'Bitcoin will be to the dollar what social media are to the traditional media.' Tomohiro Ohsumi/Getty Images.
Valéry Giscard d’Estaing, the former French president, coined the expression of “exorbitant privilege” back in the Sixties. Then France’s finance minister, he was referring to the power of the US dollar as the world’s reserve currency, something which grants the US its current economic hegemony. Such power reaches beyond America’s shores, and even those of its closest allies. It isn’t earned by being large, rich or successful. It has nothing to do with technological leadership, or the size of its army. Rather, it is linked directly to the dollar’s role in the global financial system.
Economic hegemony consists of your ability to use your economic power, your currency and your financial system to impose your will on others. Essentially coercion. Any bank that still does business with Russia, for example, risks being cut off from the US dollar markets. Given the importance of the dollar in the global financial system, countries are given no choice but to comply with US policies. Many economists are therefore sanguine about the future of US global economic hegemony. I however disagree. I think Trump’s economic policy will lead to a dwindling of America’s exorbitant privilege.
Ben Bernanke, the former governor of the Federal Reserve, once listed four services the dollar provides to the global economy: stability of value, liquidity, safety, and the role of the US as lender of last resort. Bernanke himself was instrumental in backstopping the world economy during the global financial crisis, thereby shoring up its exorbitant privilege. “The Fed served as a backstop provider of dollars during the financial crisis by instituting currency swaps with fourteen central banks, including four in emerging markets,” Bernanke recalled almost a decade after the crisis.
The US dollar didn’t assume its role as the leading global currency until after the Second World War, as the anchor of Bretton Woods, the financial system created in 1944. The deal was that the rest of the world would run fixed exchange rates against the dollar, which itself was pegged to gold. The system started to disintegrate in the Sixties, and its death came in stages. In 1971, Richard Nixon ended the convertibility of the dollars into gold. In 1973, the fixed exchange rates were dropped. Bretton Woods formally ended in 1976.
At that point, the world moved over to flexible exchange rates. This, it turned out, only strengthened US economic hegemony. It was based on a Faustian pact between countries that relied on exports, such as China and Germany, and a US that was willing to absorb the deficit. So if, for example, China sells more video consoles to the US, and Germany sells more cars, they both end up earning dollars that they then invest in the US. America’s legendary trade deficits — those that Trump hates so much — are directly related to these flows of dollars in the financial system.
These trade and savings imbalances were the engines of turbo-globalisation. Macroeconomists, and trade economists especially, love this stuff because it gels with an underlying ideology that says free global trade is beneficial to everybody, always and everywhere. But the big flaw is that it benefits some people more than others. In the end, the voters decided.They voted for Trump and for his trade policies. They didn’t listen to the economists. Politics intruded.
Geopolitics intruded, too. During the era of rampant globalisation, Germany made itself dependent on cheap gas from Russia, on exports to China, and on defence from the US. This fragmentation essentially destroyed the German economic model, traditionally based on industry, leaving it dangerously imbalanced and vulnerable.
Even vaster changes could soon arrive. Trump’s first presidency gave us a hint that the era of one-world globalisation was nearing its end. But back then, he was not as focused as he appears to be now. If he succeeds in eradicating America’s big bilateral trade deficits — against Mexico, Canada, China and the EU — the dynamics of global trade and finance could change fundamentally. As the countries that relied so much on their ability to export to the US have to trade more with each other, there will be less need to use the dollar for international transactions. Inevitably, the exorbitant privilege will decline.
Privilege also declines the more you wield that power. After Russia invaded Ukraine, the US, and EU governments, froze Russia’s reserve assets invested there. Foreign investors are now starting to question whether their US-invested money in Ukraine is still safe. Bernanke’s claim that the dollars offered the service of “safety” and “liquidity” certainly does not conform with Russia’s experience — and it will not keep its money in America and Europe when the war ends. Meanwhile, those countries which have not taken sides are watching Western sanctions with concern. The Chinese, for example, have started to reduce their exposure to US markets.
The turbulence is all complicated by the internal inconsistency to Trump’s economic policies: he wants to close the trade deficit, but he also wants the US dollar to remain the most important currency. Scott Bessent, Trump’s treasury secretary, is the man in charge of managing those conflicting objectives — probably the hardest job in the Trump administration right now. Bessent used to be a brilliant investor — one of the brains behind George Soros’ spectacular bet against the Bank of England in 1992, that ended with the pound’s exit from Europe’s exchange rate mechanism. But even he would struggle to meet the logically conflicting goals Trump has set for his economic policy: if the administration succeeds in cutting down the US trade deficit, as well as the budget deficit, and returns the economy to a more balanced position, it will not immediately end the role of the dollar as the leading global currency. These shifts take time. But it will set the ball rolling.
There is another problem. Technology is changing finance. The most likely future competitor to the dollar as a global transaction currency may not be the euro, the renminbi, or another fiat currency. It could be bitcoin. Trump’s administration is also busy deregulating the crypto industry because the President has proclaimed that he wanted all bitcoins to be in the US. I almost fell off my chair when he said this. Bitcoin is not like a stock or a bond that you own. To Americanise it would be as futile as the attempt to bring the entire internet into your village.
The inconsistency in Trump’s economic policy goals isn’t going unnoticed. Some smart investors I know are currently pouring a lot of their wealth into gold and bitcoin. And like me, they are sceptical about whether the West will get on top of inflation. I am also not sure that Trump really cares as much about inflation as he pretended during the campaign. But I do believe he is serious about the tariffs. A sharp-minded investor would, therefore, realise that this is a strategy that would be very positive for alternative investments such as Bitcoin and gold, and very bad for investments that thrive in environments of stable and low inflation, such as government bonds.
How will this play out? I believe Trump’s tariffs will come. The US trade deficit will decline. An increasing volume of global trade will take place outside the US and the EU will cautiously reconnect with China. The dollar will remain the leading global currency for a while — certainly for the duration of Trump’s presidency. But it will start to lose its dominance, at which point more people will turn to bitcoin. It will be to the dollar what social media is to the traditional media. First it was ridiculed. Then, suddenly, it became an existential threat. And then, the traditional media became the legacy media.
Trump’s policies will lead to a long-term erosion of not America’s global power, but of its ability to use economic coercion to make the rest of the world comply with its priorities. America’s exorbitant privilege came with a price. The rest of the world accepted US global leadership not out of deference but because it was a good deal for almost everybody. With Trump, that won’t be the case any longer. Americans will find that they can still live comfortable lives without the exorbitant privilege, but foreign policy will get a lot harder.
Join the discussion
Join like minded readers that support our journalism by becoming a paid subscriber
To join the discussion in the comments, become a paid subscriber.
Join like minded readers that support our journalism, read unlimited articles and enjoy other subscriber-only benefits.
SubscribeDumb as brics is what I think of the leaders of the global south, particularly South Africa which has squandered its inheritance of natural resources, large beautiful country and rule of law.
Dumb as brics is what I think of the leaders of the global south, particularly South Africa which has squandered its inheritance of natural resources, large beautiful country and rule of law.
As Douglas Murray says; yes, the West has lots of problems but where would you rather live ? Are people smuggling themselves into these countries ? Of course not. India is becoming a one-party state and China’s economic model is now tottering with another round of property development defaults. It’ll be a miracle if SA can keep the lights on.
It’s surprising how small South Africa’s GDP is. But I think the article’s claim that it is only 1.62% of BRICS total GDP is misleading – China is 75% of BRICS GDP, so everyone else is a minnow in comparison.
Given the comparative starting points, SA has not done very well:
India : $3738bn ; $2.5K/head
Canada : $1731bn ; $45K/head
Australia : $1376bn ; $56K/head
Singapore : $324bn ; $58K/head
South Africa : $349bn ; $6.2K/head
New Zealand : $201bn ; $42K/head
2017 GDP data, in US$.
Singapore’s done that from nothing with no natural resources or agriculture (quite possibly because it doesn’t and that really focuses the mind).
Why is Canada on the list?
Why is Canada on the list?
The West has lots of problems “BUT”. Er.,.exactly.
Sigh…the usual names in this thread, with the usual low-resolution analysis and sprinkled with the usual inductively reasoned sanctimony. A combination that is ubiquitous throughout the strata in the West and NATO, and which goes a long way towards explaining why the predictive powers of the much-vaunted Epistocracies of the “democratic” West have been so poor of late in economics, socio-politics, geo-politics – I could go on… That “the great unwashed” (personal membership confirmed) don’t do any better is hardly the point. It is not “we” who claim to be all-knowing and/or are destined to rule over the rest of humanity because, well, History, you dummies!.
Pottinger repeats the same old mistake in his framing of an emerging, complexity-driven and tectonic trend in human affairs – i.e. the slow but now irreversible end of Western hegemony over the globe – in binary terms. I paraphrase: “The BRICS can’t replace Washington/NATO (read: Anglo Saxon) rule, therefore Anglo Saxon rule will (must!) continue”. It is a category error. The BRICS group is just one part of a nascent and still loosely formulated IDEA – the idea that 70% of the world’s population has a) seen and had enough of what the “moral West” has to offer (of late, in its decline) and b) would like to try something else, thank you very much. To focus on BRICS is to fall for the Availability Heuristic; the ambitions and interests of BRICS, SCO, EAEU etc all overlap strongly on a Venn-diagram basis. It is the West, which produces only 20% of what it consumes, that is the outlier here.
Will “we” succeed? The short to medium term will be messy and, sure, there will be many moments for the armchair cognoscenti of the West to snigger and preen; to fiddle as the smoke bellows ever thicker. That We – and here I mean humanity as a whole – will ultimately ALL be losers because of how the global system was mismanaged since the end of WW2 is something only toxically parochial fools would harrumph about.
So, rather than wringing his hands about “Russians under the African bed!”, the selectively ahistorical Mr. Pottinger should reflect on who it was that effectively “owned and ran” Africa (and the rest) for the past 300 years (and mostly still do), and what exactly they did with their “Darwin-ordained” opportunity. Maybe it’s time to try another model. What’s to lose?
Hmm, the ‘likes’ suggest that Mr. Buchan’s piece has not gone down well. Still and all, he has a point.
America/Europe bad, therefore throw your lot in with Russia and China? Good luck with that.
Hmm, the ‘likes’ suggest that Mr. Buchan’s piece has not gone down well. Still and all, he has a point.
America/Europe bad, therefore throw your lot in with Russia and China? Good luck with that.
It’s surprising how small South Africa’s GDP is. But I think the article’s claim that it is only 1.62% of BRICS total GDP is misleading – China is 75% of BRICS GDP, so everyone else is a minnow in comparison.
Given the comparative starting points, SA has not done very well:
India : $3738bn ; $2.5K/head
Canada : $1731bn ; $45K/head
Australia : $1376bn ; $56K/head
Singapore : $324bn ; $58K/head
South Africa : $349bn ; $6.2K/head
New Zealand : $201bn ; $42K/head
2017 GDP data, in US$.
Singapore’s done that from nothing with no natural resources or agriculture (quite possibly because it doesn’t and that really focuses the mind).
The West has lots of problems “BUT”. Er.,.exactly.
Sigh…the usual names in this thread, with the usual low-resolution analysis and sprinkled with the usual inductively reasoned sanctimony. A combination that is ubiquitous throughout the strata in the West and NATO, and which goes a long way towards explaining why the predictive powers of the much-vaunted Epistocracies of the “democratic” West have been so poor of late in economics, socio-politics, geo-politics – I could go on… That “the great unwashed” (personal membership confirmed) don’t do any better is hardly the point. It is not “we” who claim to be all-knowing and/or are destined to rule over the rest of humanity because, well, History, you dummies!.
Pottinger repeats the same old mistake in his framing of an emerging, complexity-driven and tectonic trend in human affairs – i.e. the slow but now irreversible end of Western hegemony over the globe – in binary terms. I paraphrase: “The BRICS can’t replace Washington/NATO (read: Anglo Saxon) rule, therefore Anglo Saxon rule will (must!) continue”. It is a category error. The BRICS group is just one part of a nascent and still loosely formulated IDEA – the idea that 70% of the world’s population has a) seen and had enough of what the “moral West” has to offer (of late, in its decline) and b) would like to try something else, thank you very much. To focus on BRICS is to fall for the Availability Heuristic; the ambitions and interests of BRICS, SCO, EAEU etc all overlap strongly on a Venn-diagram basis. It is the West, which produces only 20% of what it consumes, that is the outlier here.
Will “we” succeed? The short to medium term will be messy and, sure, there will be many moments for the armchair cognoscenti of the West to snigger and preen; to fiddle as the smoke bellows ever thicker. That We – and here I mean humanity as a whole – will ultimately ALL be losers because of how the global system was mismanaged since the end of WW2 is something only toxically parochial fools would harrumph about.
So, rather than wringing his hands about “Russians under the African bed!”, the selectively ahistorical Mr. Pottinger should reflect on who it was that effectively “owned and ran” Africa (and the rest) for the past 300 years (and mostly still do), and what exactly they did with their “Darwin-ordained” opportunity. Maybe it’s time to try another model. What’s to lose?
As Douglas Murray says; yes, the West has lots of problems but where would you rather live ? Are people smuggling themselves into these countries ? Of course not. India is becoming a one-party state and China’s economic model is now tottering with another round of property development defaults. It’ll be a miracle if SA can keep the lights on.
I keep saying this: If you add Kazakhstan to the BRICS, you get BRICKS! It’s sure to be a winner!
Enforced with mortars?
Mexico, Oman, Rumania, Turkmenistan, Afghanistan, Rwanda and Saudi Arabia?
Mexico, Oman, Rumania, Turkmenistan, Afghanistan, Rwanda and Saudi Arabia?
Enforced with mortars?
I keep saying this: If you add Kazakhstan to the BRICS, you get BRICKS! It’s sure to be a winner!
The only thing that ties the BRICS together is their mutual corruption and greed–and the fact that the first letters in each nation’s name just happen to misspell “bricks.”
That Putin and Xi dream of somehow making it a counterweight to democratic countries in NATO, the EU, etc. is laughable.
A herd of cats has more unity.
The only thing that ties the BRICS together is their mutual corruption and greed–and the fact that the first letters in each nation’s name just happen to misspell “bricks.”
That Putin and Xi dream of somehow making it a counterweight to democratic countries in NATO, the EU, etc. is laughable.
A herd of cats has more unity.
The reality is that the three most powerful members of BRICS, Russia, China, and India, have diverging interests that will almost certainly keep the group from having much real influence or impact, assuming the divergence doesn’t split them entirely. China and Russia clearly have designs on turning BRICS into an anti-American economic alliance, which is not something India is likely to support, given their growing rivalry with China and involvement in the QUAD alliance. That combined with the anti-american slant of the governments of two of the other members is likely to leave India the odd man out as the only member still pursuing true neutrality. The deeper the Russo-Chinese axis goes and the more they succeed in bringing in other members (such as Iran), the harder it will be for India to remain neutral. Ultimately, geopolitical forces are pushing us all towards a Russo-Chinese axis opposed by an India/Australia/US/Japan alliance in the Asian sphere. Given India’s participation in the QUAD and their shifting military expenditures toward American rather than Russian weapons, I expect they already know which way the wind is blowing and which side will further their national interests, but they will hang on to neutrality as long as possible for economic reasons.
The reality is that the three most powerful members of BRICS, Russia, China, and India, have diverging interests that will almost certainly keep the group from having much real influence or impact, assuming the divergence doesn’t split them entirely. China and Russia clearly have designs on turning BRICS into an anti-American economic alliance, which is not something India is likely to support, given their growing rivalry with China and involvement in the QUAD alliance. That combined with the anti-american slant of the governments of two of the other members is likely to leave India the odd man out as the only member still pursuing true neutrality. The deeper the Russo-Chinese axis goes and the more they succeed in bringing in other members (such as Iran), the harder it will be for India to remain neutral. Ultimately, geopolitical forces are pushing us all towards a Russo-Chinese axis opposed by an India/Australia/US/Japan alliance in the Asian sphere. Given India’s participation in the QUAD and their shifting military expenditures toward American rather than Russian weapons, I expect they already know which way the wind is blowing and which side will further their national interests, but they will hang on to neutrality as long as possible for economic reasons.
South Africa hosting the BRICS conference? It’s going to be a fun week looking at news footage of delegates getting mugged and carjacked.
South Africa hosting the BRICS conference? It’s going to be a fun week looking at news footage of delegates getting mugged and carjacked.
I hope the writer of this article as well as some post -modern iterations of racist ignoramuses in ” comments” are eating their hearts out with foolish analysis/ assumptions after the BRICS summit ended on a successful note.