The last month has been filled with global political and economic events that shook worldwide news and caused stirs and disturbance in international relations. The ongoing trade wars between the United States and dozens of nations have turned a spotlight on the economic aftermath being left and triggered a rush towards news coverage of any statement or decision taken in global macroeconomics. One of the most brought up topics is the oncoming economic crisis and the end of the reign of the United States dollar. How did this currency govern the global economy and become the world’s dominant reserve currency? What difficulties and dangers is it facing today?
In 1944, the end of World War 2 was in sight, and the Allies realized that they would march victorious out of this war and lead the post-WW2 world. So, they got together in Bretton Woods and started talking about leading a world with no wars, poverty, and depression. Hence, its name, the Bretton Woods Agreement. In July 1944, 730 delegates representing 44 countries met with the goals of creating a strong foreign exchange system that protected currencies from devaluation and promoted the growth of the international economy. One of the two primary designers of that conference was John Keynes, who hoped to issue a new global currency named the Bancor and establish a global central bank under the name of the clearing union. As for the second designer, Harry White, he wanted a global lending fund and the use of the US dollar as global currency. In the end, the adopted program was a mix of both ideas.
This agreement made the various worldwide currencies pegged to the US dollar’s value, which had gold as a basis. In addition, it led to the creation of two international institutions: the International Monetary Fund (IMF) and the World Bank. The IMF works with countries that have monetary and economic problems and guides them on how to fix them by changing their internal policies and structures. Meanwhile, the World Bank lends money to developing countries in hopes of economic development.
In 1973, the Bretton Woods system collapsed due to the inability of the US government to back up the number of dollars in circulation with its inadequate gold supply. Countries had the freedom to choose any exchange arrangement for their currency except pegging it to gold. The United States of America started looking for a substitute to the Bretton Woods agreements and found it in the petrodollar deal with Saudi Arabia in 1973. Maintaining the demand for the US dollar is vital to the economy of the USA, so in return for offering weapons and protection to Saudi Arabia, the latter country agreed to price all their oil exports exclusively in US dollars and invest their surplus in US debt securities. In 1975, the 13 members of The Organization of the Petroleum Exporting Countries (OPEC) had agreed to follow the steps of Saudi Arabia and later on followed the other oil exporting countries. The maintenance of the petrodollar is the USA’s primary goal, for without it, the dollar would collapse, and many wars have been waged in order to prevent steps that would lead to it.
The western sanctions on Russia as a response to the war against Ukraine have fastened the slow de-dollarization efforts that Russia had been putting since 2014 as well as other countries such as Brazil, China, Iran, India, and Turkey. These nations had started working on protecting and shielding their economies from US economic and monetary policy. They stepped into leading roles on a global economic scale due to their realization that the USA isn’t using the US dollar as an economic instrument but as a pressure. As a response to US and EU sanctions, Moscow decided to take countermeasures. Russian President Vladimir Putin prohibited the supply of Russian gas to countries that have sanctioned Russia unless the supplies are paid for in rubles. In addition, it has been repeatedly reported that Saudi Arabia is considering accepting the Chinese yuan for oil sales to China, aiming to strengthen economic ties with China and diversify away from dollar dependency.
It is easily noticeable how the global economy has already been split, and we’re watching the new economic world unfold in front of us with the rise of an eastern currency that has the ability to compete. If all political issues were solved between eastern nations, with the US dollar, they may govern the monetary world one day. As Zoltan Pozsar, managing director at Credit Suisse, has said: “We are witnessing the birth of a new world monetary order centered around commodity-based currencies in the East that will likely weaken the Eurodollar system and also contribute to inflationary forces in the West.”
With President Trump back in the office, global economic tensions rose to record numbers as the new US president announced and imposed tariffs on various countries. 25% tariffs on imports from Canada and Mexico, 20% on Chinese imports, and 25% on all imports from the European Union (EU). In retaliation, Canada hit back at the US with 25% global steel and aluminum duties with tariffs that target $29.8 billion worth of American goods, China imposed an additional 15% tax on key American farm products, and the EU has announced €26 billion in tariffs on US goods. Signs of a recession, which President Trump has consistently downplayed, have been shown with the stock market turning into a bloodbath losing trillion dollars in value. Ongoing inflation, and record high spike in the price of gold, seen as a safe haven in economic turmoil, hitting an all-time high of over $3500 an ounce.
We have presented the rise of the US dollar and how it’s threatened with being dethroned from its supreme economic status. The fall of the current leading currency started years ago, but it is surely taking a drastic turn and will end up causing disasters worldwide. Such actions will lead to significant turbulence and a severe recession in the global economy before a new leading currency takes over. With energy prices soaring, and commodity prices skyrocketing with higher taxes imposed, fewer products will be exchanged between nations. As French economist Frederic Bastiat once said, “When goods don’t cross borders, armies will.” Is it possible that the third world war has already begun?
Edited by Chrsity Abou Saad and Amin Kharrat