Success and Failure of the US Dollar: The Dirge of a Great Country

In what could be called the American presidential debate of the ages, standing menacingly on one side was a naughty old man known for lying, and on the other side stood the incoherent old incumbent, senile and doddering. While the results of public opinion polling show a big loss for Joe Biden, British media clearly proclaimed, “The biggest loser is America!”

Indeed, it is not just Biden — the defeated U.S. president and the only candidate the Democrats could put forward — who is aged; it is also America, which is trying to maintain hegemony yet is riddled with problems at home and abroad, and whose infrastructure is outdated, whose manufacturing industry is weak and who is falling behind in technological development.

The U.S. has been able to rely on its global dominance for half a century because it was lucky enough to escape the ravages of two world wars, and perhaps more importantly, because of the dominance of the U.S. dollar. The U.S. dollar is not only practically the sole medium for trade, but it is also the most important foreign exchange reserve in central banks worldwide. Thus, a paper dollar can be used around the world, and central banks in other countries are happy to hold as assets U.S. government debt. What’s even more ridiculous is that the U.S. government can print and distribute the dollar at will, using it as payment to extract whatever resources it needs from any country. This unique privilege helps the country flourish and gives it a weapon with which it can punish opponents.

This valuable privilege originally involved gold as exchange. After the gold standard collapsed, the promise of $35 in exchange for one ounce of gold supported the global status of the dollar. In 1971, however, when the U.S. became mired in the Vietnam War, gold reserves, which originally accounted for 70% of the world’s supply, fell continuously. Inflation in the U.S. grew, and the original promise of $35 became unrealistic as countries demanded exchanging U.S. dollars for gold. After President Richard Nixon brazenly and unilaterally ended the gold exchange, the dollar became the currency for credit, backed by the credibility of the U.S. This also freed the U.S. from any constraints and allowed it to print money and trade as it pleased. The only issue was that the U.S. was not then strong enough to take on this great responsibility. Secretary of State Henry Kissinger engaged in high-level talks with the Saudis, negotiating U.S. military and technological support. In exchange, Saudi Arabia and OPEC countries sold oil in U.S. dollars and then used the profits to buy U.S. government debt. In this way, every country that highly depended on oil that year shared the U.S. dollar, and the American government had an outlet for its national debt.

American dominance for half a century has allowed the U.S. to take advantage of the rest of the world. However, taking advantage of others has also disadvantaged the U.S. Because printing and borrowing money is so easy, people in every class have become accustomed to spending more money than is needed. The trade deficit is increasing, and foreign goods are flooding the market, disadvantaging domestically produced products. Some countries have seized this opportunity to lower currency values and create a massive trade surplus, further hurting the vitality of the American manufacturing industry. The situation has intensified in recent years, as the government has cut taxes and paid extravagantly for large-scale subsidies, causing the national debt in proportion to gross domestic product to double in 20 years. Now, the interest budget exceeds the national defense budget. The debt burden is increasing daily and may become overwhelming, which would intensify the blow to international confidence in the U.S. dollar.

Add to this the Russia-Ukraine war, in which the U.S. and its allies are using the dollar as a weapon, unsettling many other countries. And adding more fuel to the fire is the fight between the U.S. and China. The U.S. is increasing sanctions daily, in response to which China is reducing its holdings of U.S. debt and striving to de-dollarize. Because China is the second largest holder of U.S. dollars, the dollar in global foreign exchange reserves has also continued to decrease. Six years ago, it accounted for 63% of global foreign exchange reserves; last year, it had already fallen to 54%, and estimates predict it will fall below 50% in a few years. Not only is the status of the U.S. dollar declining, but as its proportion in foreign exchange reserves falls, the sale of American debt is weakening. As yields gradually rise, the ability of the U.S. government to repay its debts with interest will be increasingly affected.

Recent online reports said Saudi Arabia suspended its 50-year oil agreement with the U.S. on June 9. Although this is difficult to verify, Saudi Arabia has long regarded China as its No. 1 buyer. China contributed to reopening diplomatic relations between Saudi Arabia and Iran and is dissatisfied with America’s biased position in the Israel-Hamas war. Therefore, whether or not the agreement was canceled, Saudi Arabia already uses renminbi to sell oil to China. As digital RMB becomes more widespread, its proportion globally will increase. Moreover, in October, BRICS countries will discuss independent currencies. Ten ASEAN countries are also calling for local currency in trade, all of which is a blow to the standing of the U.S. dollar. This is the first time in half a century that the U.S. is facing such a serious problem. What will the future be for a country that takes advantage of others and has gotten used to eating and running?

The author is an economic commentator.