A multipolar world and the dollar

Christine Lagarde, the head of the European Central bank (ECB), made an important ‘keynote’ speech last week to the US Council of Foreign Relations in New York.

It was important because she analysed recent developments in global trade and investment and assessed the implications of the apparent move away from the hegemonic dominance of the US economy and the dollar in the world economy and the move towards a ‘fragmented’, ‘multipolar’ world economy – where no one economic power or even the current imperialist bloc of the G7-plus will dominate global trade, investment and currencies.

Lagarde explained: “The global economy has been undergoing a period of transformative change. Following the pandemic, Russia’s unjustified war against Ukraine, the weaponisation of energy, the sudden acceleration of inflation, as well as a growing rivalry between the United States and China, the tectonic plates of geopolitics are shifting faster.”

You may not agree with the causes that Lagarde offers, but she concluded that “We are witnessing a fragmentation of the global economy into competing blocs, with each bloc trying to pull as much of the rest of the world closer to its respective strategic interests and shared values. And this fragmentation may well coalesce around two blocs led respectively by the two largest economies in the world.”

So it’s fragmentation and a coalescence into a battle between a US-led bloc and a China-led bloc.  This is the worry for Lagarde and the US-led imperialist bloc – a loss of global control and a fragmentation of global economic power not seen since the inter-war period of the 1920s and 1930s.

Lagarde talked nostalgically of the post-1990 period after the collapse of the Soviet Union, supposedly heralding a period of global dominance by the US and its ‘alliance of the willing’. “In the time after the Cold War, the world benefited from a remarkably favourable geopolitical environment. Under the hegemonic leadership of the United States, rules-based international institutions flourished and global trade expanded. This led to a deepening of global value chains and, as China joined the world economy, a massive increase in the global labour supply.”

Yes, these were the days of the globalization wave of rising trade and capital flows; the domination of Bretton Woods institutions like the IMF and the World Bank dictating the terms of credit; and above all, the expectation that China would be brought under the imperialist bloc after it joined the World Trade Organisation (WTO) in 2001. 

However, it did not work out as expected.  The globalization wave came to an abrupt end after the Great Recession and China did not play ball in opening up its economy to the West’s multi-nationals. That forced the US to switch its policy on China from ‘engagement’ to ‘containment’ – and with increasing intensity in the last few years.  And then came the Russian invasion of Ukraine and the renewed determination of the US and its European satellites to expand its control eastwards and so ensure that Russia fails in its attempt to exert control over its border countries and permanently weaken Russia as an opposition force to the imperialist bloc.

Lagarde comments on the economic implications of this: “But that period of relative stability may now be giving way to one of lasting instability resulting in lower growth, higher costs and more uncertain trade partnerships. Instead of more elastic global supply, we could face the risk of repeated supply shocks.” In other words, globalization and the easy movement of supply, trade and capital flows that benefited the imperialist bloc so much (see our paper The economics of modern imperialism) had come to an end. 

The response has been an intensification of protectionist measures (rising tariffs etc); control of trade, particularly in technology and attempts to reverse globalization into ‘reshoring’ or ‘friendshoring’ capital that previously went to all parts of the globe.

As Lagarde put it: “governments are legislating to increase supply security, notably through the Inflation Reduction Act in the United States and the strategic autonomy agenda in Europe. But that could, in turn, accelerate fragmentation as firms also adjust in anticipation. Indeed, in the wake of the Russian invasion of Ukraine, the share of global firms planning to regionalise their supply chain almost doubled – to around 45% – compared with a year earlier.”

Do these developments mean that the imperialist bloc is losing control of the extraction of surplus value from the working people of the world?  In particular, is the US dollar’s role as the emperor of currencies under threat from other currencies in trade and investment? Lagarde commented: “Anecdotal evidence, including official statements, suggests that some countries intend to increase their use of alternatives to major traditional currencies for invoicing international trade, such as the Chinese renminbi or the Indian rupee. We are also seeing increased accumulation of gold as an alternative reserve asset, possibly driven by countries with closer geopolitical ties to China and Russia.”

It’s undoubtedly true that the imposition of economic sanctions on Russia employed by the imperialist governments – banning of energy imports; seizing FX reserves; closing international banking settlement systems – has accelerated the move away from holding the dollar and euro.  However, Lagarde added the caveat that this trend is still way short of dramatically changing the global financial order.  “These developments do not point to any imminent loss of dominance for the US dollar or the euro. So far, the data do not show substantial changes in the use of international currencies. But they do suggest that international currency status should no longer be taken for granted.”

Lagarde is right.  As I have shown in previous posts, that although the US and the EU have lost ground in the share of world production, trade and even currency transactions and reserves, there is still a long way to go before declaring a ‘fragmented’ world economy in that sense.

The US dollar (and to a lesser extent the euro) remains dominant in international payments. The US dollar is not being gradually replaced by the euro, or the yen, or even the Chinese renminbi, but by a batch of minor currencies. 

According to the IMF, the share of reserves held in US dollars by central banks has dropped by 12 percentage points since the turn of the century, from 71 percent in 1999 to 59 percent in 2021.  But this fall has been matched by a rise in the share of what the IMF calls ‘non-traditional reserve currencies’, defined as currencies other than the ‘big four’ of the US dollar, euro, Japanese yen and British pound sterling, namely such as the Australian dollar, Canadian dollar, Chinese renminbi, Korean won, Singapore dollar, and Swedish krona. All this suggests is that the shift in international currency strength after the Ukraine war will not be into some West-East bloc, as most argue, but instead towards a fragmentation of currency reserves.

This fragmentation worries Lagarde, as a key representative of the US-EU global hegemony.  She proposed: “insofar as geopolitics leads to a fragmentation of the global economy into competing blocs, this calls for greater policy cohesion. Not compromising independence, but recognizing interdependence between policies, and how each can best achieve their objective if aligned behind a strategic goal.” What does she mean?  She means that the major powers must work together with similar fiscal and monetary measures to ensure that ‘fragmentation’ fails and the existing order is sustained.  But that is going to be very difficult in a world economy that is slowing in real GDP and investment growth, and above all, where the profitability of capital remains around all-time lows.

The US dollar and its hegemony is not under threat yet because “50-60% of foreign-held US short-term assets are in the hands of governments with strong ties to the United States – meaning they are unlikely to be divested for geopolitical reasons.”  (Lagarde). And it’s even the case that ‘anti-US’ China remains heavily committed in its FX reserves to the US dollar.  China publicly reported that it reduced the dollar share of its reserves from 79% to 58% between 2005 and 2014.  But China doesn’t appear to have changed the dollar share of its reserves in the last ten years.

Moreover, multilateral institutions that could be an alternative to the existing IMF and World Bank (controlled by the imperialist economies) are still tiny and weak.  For example, there is the New Development Bank set up in 2015 by the so-called BRICS (Brazil, Russia, India, China and South Africa).  The NDB has now appointed Brazil’s former leftist President Dilma Roussef as head, based in Shanghai. 

There is much noise that the NDB can provide an opposite pole of credit to the imperialist institutions of the IMF and World Bank.  But there is a long way to go in doing that.  One ex-official of South African Reserve bank (SARB) commented: “the idea that Brics initiatives, of which the most prominent thus far has been the NDB, will supplant Western-dominated multilateral financial institutions is a pipe dream.” For a start, the BRICS are very diverse in population, GDP per head, geographically and in trade composition.  And the ruling elites in these countries are often at loggerheads (China v India; Brazil v Russia).

As Patrick Bond put it recently: “The “talk left, walk right” of BRICS’ role in global finance is seen not only in its vigorous financial support for the International Monetary Fund during the 2010s, but more recently in the decision by the BRICS New Development Bank – supposedly an alternative to the World Bank – to declare a freeze on its Russian portfolio in early March, since otherwise it would not have retained its Western credit rating of AA+. ” And Russia is a 20% equity holder in NDB.

But back to Lagarde: “the single most important factor influencing international currency usage is the “strength of fundamentals.” In other words, on the one hand, the trend of weakening economies in the imperialist bloc facing very slow growth and slumps during the rest of his decade; and on the other, continued expansion of China and even India.  This means that the heavy military and financial dominance of the US and its allies stands on the chicken legs of relatively poor productivity, investment and profitability.  That’s a recipe for global fragmentation and conflict.

16 thoughts on “A multipolar world and the dollar

  1. One important missing point in this excellent view has to do with the astonishing levels of debt by the global economy in general and specially by the US. That means the fall of the dollar, high inflation, etc. It also means there will soon come a time when the US can no longer sustain the absurd number of military bases all over the world. So it’s out of question that the US could afford a double conflict with Russia and China, as all the hawks in Washington are headed to. So I think it’s only a matter o time and it wont take long.

  2. What’s your thoughts on the Irish economic landscape at the moment, theyannounced a surplus of 10 billion to spend as a result of corporate tax and say that over the next few years this will continue to rise ….somebody once said Ireland was just a case of leprechaun economics

    1. Ireland’s GDP is wildly distorted because it includes the profits of American multinationals with operations there to avoid tax. These profits never touch Ireland’s shores but are added to its GDP. Recent changes in Ireland’s corporate tax rate (before the lowest in Europe) has meant increased revenue for the government. What the government will do with it is another matter.

  3. “share of reserves held in US dollars by central banks has dropped by 12 percentage points since the turn of the century”

    And as per bombshell Bloomberg article, now it dropped 9% in just a single year (2022). That seems tectonic, not “gradual”.

  4. If History serves us as a guide, there are two important factors we must take into consideration:

    1) in the long term, financial hegemony is nothing without industrial hegemony. It is perfectly possible to lose industrial hegemony while retaining, and even strengthening for a latency period of time, financial hegemony. This is the case of the British Empire, which retained its financial hegemony until the very end of WWII — long after it was the industrial hegemonic (it was already third place by 1900, behind not only the USA, but also Germany); more importantly, its status as the financial superpower at the very end of the 19th Century not only didn’t contain the continued rise of the USA as the industrial superpower, but actually accelerated it, through its cheap capital distributed in the form of financing American (and Australian etc.) railways;

    2) financial hegemony as per the parameter of dominance of one’s national currency can collapse suddenly, in a single historical episode. This was the case of the Pound Sterling of the British Empire, which, before WWII was, albeit slowly declining (it was at 48%, if memory doesn’t fail me), not even close to losing its global hegemony to the US Dollar. It virtually disappeared after WWII. The US Dollar was suddenly catapulted to the dominant currency right after WWII, i.e. it wasn’t a gradual, “natural” episode, but a sudden, dramatic, destructive and traumatic episode. So the collapse of a national fiat currency can — and do — collapse suddenly, even if at historical highs, but more realistically after some decades of slow decline;

    3) the fact that BRICS/NDB are insignificant now doesn’t mean they can become extremely important and powerful later, even in the short term (i.e. one decade from now). It all depends on the historical context, and a major example of this is the IMF itself: during the Cold War, it was an insignificant institution that played second fiddle to the WB and even the IADB. It became the star of the show suddenly, after the neoliberal shock therapy wave that started in Mexico and reached its apex during the subjugation of Russia at the end of the 1990s. By the early-mid 1990s it was already, by far, the most important international “bank” under service of the American Empire, i.e. its rise was spectacular and happened in some 5-8 years max, i.e. the blink of an eye by historical standards.

    It is also important to highlight the fact that the “neofeudal” movement is the initiative of the USA itself, not of the enemies of the USA. China is probably the last national-level paragon of globalization; it has been constantly reinforcing its preference for peace, continuity and deepening of “opening up” in official statements and documents (most of which are translated in English and freely available on the internet).

    If “neofeudalism” (a term which, by the way, was coined in the USA, right after the 2008 meltdown) becomes a reality, then it will be because of the USA, not the rest of the world. It is the old historian enigma: where were the legions when the Germanic barbarians destroyed the Roman Empire in the West? The answer is that the legions were the barbarians — the system had already degenerated from a professional-dominated (the auxilia were few and kept on a very short leash by born-and-bred Roman citizens) to a purely (Germanic) mercenary army (the magister militum system) more than one century ago.

    1. ERRATA: “…there are THREE important factors…” and “…doesn’t mean they CAN’T become…”

      Addendum: this “neofeudalism” stuff is exactly the newest (and last) recommendation of the greatest liberal intellectual of the Cold War in geopolitical economics, János Kornai, about which Michael Roberts published a post in 2021 (as an epitaph).

  5. Are revolutionaries supposed to support any of the sides involved? Are we supposed to back the supposedly non capitalist non socialist China? What is the solution to imperialism – nationalism, national liberation or a struggle to overturn the whole system? Of course, the only struggle capable of doing this is a class struggle directed to the overthrow of capitalism.

    1. According to the WSWS (the main Western Trotskyite newspaper), the French had 1.5 million workers marching in Paris during the apex of the revolt against Macron’s pension reforms (it’s still at their home page, main news).

      I don’t know about China, but, if the French didn’t do the communist revolution with 1.5 million workers marching in their own capital, they will never do it/don’t want to do it.

      1. I would say the possibility of communist revolution say, this year, is approximately zero. I would love to be wrong. But on a longer time scale, I think the probabilities improve. There is little to suggest that the negative otcome is not more likely. By which I mean World War. I do not see Trotskyism/Stalinism as a suitable political compass.

  6. Firstly I’d say I’m slightly disappointed Michael. I know you laser focused on this person’s speech as the major drive for the post, but on the topic of dedolarization you just basically resorted to Foreign reserves as the only metric?

    Not a single mention of bilateral trade agreements? Russia-Iran, China and a fast growing list of countries?

    Even the very recent Brazil-China agreement? Even Lula confidently asking the question why use the Dollar during his visit to China?

    The ASEAN finance ministers meeting last month with the stated goal of discussing exactly the issue of allowing their local payment system to use local currencies.

    To be clear I also think this process will take at least a few more years, but the trend should be alarming for the American leaders, even the recent Bloomberg article is not something they’d publish lightly. It is a calculated move, fueling the anti-China hate while also trying to not show the US as an actual declining power.

    Secondly I think this passage is just a wrong assertion in so many ways:

    “As Patrick Bond put it recently: “The “talk left, walk right” of BRICS’ role in global finance is seen not only in its vigorous financial support for the International Monetary Fund during the 2010s, but more recently in the decision by the BRICS New Development Bank – supposedly an alternative to the World Bank – to declare a freeze on its Russian portfolio in early March, since otherwise it would not have retained its Western credit rating of AA+. ”

    I think it is extremely naive to think this is anything but a PR move. The joke is on the westerners isn’t? First of all why on earth would you give a AA+ rating to your declared geopolitical enemy under any circumstance?

    It says more about the west’s own hypocritical behaviour, or perhaps ideological commitment to the “rules” of the game than anything else. My bet is sactions against Russia is a different beast than sanctions against China and friends. “You pretend you’ll deal with Russia and I pretend I actually rate you very very highly wink wink nudge nudge”.

    We live in a world where Russian oil was reportedly sold to Europeans despite the sanctions through India and others.
    We live in a world where Xi goes to Russia and makes strong declarations of partnership and friendship.

    The idea that China of all countries are actually going to enforce anything against Russia is, well I leave to your imagination. This is clearly a facade.

    As for the finer point about the IMF support during the 2010’s, I think China before and after Xi, Brazil before and after the 2016 coup against Dilma may have something to do with that. Well even before the coup Dilma’s term was very keen on taking many neoliberal austerity steps to fix the economy after the 2008 crash plus commodity burst double combo. Obviously it doesn’t compare to the monstrosity that was Temer and Bolsonaro’s neoliberal reforms but the point remains.

    Seems quite obvious that the BRICS went through severe political changes in the past decade. Either way it’s not something that should be summed up in a single paragraph. Yes the BRICS were mostly a useless group even 10 years ago. I don’t think this assertion proves anything, the world, the countries and their leaders are simply not the same in the slightest.

  7. I think the phrase, the dollar is not yet fractured at the center but increasingly fraying at the edges, sums it up.

    Other commentators have pointed out the lack of a political dimension to the article. I would like to add that the sun is setting on the US empire in the Middle East with the Chinese brokered Iran Saudi rapprochement. This has ramifications for Israel which is a product of the US century and which stands with or falls with the US century.

    The reason I point to the Gulf is the influence that Petro Dollars had on the world economy and how its recycling led to the rebirth of the City of London. Now a basket of Petro currencies will benefit Gulf financial centres as well as Shanghai at the expense of London and New York.

  8. Hello, I want to mention a small “mistake” in your blog: the graph of “Most active currencies used in international payment in 2021” is outdated after 2022 and only includes the Swift system. Due to the sanction, Russia’s SPFS and China’s CIPS have been used wilder than ever as a kind of alternative options to SWIFT.

    Moreover, for a long time, China made trade with developing countries focus more on commodity exchange instead of currency(natural resources to manufactured goods). The US dollar is just used as a unit of measurement in this progress. Even though it might cause a huge transaction amount in the Swift system, in fact, the real number of exchanges would be much smaller.

  9. I just want to ask a question. What is the difference between the debts of other countries and the debts of USA? Some have raised this point that debts of poor countries are mostly in dollars and they have to acquire dollar to pay for their debts. On the other hand, the US’ debts are the size of their GDP but US does not have to pay for it because they can print dollars. What do you say about this claim?

    1. Hassan. Yes the US is in a unique position because the dollar is the currency of international transactions so it can pay its debts in dollars and ‘print’ dollars to do so. But if the Fed and Treasury just print dollars, that would lead to a fall in the value of the dollar and increase the disincentive of other countries selling goods to the US to hold dollars. So far that has not happened. In contrast, poor countries must borrow in dollars and servicing that debt when the dollar is strong leads to bankruptcy and default.

      1. Hi, how are you? I write from Argentina. What is your opinion about the yuan payments between China and Argentina and Brazil? a hug from South America

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