Dodging the Dollar

The issue of exchange rates between currencies and [the question of] who is paying for international trade are extremely relevant. On March 28, the World Trade Organization (WTO) finished a symposium dedicated to this topic. During the first week of April, representatives from the BRICS (Brazil, Russia, India, China and South Africa) met in New Delhi and agreed that trade between the countries would take place in their respective currencies. The United States’ pressure to expand unilateral sanctions against Iran into financial markets intensified the need for trade and finance in other currencies.

The dollar was for six decades the predominant currency in international trade. This gave great benefits to the financiers on Wall Street and high influence to the U.S. government, and it allowed North Americans to live with a chronically unfavorable balance of trade. Even today, despite the financial crisis that originated on Wall Street and the creation of “quantitative facilitation” of more than $1 trillion, 60 percent of currency reserves are in dollars. But there are big changes on the horizon.

The mainstream media tend to invent or ignore whatever is convenient for the owners of Wall Street. This might be why they have not discussed recent agreements to discontinue the use of the dollar in international trade.

Some oil countries have begun to sell oil in other currencies and have started to separate themselves from the petrodollar, which is what they call the inorganic issuance of dollars to pay for higher oil prices, produced by the abandonment of a definite gold standard by the United States in 1973. The large export economies and some international institutions such as the United Nations have already raised the necessity of a new global reserve currency.

The U.S. economy has been deteriorating for decades; the financial effort to save the banks has diverted and sterilized the resources that could have served to stimulate it. Increasing unemployment, North American de-industrialization and a chronic commercial balance deficit recommend a shift from the dollar as a reserve currency.

Meanwhile, the United States and its satellites have accused China of devaluing its currency — the renminbi (RMB) — and have asked that China make it convertible to dollars. The paradox is that China is the biggest client of U.S. Treasury bonds and the country that would suffer most from the depreciation of the dollar, which is why the percentage of dollars in its reserves has been lowered from 74 percent to 54 percent. Another dilemma is that if the RMB was made convertible — as the United States has requested — it would accelerate the fall of the dollar.

If the equilibrium continues, the Chinese economy will reach the level of the U.S. economy by 2016, but it will grow even more. When the Chinese standard of living is raised, its economy could be the biggest in the world by 2020. This would gradually permit a greater presence of the RMB as a currency.

The symptoms

Since 2004, Russia and China have called for the creation of a new global reserve currency to replace the dollar. In their bilateral trade, they avoid the dollar and for the past year have traded solely in their own currencies. China and Japan, the second and third largest economies of the world, recently arrived at an agreement to trade in their own currencies. The BRICS have announced that they will boost trade between themselves and in their own respective currencies. Trade between the BRICS is at $230 billion and is growing at a rate of 28 percent.

Africa has one billion inhabitants, and its largest trading partner is not Europe but China. The trade between the two grows at an approximate annual rate of 31 percent, and it increased from $10.6 billion in 2001 to $132 billion in 2010 and $166 billion in 2011; it’s favorable to Africa, because $93 billion was in African exports. Chinese engineering contracts in Africa surpassed $132 billion in 2010. More than a third of these transactions were with South Africa and, after the agreement between the BRICS, this trade will now take place in rands and RMBs, which is already the reserve currency in other African countries. The biggest bank in Africa, Standard Bank, predicted that by 2015, more than $100 billion of African trade would be paid in RMBs.

Trade between India and Africa has also increased. On March 17, the second summit between India and the African ministers of commerce took place in New Delhi, where the stated objective was to increase the bilateral trade of $62 billion in 2011 to $90 billion in 2015.

It can be assumed that the trade between India and South Africa, which is at $8 billion, will take place in rupees and rands, according to the agreement between the BRICS.

China seems determined to impose the RMB as a strong currency for investment and trade. About 70,000 Chinese companies use the RMB in their Asian operations. In January, China and the United Arab Emirates agreed to abandon the dollar and use their own currencies in oil transactions. This is a currency swap for ¥35 billion ($5.5 billion). This agreement with the UAE, and the exclusion of Iran from the area of the dollar, pose a threat to the petrodollar system.

The United States has ceased to be the principal buyer of Saudi oil; it is now China, who in February imported 1.39 million barrels.

At the moment, construction is beginning on a large Chinese-Saudi oil refinery, and trade between the two countries is growing at a galloping rate. It is very probable that discreet agreements between the two are contemplating the payment of oil in RMBs.

The necessity of substituting the dollar as the principal currency for international trade and finance is each time more evident. A currency of unstable value, which in collusion with the Federal Reserve stars in fraudulent financial chaos, cannot be the currency of reference.

The prescription

A UN report foresees “a new global reserve system … that will not be based on the U.S. dollar as the only principal reserve currency.” The International Monetary Fund has also issued reports that recognize this necessity: One entitled “Reserve Accumulation and International Monetary Stability” recalls the prescription of John Maynard Keynes at Bretton Woods: the “bancor,” which would be issued by an International Central Bank. In the present conditions of absolute political predominance over the rest of society by the financial sector, this — which was recommended at the time — seems unwise. It would certainly result in increasing global corruption and further guilty collaboration between Wall Street and the City, which now characterizes [the relationship between] the Federal Reserve and the Bank of England.

The answer must start with the obvious; as Yaroslav Lissovolik of Deutsche Bank said, “The euro and dollar are no longer seen as unquestionable monopolies in the role of reserve currencies. Clearly the world needs more reserve currencies.” The financial aggression against Iran for domination of nuclear technology, the “monetary tsunami” of the grand monetary injection to reward corrupt bankers and the ridiculous freezing the accounts of Mrs. Assad for some suspected purchases, which were in fact legal, are acts that demonstrate to the world the irrational abuses of the present financial system and the urgent need for change.

In Delhi, a development bank sponsored by the BRICS also agreed that it would use a basket of their currencies in lending to other developing countries. A new stability, since the economies of the BRICS have the most stable growth. This would be a good starting point to erase the traces of the Bretton Woods agreements that imposed the World Bank, the IMF and the U.S. dollar as the arbiters of international finance.