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Dollar hegemony creates chaos

China Daily | Updated: 2023-04-08 09:13

Concerns growing over simmering bank crisis that may spill across the Atlantic


The world is holding its breath for a simmering bank crisis in the United States triggered by the spectacular collapse of Silicon Valley Bank and Signature Bank.

Across the Atlantic, the repercussions are reverberating. As European banks edge closer to a similar crisis, concerns are growing that the regional crisis could become systemic.

The real culprit for the festering crisis is the US Federal Reserve's monetary policy based on the US dollar's hegemony, which has plundered global wealth on several occasions.

After World War II, the US deliberately established the dollar's hegemony.

In the third quarter of 2022, the dollar comprised nearly 60 percent of global foreign exchange reserves. In January, the dollar accounted for about 40 percent of international payments.

Given that the dollar is so embedded in the system of international transactions, the US has turned it into a tool to bleed other countries by collecting seigniorage revenue.

With a $100 greenback costing about 17 cents to print, the US could reap $100 worth of goods and services from other nations.

Just as former French president Charles de Gaulle grumbled more than half a century ago, the US enjoyed "exorbitant privilege" and "deficit without tears" created by its dollar and used its worthless paper note to plunder the resources and factories of other nations.

From the gold dollar to the petrodollar, credit dollar and now the debt dollar, the world has been witnessing the basis of the dollar as an international currency weakening over the past decades.

To salvage the dollar's hegemony, the US has recklessly exhausted all military, finance and trade means, attempting to continuously export risks to and reap benefits from other countries through the lucrative dollar business.

To boost its domestic economy, the US often pumps excess money into global markets during periods of economic expansion, creating the illusion of a worldwide boom.

After the international financial crisis in 2008, the Fed introduced multiple rounds of quantitative easing.

Following the outbreak of the COVID-19 pandemic in 2020, it implemented "unlimited" quantitative easing, pushing global inflation to a 40-year high, forming a colossal asset bubble and exacerbating risks to the world economy.

While the oversupply of US dollars has brought "inflationary pressures not seen in a generation" to the US, other economies were hit harder. In February, annual inflation in Argentina reached the 100-percent mark for the first time since 1991.

Most of the excess dollars are exported to other countries through imports and overseas investment, allowing the US to harvest the wealth of other countries at nearly zero cost.

The world is holding its breath for a simmering bank crisis in the United States triggered by the spectacular collapse of Silicon Valley Bank and Signature Bank. [Photo/VCG]

'Irrational prosperity'

The oversupply of the dollar also creates "irrational prosperity" that deviates from the actual economic situation and exacerbates turmoil in the global financial market.

More economists are waking up to the detriments of the current dollar-based monetary system.

David E. Sumual, chief economist of Bank Central Asia in Indonesia, said the current dollar-centered monetary system does not reflect the dynamic global market. He also said the sudden policy changes of the Fed always cause volatility in other countries.

But the Fed will continue to manipulate global markets and wreak havoc on the world economy, so long as other countries do not cut their reliance on the dollar.

Analysts have warned that the Fed had driven up asset bubbles worldwide to an extremely dangerous level, and the first signs of those bubbles bursting are beginning to appear.

After years of frothy markets, real trouble is on the horizon.

While the Western banking industry is teetering on the edge of catastrophe, the Fed shows no signs of stopping its rate hikes.

Aggressive interest rate hikes have led to a global liquidity tightening, resulting in capital outflows and currency depreciation in emerging markets.

According to data from the International Monetary Fund, the pressure on debt repayment for countries denominated in the dollar has increased sharply. More than 60 percent of low-income countries are already at high risk of or in debt distress.

If the past is any indication, once a country falls into debt distress, its assets would be exposed to US plundering.

As the Fed flip-flops on its monetary policy, the US also suffers temporary economic pain. Still, with its hegemonic currency, Uncle Sam can shuffle the risks to others and emerge largely unscathed from a crisis it started.

After the 2008 global financial crisis, it took the European Union 13 years to return GDP per capita to its pre-crisis level, while it only took the US two years to do so.

Despite a brief jolt, the United States continues to plunder the world.

However, the abuse of the dollar, weaponization of global financial infrastructure and the country's irresponsible monetary policy are backfiring and eroding US credibility.

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