The Coming Demise of the US Dollar?

Interviewer: Jacques Sapir, we wanted to have your point of view on economic realities, namely the engagement between Russia and China regarding their energy independence in the gas and oil sectors. February 2014 marked a turning point: The U.S. might no longer be the economic pillar on the international scene. Are the implications real?

J. Sapir: Certainly, the recent initiatives taking by the Russian and the Chinese governments have potential repercussions. Indeed, the U.S. dollar has three functions on the international scene: First, it is a unit of account, as many prices are calculated on a dollar basis, not only gas or oil, but raw materials such as metals, cereals, etc. …; second, it is a unit of transaction, that is, the currency used to make and pay off international deals; and third, it is a reserve currency. What this new Russo-Chinese deal wants to change is the use of the dollar as a unit of transaction in specific transactions such as notably those regarding energy deals. It seems it will happen but that implies that the Russian ruble will be recognized in China, which is already the case, and that the Yuan will be recognized in Russia, which has been the case since the end of last year, the date on which the Yuan was first listed on the Russian stock market. On a bigger scale, this deal echoes reiterated concerns from a series of countries — including those from the Persian Gulf region and Latin America which are raw material manufacturers — which want out of the dollar zone as a unit of transaction. In addition, the complaint filed by the U.S. government against the French bank BNP Paribas is based on the fact that financial transactions were made contrary to U.S. laws, as the bank was using dollars and the clearinghouse of the dollar is in the U.S. This extremely complex legal issue has worried a number of countries which use the dollar as a unit of transaction, and can only prompt them to use another transaction currency instead.

Interviewer: A second question. Do you believe in the creation of a new reserve currency such as bitcoin, a digital currency, or the euro, despite the latter being in turmoil? You are a specialist in geopolitics and high finance; do you believe in the blossoming of a new sole monopolistic reserve currency or a multitude of reserve currencies in disparate regions?

J. Sapir: That issue is a very old one. The dollar as a reserve currency was strongly questioned by General de Gaulle in 1965-66. For each economic and financial crisis, this issue is regularly brought to the fore. Nowadays, the current system based on the dollar, which is not exclusively but largely dominant as a reserve currency, is not satisfactory. It is blatant in the structural reserve of central banks. For instance, there is the dollar, the euro, and new currencies such as the Canadian/Australian/Singaporean dollar etc. … Evidently, there is at the very least a need for diversification, and maybe a desire for structural change.

From this vantage point, it is clear what the alternative is. To operate a change in the international monetary system, the political situation must be ready for an international conference mirroring the 1944 Bretton Woods conference. At the moment, it seems the time has not yet come since the U.S., which profits from the current situation, will do anything to maintain the current system, or at least slow down the changing process. The other face of this alternative is the development of currencies which, at a regional level, adopt the role of regional reserve currency. I believe, for instance, that it is China’s ambition to convert the Yuan into a regional reserve currency of the Asia-Pacific countries, perhaps in combination with the Australian and Singaporean dollar. Moreover, it is known that Russia wants the ruble to be a reserve currency for the members of the Community of Independent States. As a result, the emergence of different currencies will progressively erode the position of the dollar as currency reserve.