Present dollar system

“Great powers have great currencies”

  • Robert Mundell, Nobel Laureate

Raison d’être of present dollar system and its repercussions.

The reason why the United States has been able to fuel this global demand for dollars is linked to the need for other countries to own dollars to be able to buy oil and other goods worldwide. For example, if Bolivian company exports bananas to Norway, the payment method requires the use of dollars. Norway must therefore own US currency to pay and receive the goods purchased. Similarly, the dollars Bolivia receives will be used to buy other necessities like oil from Venezuela.

Practically all countries until a few years ago used US dollars to trade amongst each other, even countries that were anti-American and against US global policies. EU’s euro-zone uses mainly euros as the mean of purchases inside the zone but otherwise dollars.

This continued dependence of dollar has caused some peculiar effects on the global trade and markets. Dollar soon replaced precious metals like gold as a means of value measure, which had been the standard for the global economy for hundred years. At the same time, the price formation of gold became under management of central banks.

The present international financial system, based on one major single national currency has become more and more volatile, partly also due to “enormous amounts of loose money”.

The world has seen frequently financial and economic crisis, since the birth of petrodollar 1974:

  • 1979-80 worldwide energy crisis and depression
  • 1989, October 19, stock market crisis “Black Monday”
  • 1990-1992 economic depression
  • 1997-1998 Asian and Russian economic crisis and depression
  • 2000-2001 stock market crisis, “IT Bubble”
  • 2007-2009 worldwide finance crisis and depression, “US subprime loans, bankruptcy of Lehman Brothers”

The Federal Reserve System has been printing dollars practically without limit with interest rates at around 0%, aware that the demand for dollars would “never cease”. The US finance and monetary policy has created the favorable conditions for a new global financial bubble that could even bring down the entire present world economy when it bursts.

The US to achieve an unparalleled strategic advantage

This dollar arrangement has allowed the US to achieve an unparalleled strategic advantage over its geopolitical opponents (initially the USSR, now Russia and China), namely, a practically unlimited dollar-spending capacity even as it accumulates an astronomical public debt (about 27 trillion dollars in October 2020).

This has enabled US Government and Pentagon to establish, build up and maintain the military-industrial complex and military forces covering the whole world manifold, “Command of Commons” as Barry Posen expresses this capability.

The dollar’s role as the undisputed reserve currency of the world allows the United States to impose unilateral sanctions, threats of trade wars and other punitive actions against other countries and other actors, according to US political will. The weaponization of dollar and other economic weapons have been frequently used by the US in recent years, e.g. against Russia, Iran, North Korea, Venezuela, China, Cuba, Nicaragua, Turkey, Libya, Syria and a number of other countries and actors as well.