruz do Rio Pardo, São Paulo, 2010), Amazônia Sustentável- Para o progresso do Brasil e combate ao aquecimento global (Viena- Editora e Gráfica, Santa Cruz do Rio Pardo, São Paulo, 2011), Os Fatores Condicionantes do Desenvolvimento Econômico e Social (Editora CRV, Curitiba, 2012), Energia no Mundo e no Brasil- Energia e Mudança Climática Catastrófica no Século XXI (Editora CRV, Curitiba, 2015), As Grandes Revoluções Científicas, Econômicas e Sociais que Mudaram o Mundo (Editora CRV, Curitiba, 2016), A Invenção de um novo Brasil (Editora CRV, Curitiba, 2017), Esquerda x Direita e a sua convergência (Associação Baiana de Imprensa, Salvador, 2018, em co-autoria) and Como inventar o futuro para mudar o mundo (Editora CRV, Curitiba, 2019).
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