The Loss of Dollar Hegemony: A Brief Primer

At the end of World War II, the US emerged as the only power without wholesale destruction of its cities and towns, with its manufacturing at its peak, and its infrastructure unscathed. This position of dominance was further enforced and cemented by the US dollar becoming the currency of trade and reserve that is the basis of economic activity in the world. The advantage of having the dollar, which the US could “print” (now digitize) has been huge.  But, it has also been abused by generations of politicians in Washington DC, and the arrangement is starting to unravel, at an accelerating pace.  

Consider the effect that the dollar hegemony has had on US wealth and power. Being the owner of the world’s currency is like playing monopoly with an endless supply of money. The power of the dollar hegemony is made patently clear in that the US outspends the next top nine nations combined on its military, extending its muscle with some 900 bases around the world. This power is paid for by simply transferring digits into the accounts of the military-industrial complex. In the area of trade, the US imports more than it exports. This imbalance is paid for by issuing debt in dollars, which other countries and investors buy.

Furthermore, by controlling the world financial system, the US has the power to influence the flow of capital to the central banks of foreign nations. Countries borrow in dollars (created from thin air by the US) and have to pay back, with interest, in hard-earned dollars. This has also given the US the ability to dictate the terms of loans to other countries, often refinancing already large loans with yet more US-created dollars. Due to the dollar hegemony, the US is able to dictate terms of loans and to pressure nations into submitting to US policies. If a major US multinational corporation doesn’t like regulations or a deal it can negotiate on its own with a foreign government, the financial power of the dollar is used to strong-arm that government into terms favorable to the multinational. The strong-arming can be in the form of denying credit or crippling “sanctions.” Even when a loan is granted, it often comes with austerity programs and geopolitical conditions that usurp sovereignty and are detrimental to the people of the borrower nation. Thus, immense wealth and power has been created for Wall Street with a few clicks on a computer keyboard. 

For the last 75 years, the US has built its global empire largely on dollar hegemony. But having this privileged position, and maintaining it with coercion and force is a double-edged sword. The easy money has allowed the US to neglect its manufacturing base. After all, why produce something which takes material and labor, when it can be purchased cheaper with US-made currency? This has resulted in sending well-paying manufacturing jobs overseas, and turning the US into a service and finance economy. Dollar hegemony has also allowed the US to fund endless wars, to satisfy the greed of the military-industrial complex and the ambition of entrenched Washington DC bureaucrats. 

We often hear from politicians that all the US wants is to enforce a “level playing field” in international trade – a code phrase calling for countries to open borders to US multinational corporations, lest they have to face the might of the US military. The accusations thrown on a country of “unfair” competition is to play on Americans’ sense of fair play in order to manufacture conflict and public support for the next military intervention. But, the call for a leveled field ignores the fact that the field has been heavily slanted in favor of the US.

In spite of the huge advance that dollar hegemony has given the US, the balance of power among nations is changing. As other nations have been able to rise economically, they are not content with following US-imposed “rules” for a slanted “world order.” BRICS countries (Brazil, Russia, India, China, and South Africa), are forming their own trading agreements, and other countries want to join, including Saudi Arabia, Argentina, Iran, Mexico, Indonesia, Turkey, Egypt, and many other African countries to form a BRICS+ trading bloc. The BRICS+ countries want financial cooperation outside of the US influence. Notable among these is Saudi Arabia. The world’s largest oil exporter, the Saudis have sold their oil in dollars since the 1970s, thus underpinning the demand for dollars. But now the Saudis are in talks with China about selling oil in Chinese Yuan. Russia is already selling its oil in non-dollar currency to large markets like India and China.

The loss of the dollar’s hegemony has been accelerated under the Biden administration, as a direct result of the sanctions the US and its Western satellites imposed on Russia in reaction to the war in Ukraine. Among these sanctions, there are three which have weaponized the dollar hegemony: 1. the removal of Russia from the SWIFT payment system, essentially making it impossible for Russia to transact in dollars; 2. The freezing and seizing of Russian national reserves held in dollars; and sanctions aimed at restricting the price and trade of Russian commodities, which has forced Russia and its trading partners to price Russian imports and exports in currency other than the dollar. 

These sanctions have sent a chilling message to the rest of the world: “We can do the same to any nation.” And the world got the message. But, instead of achieving the intended effect of submission, many nations have determined to get out from under the dollar hegemony. It is unrealistic to expect that growing economic powers, like the BRICS, will continue indefinitely to play in an unleveled field where a country can be cut off from trade and its national reserves erased arbitrarily at any time. It is in these nation’s best interest to trade with each other outside of US interference. 

The repercussions to the US of the loss of the dollar hegemony are hard to fully comprehend. One can expect a devaluation of the US dollar and strong inflationary pressure. 

As the international demand for dollars is reduced, both for trade and as a reserve currency, there will be “excess liquidity” in dollars – too many dollars chasing goods and services. This will be compounded by the fact that the US is a net importer of goods, with an economy that relies on services and financial transactions rather than manufacturing. 

Historically, transitions of this magnitude have not been achieved peacefully. Given the huge fortunes at stake, the financial institutions and corporations who control US politics, and therefore the US military, will want to retain the dollar hegemony at all costs. There is already a lot of noise about war with China, a nuclear power, in addition to the proxy war the US is already fighting against Russia in Ukraine. The reckless actions of inept politicians and the greed of a few have resulted in a less safe and much more uncertain future for the US, with the risk of a nuclear war that would lay waste to humanity. As is always the case, those who will suffer more under runaway inflation and armed conflicts will be the regular people. The oligarchs will look for ways to protect their wealth and reduce their risk.  Although it is impossible to protect from a nuclear holocaust, the irrational attitude being floated around is that the US can “win” a nuclear war.

This state of sheer madness can be avoided. The loss of the dollar hegemony does not have to result in a hard fall for millions in the US or annihilation around the world. New international financial arrangements can be made. New stores of value can emerge that include commodities, gold, or even the dollar as part of a balanced system. But participation in the creation of alternatives to the dollar cannot be undertaken with an attitude of world dominance. Such an attitude will only ensure that the US is left out of trade and financial agreements with major emerging economies. Promises of not using the dollar as a weapon ever again will not suffice. The practice of using dollar hegemony to subjugate other nations has been used too often and with devastating effects. A new system that restores trust, and does not rely on unilateral military muscle, needs to emerge – and will emerge – with or without the US.

There has to be a willingness among Washington DC politicians, and their handlers in Wall Street, to create arrangements that are mutually beneficial to all the countries involved. After all, isn’t a “level playing field” what the Washington DC politicians say they want? Or, better yet, there have to be new elected officials who are not beholden to Wall Street and are willing to make rational decisions for the benefit of the people of the US and the rest of the world.