The Russia-Ukraine conflict has sparked off a global reset in the world order. The reserve currency status of the US dollar is put in question by experts worldwide. The sanctions wielding power of the US Government through international institutions and the payment systems will be soon challenged. Irrespective of whether countries like Russia and Iran deserve sanctions or not, we need to understand how is the US dollar hegemony taking the once acceptable international currency to a suicide path.
The Bretton woods agreement after the Second World War already established the US dollar as the reserved currency of the world. Reserved currency means that all countries need US dollars with themselves for doing any kind of bilateral or multilateral transactions with countries or international bodies.
Come 1971 and Prime Minister Indira Gandhi was termed the most admired person in the world (non-Communist nations) by a Gallup poll. President Nixon who was then facing a lot of economic fallouts, chose the Indian Independence Day, August 15th, 1971 to de-link US dollar from gold.
Understanding How The US Benefits
The concept of Fiat money came into being. This means that the currency is not backed by any finite resources like gold. It is just printed out of thin air by the Government as per the prudence of global demand and supply of the currency.
The US dollar being the reserve currency status already, now has an artificial demand as all nations of the world have to first work hard to earn dollars and then transact with each other or international bodies.
The money meant for repayment of debts and loans of all countries to one another or any international institution, finally ends up coming back to the US federal reserve. This essentially means the rest of the world is in a sense employed to pass on their wealth to the US. The US can consume as much as it wants and print currency, if need be, when payment is required.
Forex reserves and safety money are always kept by countries in the US dollars to be able to buy crude oil, gold and essential necessities like food. The safest investment portfolio of the world is the US treasury bonds. It is so safe that the US Government can print the currency any time and give you back.
Americans enjoy a very low rate of interest while taking loans as all the nations park their savings in the US dollars. This essentially means that a sizable chunk of inflation is gradually shifted to the rest of the world.
The US does not need to worry much about the trade deficit and raises the debt ceilings whenever required. The US also does not need to focus on exports. The international institutions mostly operate in US dollars, funded by US dollars and hence the US can wield influence to bail out and sanction anyone/ any country.
Steps taken by the World –
- Five countries Nepal, Bhutan, France, UAE and Singapore operate the Indian UPI (Unified Payments Interface)
- Nations like the UAE, Myanmar, Russia and Iran have sealed deals to conduct transactions with India in Rupees. Talks are ongoing with several countries in the world to opt for India’s domestic currency for trade.
- India is considering oil deals with Russia in currencies other than the Yuan, Ruble as well as Dirhams. The Reserve Bank of India recently approved Rupee as currency for international trade settlements.
- India is initiating bilateral formats of trade and commerce agreements and free trade agreements with as many nations as possible. A clear departure from multilateral trade deals. This will help ramp up usage of Indian currency spread in the future.
- Russia began the ground work by mid-2021 for the Ukraine attempt by transferring and converting the US dollar investments and reserves in other forms. The sanctions were slapped on it for the Ukraine conflict.
- Saudi Arabia offered an oil deal with China in yuan instead of the US dollar. Belarus stock exchange is also in process to trade in yuan.
- Israel lowered its US dollar reserves and made space for the Yuan. Iran has reiterated to sidestep the US dollar for international transactions. China is also concerned about future economic sanctions on the country.
- BRICS nations are considering a draft agreement for conduction of all trade in domestic currencies.
There are reports about creation of a common BRICS currency pool as an alternative.
All big nations like Iran, Russia, India, China, Saudi Arabia, UAE and Israel appear to be keen on gradually phasing out the US dollar from the reserve currency status. This will have geo-political as well as economics and defence related consequences for some countries. Some new formula is expected to be created mainly between India, Russia and China looking at their tacit approval of the spheres of influence in the respective regions for trade and peace. Having known that the US does not have much to sell to the World, the US dollar reserves of central banks of all the nations could be soon replaced by Gold and other currencies.