Where is the hegemony of the US dollar

To reduce dependence on the US dollar, it is necessary to ensure orderly and stable money supply, adapt to economic growth, and ensure stable prices and exchange rates

Wen | Chen Bingcai

Editor | Su Qi

All talk about the hegemony of the US dollar, where is the hegemony of the US dollar? Only by understanding the location of hegemony can we truly overcome the dilemma of hegemony.

1、 The Specific Manifestation of US Dollar Hegemony

First, the hegemony of the US dollar is that the US dollar is the world currency and hard currency. The US dollar is a substitutegoldInternational transaction media and payment settlement methods. Without the US dollar, countries cannot expand imports, borrow foreign debt, and make international investments. Therefore, countries must obtain and earn US dollars in order to introduce international advanced technology and equipment. When gold is used as currency, it is necessary to increase the supply or circulation speed of gold in order to stimulate economic development.

Secondly, the hegemony of the US dollar lies in its ability to obtain seigniorage. Against the backdrop of gold being the world currency, no country can receive seigniorage. Under the gold exchange standard, after paper currency replaced gold as the reserve currency, the status of paper currency in various countries remained on the surface equal, but currencies linked to gold for international exchange and payment can receive partial seigniorage. After the complete decoupling of paper currency from gold, the status of paper currency is unequal to that of reserve currency. One can make international payments and settlements, while the general sovereign currency cannot make payments and settlements, and will not be stored or even used as a valuation currency. At this point, the issuance of paper currency as reserve currency is a complete seigniorage. The US dollar is the cost of printing a piece of paper, while other countries must provide goods, services, technology, or services equivalent to the face value of the paper currency. Gold cannot be produced indefinitely, but paper currency can be produced indefinitely, so the hegemony of the US dollar can seek long-term huge international economic and financial benefits.

Thirdly, the hegemony of the US dollar also manifests as the credit of sovereign currencies being endorsed by the amount of US dollars. In the era of paper currency as the world currency, countries did not have the US dollar or other currenciesforeign exchangeAs for foreign exchange reserves, the exchange rate of the local currency lacks sufficient credit, the economy is relatively backward, and there is a lack of international trade and investment capacity, as was the case with the Economic and Trade Conference of the socialist camp back then. Today, if a country does not have sufficient foreign exchange reserves and sufficient US dollar liquidity, the interest rate cost for enterprises and governments to raise funds internationally is relatively high, and even leads to a significant depreciation of the exchange rate. And sufficient foreign exchange reserves can interveneForeign exchange transactionsMarket exchange rate fluctuations ensure the stability of the local currency exchange rate and prevent debt crises.

Fourthly, the hegemony of the US dollar also manifests as a change in the path of economic development and rise after the US dollar replaces gold. Under the gold standard or gold exchange standard, the shortage of gold makes it difficult to expand domestic commodity circulation, while the increase of gold brings about the expansion of trade circulation scale and economic scale. The cyclical overproduction crisis in the early stages of capitalism was characterized by insufficient demand for purchasing power and insufficient gold in circulation. When gold and silver are used as world currencies, the amount of gold and silver possessed determines the size of a country's economy, trade, and the expansion it brings, and whether the country's economy can rise. In the era of gold standard and gold exchange standard, the rise of great powers must have enough gold and silver. However, both gold and silver have limited mineral resources, circulation, and trading, and their impact on the rise of the country has a relatively long history. After paper currency replaces gold as the world currency, the amount of paper currency with reserve currency determines and affects a country's economic strength, and also determines whether a country's economy can rise. Moreover, under the paper currency system, the rise of the national economy took place faster than in the era of gold as currency, as its convenience greatly increased. The rise of Japan and Germany after the war and the development of Four Asian Tigers have a huge relationship with the huge US dollar surplus from the United States,30In just one year, great achievements can be achieved. The economic development of China since its reform and opening up cannot be separated from its trade with the United States and its huge US dollar surplus.

Fifth, the hegemony of the US dollar is more manifested in the fact that the United States can use the US dollar to negotiate and demand prices. After the US dollar became the world currency, the US trade must be in deficit for other countries to hold the US dollar and then flow back through the capital account; Or through direct investment, debt, or securities capital outflow. In short, on the US balance of payments, there must be a deficit, otherwise the US dollar cannot flow out. Therefore, the increase in US dollar foreign exchange reserves of various countries is actually a manifestation of US dollar outflow, a manifestation of US goods trade deficit, or a manifestation of US securities capital outflow.

The larger the US trade deficit or the more US dollars flowing out through various channels, the more favorable the US dollar position is, and the greater the US dollar assets owned by foreign institutions and governments. But when a country rises due to its large US dollar holdings, the United States can use trade deficits or undervalued exchange rates as excuses to demand a reduction in trade surplus, exchange rate appreciation, open markets, and even threaten or use high tariffs to force compliance, or to crack down on listed companies in the United States, reducing their securities capital outflow, and cracking down on their economic development and rise. The United States has used this method against Germany and Japan, and today it is using this method against China and multiple other countries.

Sixth, the prominent manifestation of US dollar hegemony is the ability to use the account and payment system under the paper currency system to restrict, freeze, and confiscate the funds, asset transactions, payments, and other sanctions on the account. Paper money is different from gold. After gold flows out, it must be exchanged for goods and services in order to return. Paper currency is the currency of a sovereign country, so all paper currency must be returned to the accounts of the sovereign country's banks or financial institutions. Only in this way can currency generate and pay interest, and have liquidity. After the outflow of the US dollar, there is no need for exports of goods and services, and the US dollar automatically flows back to the United States. Foreign institutions open bank accounts to deposit US dollar funds back to the United States or conduct investment transactions in the United States. Not only is it outflow and inflow, but as long as it is a US dollar transaction, it is reflected in the trading system of the US dollar account, which is the value of the US dollarSWIFTPayment and settlement system. The uniqueness of US dollar storage loans and various cross-border transactions and payments in accounts makes US dollar hegemony ubiquitous. The US government can order a ban on account transactions, payments, and even freeze or even confiscate assets. The Korean War, Iraq War, Libya War, and the United States have all frozen their US dollar assets. At present, the economic sanctions imposed by the United States on Iran, Russia, and North Korea are also regulated and implemented through accounts.

It can be seen that due to the sovereign currency characteristics of the US dollar, holding US dollar assets carries risks: the more US dollars earned, not only cannot be used domestically, but also cannot be used as wealth under one's true control, resulting in greater risks. However, one cannot avoid owning the US dollar or have less US dollar assets. China's foreign exchange reserves and financial assets expressed in US dollars are both held in US dollar and US dollar accounts, which is an unavoidable risk.

2、 The way out to break the hegemony of the US dollar

The formation of US dollar hegemony is a historical process. The replacement of the pound by the US dollar as the world currency did not mean that the economic scale was the largest in the world, and the status of the US dollar was elevated, which took decades.

The hegemony of the British pound and the hegemony of the US dollar are both monetary hegemony under the gold exchange standard. After the decoupling of the US dollar from gold, the hegemony of the US dollar broke free from the shackles of gold and embarked on a true path of hegemony. Printing US dollar paper currency has global demand, and the US dollar has become the absolute credit currency of the world. Even sovereign currencies rely on the endorsement of the US dollar to have international credit. since20century70Since the 1990s, once the US dollar crisis occurred, its position has been consolidated and strengthened. The world's demand for the US dollar is increasing, not the opposite. Therefore, in the next decade, cracking down on the hegemony of the US dollar will not be easy.

In today's world, many countries both hate and love the US dollar. Hating the US dollar is because of US hegemony. Love for the US dollar is because without it, international business and activities cannot be carried out and international influence cannot be expanded. Love and hate are intertwined, inseparable from the US dollar. They reluctantly accept the US dollar and even help it consolidate its position, enhance and expand its influence.

How to break the hegemony of the US dollar?

One is to establish regional currencies or innovate regional currency symbols. To break the hegemony of the US dollar, it is necessary for all countries to work together to abandon the US dollar, not to use, hold or hold less of it, at least within a certain region and scope, not to use the US dollar as an international credit currency, and establish their own credit currency. For example, in the Eurozone, the euro is a credit currency, and the US dollar may not be needed.1929Year -1933During the Great Depression, Japan once established a yen zone. The six Gulf countries once proposed the establishment of a unified currency, but were unable to achieve it. Asia has also proposed the Asian dollar concept, but it has not been realized. It can be seen that establishing a regional currency is not easy. But in the future, regional payment, settlement, and trading currency symbols (similar to virtual gold) can be established, which are recognized by countries in the region and have a fixed exchange relationship with sovereign currencies. Storage will still be represented in sovereign currencies, thus avoiding the use of the US dollar.

The second is to attempt to accept sovereign currencies as international credit currencies. All sovereign currencies can fulfill their monetary functions domestically, but when they go abroad, they do not recognize or accept each other and trust third-party currencies, namely the US dollar, British pound, Japanese yen, and euro. Why? If the British pound and US dollar were linked to gold in the early days and could be exchanged for gold, it can be recognized that they are international currencies, but today they are no longer related to gold, why do they still rely on it? Actually, this is a historical habit, path dependence. Path dependence has already caused harm, why not abandon it? It is due to inadequate theoretical understanding and mutual distrust among countries. Despite good relations among countries, even alliances and strategic partners, when faced with interest issues, they still believe in the US dollar, which indicates that sovereign countries have not yet established true international credit and trust. Therefore, sovereign countries should sign agreements based on mutual trust and accept each other's currency as the currency for cross-border valuation, flow, payment, settlement, and transactions in accordance with laws, regulations, and policies, so that the US dollar is not used. The emergence of paper currency as an international credit currency is not only a result of historical development but also a result of economic strength. More importantly, it lies in people's historical awareness and habits. Once trust is established between countries, the historical habits of currency can be changed. If combined with Token money, a new monetary payment and settlement system can be established.

Thirdly, establish a market-oriented cross-border payment and settlement system. As a means of pricing, payment, settlement, trading, and storage, currency lies in credit, in establishing a sense of credit, and in having an institutional system that supports credit awareness, especially a free flow system for payment, settlement, trading, and storage. Therefore, the solution to the hegemony of the US dollar is also a technical issue, which is to establish a way to surpass at leastSWIFTA competitive payment and settlement system. If we cannot establish a globally applicable, convenient, and efficient currency system that can compete with the US dollar payment and liquidity system, we cannot replace or abandon the US dollar system, nor can we compete with the US dollar system. Although the euro can compete with the US dollar, including the pound, it still cannot compete with the US dollar in terms of liquidity, global payment system, financial tradable products, and optional convenience.

Sovereign currency countries have established their own payment and settlement systems, which are not unfamiliar to central banks of various countries. The simplest and fastest way is to connect the payment and settlement systems of the central banks of the two countries, and conduct cross-border transactions, payments, settlements, and fund circulation based on market exchange rates. But the central bank's payment and settlement system is government owned, and government departments in one country have access to all cross-border payment and settlement data of enterprises in another country. It should be said that there are also risks involved. If there is a conflict in the relationship between the two countries, will the account system be used for sanctions? Therefore, only a market-oriented payment and settlement system can provide peace of mind for cross-border transactions, payments, settlements, and capital flowsSWIFTThe system has advantages.

If sovereign currencies really want to abandon the US dollar, they need to have the determination to establish a market-oriented payment and settlement system, and can truly achieve marketization, gradually increasing from bilateral to multilateral. The government promises not to intervene in legal form, and can form a payment and settlement system for sovereign currencies.

The fourth is to allow overseas institutions to freely open local currency accounts within China. The local currency that flows out of the country needs to be refluxed, and it needs to be freely and quickly refluxed. This requires allowing overseas institutions to open local currency accounts within the country and enjoy national treatment in local currency.

Allowing overseas institutions to open local currency accounts within China involves the theory of capital account openness and free capital flow, which is generally believed to bring financial risks. In fact, the risk of capital account opening is relative to the reserve currency, not to non reserve currencies. Reserve currency is a freely convertible currency, with a huge scale of financial assets that can be infinitely supplied. Full openness will bring shocks, and non reserve currencies do not have this characteristic, so there is no need to worry. More importantly, the outflow of local currency into China is relatively small compared to the scale of the local currency, so there is no need to worry about its risks. Just like the outflow of the US dollar and returning to the US, does the US need to worry about this impact? unwanted. Overall, the risk of sovereign currencies flowing into China outside of reserve currencies is controllable.

As long as bilateral trade and investment agreements are signed, allowing for valuation, trading, payment, settlement, investment, and flow in local currency, the restrictions on bilateral local currency capital accounts can be completely relaxed, and capital account controls under reserve currencies cannot be transferred to sovereign currencies. If there are concerns about risks, both sides can consider implementing total or balance control of free cross-border capital flows. This approach can be continuously expanded within multiple countries or regions to eliminate historical habits and path dependence on reserve currencies. The economic development and rise of various countries mainly rely on their own currencies, the currencies of both trading parties, rather than relying on the US dollar.

The fifth is to establish corresponding bilateral (regional) international financial institutions to coordinate and solve specific problems. Cross border transactions, payments, settlements, and flows of funds involve interbank lending, bank credit, currency swaps, trade financing, exchange transactions, etc. It requires the opening of bilateral interbank lending and foreign exchange trading markets, as well as the interconnection of clearing systems. In the early stages, specific institutions can be established to assist in completing the task, such as establishing a bilateral holding financial institution as a member of the bilateral lending market and foreign exchange trading market, which can meet liquidity needs at any time and meet the currency needs of credit facilities. Bilateral or multilateral international financial institutions established can adopt the method of local currency investment, and when financing, local currency financing can be used to completely eliminate exchange risk, and the scale can be enlarged. If only invested in US dollars, it is difficult to scale up. In addition, it is possible to establish some bilateral trust guarantee institutions to provide guarantees for some projects.

Of course, in order to increase bilateral and multilateral trust, it is necessary to properly handle exchange rate and inflation issues. Therefore, bilateral central banks should coordinate on issues such as exchange rates and rising prices. In fact, if we do not rely on the US dollar for credit endorsement of our local currency, as long as we control the money supply well, prices will not rise significantly, and the exchange rate will not depreciate significantly.

The sixth is to lobby regional financial institutions to invest and raise funds in sovereign currencies. International regional financial institutions, originally funded by countries within the region, were supposed to serve the economic and financial needs of relevant countries in the region. However, due to the fact that the currency of investment is the US dollar, it cannot be expanded because the acquisition of the US dollar requires a surplus in exports, debt, and foreign direct investment. This is not easy for non reserve currency countries, so it is difficult to continue to increase capital in the US dollar.

Financial institutions within a region, registered capital1000100 million -2000Billions of dollars are already large, but1000100 million -2000Under the constraint of not being able to absorb deposits, the capital of billions of dollars cannot continue to grow and develop like domestic commercial banks, and will inevitably not be able to serve the economic and financial growth needs of countries in the region. But if regional financial institutions change their investment methods, countries can establish regional financial institutions with local currency investment, and the increase in capital can also be increased in local currency. Countries can continue to expand their local currency capital, and regional financial institutions can become larger and serve the needs of regional economic and financial development. After investing in local currency, the financing needs of domestic enterprises are also provided in the form of local currency, which can avoid exchange risk and debt risk. This type of project provides government guarantees, and regional financial institutions mainly provide a standardized process for fund use and supervision. This can make regional financial institutions larger and solve the problem of insufficient loans for infrastructure, working capital, and other aspects in regional economic development.

Seventh, maintain the stability and even appreciation of the currency value, and return to the fixed exchange rate system when necessary. A continuously depreciating currency cannot have international credibility and will not be used by enterprises or financial institutions for international payments, settlements, and debt repayment. Currencies with high exchange rate volatility are also difficult to use for international payments and settlements, as there is too much uncertainty and the currencies of countries with severe inflation are also difficult to be trusted by the international community. Throughout history, any paper currency that serves as a reserve currency must be stable, appreciative, or at least continuously stable before becoming a reserve currency. Although the yen is a reserve currency, its relatively low proportion is due to its high volatility, and even Japanese companies are unwilling to settle in yen.

Therefore, in order to get rid of the hegemony of the US dollar and the adverse effects of US dollar sanctions, countries in a certain region must first control inflation, ensure price stability and exchange rate stability, and use import control, exchange control and fixed exchange rate to ensure exchange rate stability, instead of implementing the so-called free floating exchange rate, which will inevitably lead to serious and continuous inflation, thus making the economy and finance out of control, This situation exists in many small countries.

To break down the hegemony of the US dollar and reduce dependence on the US dollar, it is necessary to ensure the orderly and stable money supply, adapt to economic growth, ensure price stability and exchange rate stability, so that sovereign currencies in the region can have mutual trust and implement sovereign currency valuation, payment, and settlement. With years or even decades of sovereign currency use, the market will gradually choose the dominant currency within the region, so there is no need to worry about US dollar hegemony and sanctions on the US dollar account system.

In short, anything that can be done with sovereign currencies within the country, as long as there are good mechanisms and institutional arrangements, can be done without reserve currencies such as the US dollar. It can be done with local currency or sovereign currencies recognized and accepted by the country. In this way, it avoids the huge risks brought by US dollar account sanctions and sanctions.

(The author is an academic member of the International Financial Forum)