In my previous column, I tried to show that the U.S. dollar will not be able to sustain its international reserve currency role indefinitely. The current status of the U.S. dollar is a direct result of the U.S. being the hegemonic power of the world in terms of economy and finance. However, the relative power of the U.S. has been declining for decades and the world is becoming more and more multipolar as the center of the world economy has continuously been inching towards the East. As a result of this tectonic shift, the sustenance of the current commercial and financial system will be more and more difficult. And, eventually the global system will be replaced by another one, which is congruent with the multipolarity of the world itself.
The U.S. dollar as the international reserve currency is the product of a world system dominated by the U.S. Once this dominance is over, a new global order will certainly emerge sooner or later. I am not trying to say that the transition will be smooth and painless. Nor am I asserting that there is a certain path to be walked on and a definite final destination to be reached. The U.S. will certainly try to resist this shift as much as it can afford. Actually, it started doing this in an effort to preserve its relative power in the world by using import tariffs, the dollar and the U.S.-centered international payments system directly or indirectly as a weapon against countries such as China, Russia, Iran, and Turkey. However, I should stress again that these maneuvers on the part of the U.S. will only hasten the transition from the current global system to the one waiting for us in the middle/long term.
The U.S. dollar as the international reserve currency is the product of a world system dominated by the U.S. Once this dominance is over, a new global order will certainly emerge sooner or later.
But, exactly what is awaiting us? As I indicated above, the future is not carved on a rock. However, the future could play itself out in a limited number of ways, since global mode of governance has to be highly correlated and in congruent with the global power structure. We are heading towards a multipolar world, so the new global system has to reflect this pattern in its architecture. This means that the U.S. dollar will not be replaced by another national currency. In this regard, the U.S. dollar will be the last national currency of the modern world acting as the international reserve currency. Why? First of all, no country -including the U.S.- will be able to afford such a status, since in order to have such a currency, the state in question must dominate the world both economically and financially to a great extent. Only then could the state balance out the national and international needs sustainably, sufficiently and more or less satisfactorily at the same time.
Secondly, an international reserve currency comes with its privileges. The U.S. has benefited from the U.S. dollar both directly and indirectly to an incredible extent. In a multipolar world, no national currency can ever have such a favored status, even if it mistakenly believes that it can afford it.
The U.S. has benefited from the U.S. dollar both directly and indirectly to an incredible extent. In a multipolar world, no national currency can ever have such a favored status, even if it mistakenly believes that it can afford it.
Therefore, in the transition period, we will see that numerous states around the world will increasingly engage in bilateral trade and swap agreements between themselves to use their national currencies. However, this does not mean that in the end every country will use its national currency in international trade. Such a world would be highly volatile and unsustainable both commercially and financially. The world is way better with an international reserve currency such as the U.S. dollar (particularly when it is not used as a political weapon), than with numerous national currencies exchanged in international trade.
Moreover, the world will not be completely “flat” in a multipolar world. Far from it. Only a few number of states who are economically and politically strong will have a meaningful influence in international trade and finance, though other states will have important roles in the balance of powers. So, there will be “regional powers” such as the U.S. and China, which will dominate their regions both economically and financially in the “flat world,” without being able to trump one another.
In the transition period from a unipolar to multipolar system, we will see that numerous states around the world will increasingly engage in bilateral trade and swap agreements between themselves to use their national currencies.
This general future outlook of the world could in theory translate into two different international financial/commercial systems. In the first scenario, national currencies of regional powers could be used as “regional currencies” in international trade. States outside of the region will also use the currency of the regional power when engaging in trade with one of the states in the region in question. It will be like using Chinese yuan when trading with South Korea. However, this scenario necessitates states around world to accumulate different types and vast amounts of reserves in their coffers. Furthermore, international trade and finance will be highly volatile and unsustainable in such a scenario due to (inevitable) fluctuations in exchange rates. It seems that the only meaningful way for this scenario to materialize is that states from different regions will minimally engage in trade between one another.
The second scenario is the path of regional clearing unions. Under this scenario, bilateral swap agreements will evolve into regional clearing unions (RCU) in the medium/long term. And, international trade will be “governed” by these RCUs. Every RCU will have its international “abstract” currency like Bancor. And, in time these regional clearing unions could band together to form the world’s international clearing union and introduce the international “abstract” currency of the world. Under this scenario, a sustainable and much more equitable international trade and finance order could be established. It seems that the second path is the one the world should strive to go down.