/ world today news/ The latest machinations in the world of international finance have given new life to Francis Fukuyama’s thesis or something similar to it. The political philosopher published The End of History and the Last Man in 1992. The book argued that history had decided that liberal democracy was the superior form of government after the fall of the Soviet Union.
It seems to logically follow that moving into the future, the rest of the world will adopt this way of governing, and when the whole world is turned over, the historical process will end. We would all be liberal democrats from here to eternity.
In retrospect, Fukuyama’s thesis seems both arrogant and naïve. With the emergence of alternative regimes in countries such as Russia and China, it has become clear that liberal democracy is not the logical endpoint of historical development.
Moving into the 21st century, it seems that political evolution – and perhaps, in some cases, decentralization – will continue as ever.
The historical process, at least as far as regimes of government are concerned, is cyclical rather than linear. In February 2022, in response to Russia’s invasion of Ukraine, the United States government, along with the governments of its allies, froze Russian foreign reserves.
In doing so, the US government started a chain reaction of events that may ultimately lead to the end of the dominance of the US dollar in the world economy.
By seizing Russia’s foreign exchange reserves, the United States signaled to the rest of the world that US dollar reserves—until then considered as good as gold—were safe only as long as a country’s foreign policy was not disapproved of by the United States.
Countries around the world have realized that holding US dollar reserves and assets now carries serious risks and have begun to look for alternatives. Soon after, discussions began about the creation of a BRICS currency.
Talk of a falling US dollar is now so loud that it’s impossible to ignore. US Treasury Secretary Janet Yellen acknowledged this development, saying we should expect a gradual decline in the dollar’s share of global reserves.
The response of those who want to assume the dominance of the dollar in the future has been a return to Fukuyama. They describe the dollar as historically unique and the dollar-based global system as something like “the end of financial history.”
They argue that until the dollar came on the scene after World War II, establishing world trade was a messy process, often involving gold and other “barbaric relics.”
The advent of the dollar, with its deeply liquid capital markets and its complex legal system, changed all that forever. And so humanity reached the end of financial history.
The most sophisticated defender of this view is the economist Michael Pettis. Pettis claims that the US dollar is actually the world’s first true reserve currency.
“Although the pound was indeed used more than any other currency in Europe to settle trade,” Pettis writes of Britain’s time as ruler of the world economy, “and confidence in its conversion to gold was hard won by the Bank of England after the Napoleonic Wars, every time claims on the pound grew relative to the amount of gold held by the Bank of England, confidence in it was undermined.”
“In this case, foreigners tended to reverse their use of pounds, forcing the Bank of England to raise interest rates and adjust demand to regain gold reserves,” he wrote.
The dollar is different, Pettis and others argue, because since 1971, when President Nixon closed the gold window, it has been purely fiat currency. This means that America can run potentially unlimited trade imbalances with the rest of the world.
This was a departure from the past when, if a country ran a trade deficit with its trading partners, gold would flow from the deficit country to the surplus country. This would cause the deficit to depreciate their currency against gold and the trade deficit would close.
Not so in the era of US dollar hegemony. America’s trade deficits—and even those of American allies like Britain—can be financed either by giving paper money to foreigners or by allowing them to recycle that paper money into American assets.
While Pettis leaves open the question of whether this system can ever end, more eager proponents of the end of financial history present this extremely powerful system as so globally embedded as to be invincible.
This reaction is nothing short of strange. One does not have to be an economist to recognize that there is something wrong with this system. Why should other countries send valuable goods and services to the United States and other Western countries in exchange for what ultimately amounts to worthless paper?
Proponents of the end of financial history usually refer to American military might. This argument has been raised squarely by the hard left, which has long described the US dollar system as an outgrowth of US imperialism.
Yet this grossly simplistic view is no more true when America’s defenders articulate it than when America’s opponents do it.
There is no connection, factual or logical, between US military power and the dominance of the US dollar. If a country decides to stop holding dollars, the US Navy has no orders to blockade their ports; nor should it, for such a move would be complete madness.
This hoary old narrative simply shows the extremely naïve view some have of how military and geopolitical power is distributed and exercised.
The reality is that the US dollar system remains in place while other countries play within it. Why do they play? Until recently, they played and participated, mostly because it benefited them. In the 1990s and 2000s, developing countries, led by China, used the US dollar system to build their economies.
They realized that by selling manufactured goods to the United States and other Western countries, they could grow rapidly—and in an act of classic mercantilism, they took advantage.
Yet it was never going to be a permanent arrangement. Once these countries have raised their economies from the dust, they will always turn away from this system, whether gradually or suddenly.
The fact that Western leaders did not realize the game that was being played is a testament to what a strange period in history the 1990s and 2000s were with their dogged Fukuyama optimism.
Since the financial crisis of 2008, the system of US dollar hegemony has existed in something of a state of limbo. In 2010, the Chinese stopped relying on large trade surpluses to fuel their economy, turning instead to domestic investment.
Since the 2020 blockade, possibly in response to the protectionist rhetoric that has spread in the Trump administration, China has shifted its trade away from the United States and toward developing countries.
Even intelligent thinkers like Pettis seem to have missed these important changes.
“The end of dollar dominance does not mean a global trading system that simply and seamlessly switches from denominating trade in dollars to denominating it in another currency,” he wrote.
“Instead, it means the end of the current global trading system,” Pettis said.
To a very large extent, the “current global trading system”—by which Pettis seems to mean the one that dominated the 1990s and 2000s—has already ended. Does this mean an impending collapse of the US dollar? Probably not.
The confiscation of Russian foreign reserves – a policy that will probably go down in history, along with Churchill’s return to the gold standard in the 1920s, as one of the worst economic decisions in history – greatly accelerated the process, but this does not mean an impending apocalypse.
The hegemony of the US dollar is likely to weaken gradually over the next ten or twenty years. Other parties will feel around, like in a dimly lit room, about what works and what doesn’t. Eventually, a new equilibrium will be reached where the US dollar is one of many global trading currencies.
This means that Western countries need to put their house in order immediately. They can no longer rely on large trade deficits with developing countries.
If they do, they may wake up one day to find that these products are no longer available at reasonable prices and that they do not have the capacity to produce them themselves.
For this reason, a serious industrial policy is needed. It is no exaggeration to say that we really only have one chance to get such a policy right. Yet the energy is currently gone.
Still dazed by the soporific end of history, Western leaders are introducing policies that claim to be industrial policies but are actually green energy policies.
The Biden administration’s deflation law spends six dollars on green energy and environmental subsidies for every dollar spent on manufacturing subsidies.
And the aggressive protectionist moves taken by both the Trump and Biden administrations, primarily against China, are self-defeating in their naïveté. They are based on the assumption that Western countries control trade flows. But they do not control them, and no one has ever forbidden their path to prosperity.
Our only option is to rebuild afresh. We must recognize that the world is changing and that the West no longer has control over the world economic situation. We only have real control over our internal affairs. But instead of trying to rebuild our manufacturing bases, we are chasing green dreams and basking in glory that is long gone.
Translation: SM
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