【TIO 太和观察家】Currency Multipolarity, and the Longue Durée

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☉ 本文作者：Warwick Powell，昆士兰科技大学副教授

☉ Author: Warwick Powell, Adjunct Professor at Queensland University of Technology.

☉ 太和智库线上英文刊物《太和观察家》2023年5月刊第32期原创文章，转载请注明出处。

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正文1946字，读完约需7分钟。

Wordcount: 1946. The article will take about 7 minutes to read.

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Warwick Powell

Adjunct Professor at Queensland University of Technology

昆士兰科技大学副教授

Introduction

The US dollar-dominated global financial and trade system has prevailed for decades, but now faces a “perfect storm” of de-dollarization. Countries are managing risks with multiple methods, aimed at a common goal: currency multipolarity. The two unprecedented monetary innovations of the decade, digital currency and non-national currency, are set to play an important transitional role.

French historian Fernand Braudel framed histories, in part, as the interplay of multiple temporalities and their respective rhythms. He considered événements as short-term events that punctuate medium term conjunctures, and which are set against what he called the longue durée. The recent acceleration of de-dollarization - that is, the diminution of the US dollar (USD) in central bank reserve holdings and as a medium of circulation in global trade - and expansion of China’s RMB in central bank reserves and use in cross-border settlements can be understood as the confluence of different temporalities and their rhythms.

Today, the world is de-dollarizing faster than over the past 30 years. However, it isn’t moving from one state dominated by a single national currency to another state currency. The USD is not giving way to the RMB; the RMB is not trying to “dethrone the dollar.” Rather, the transformation is qualitative: a new architecture is emerging, that is more multipolar than has been the case for the past 70 years or so, in which multilateral trade will be settled by a myriad of national currencies, and possibly in due course with a new non-national trade settlement currency. The new “money architecture” is less likely to embody the idea of money as a reserve asset, which underpinned the Bretton Woods settlement. Instead, with an emphasis on enabling intensified cross-border trade, it is likely that a non-national trade settlement currency, as a measure of multilateral clearing of current accounts in the form of a currency unit, will emerge. The new monetary architecture is, therefore, likely to deprive money of the character of a global reserve asset.

The development of digital currencies is an important precondition for the design and implementation of efficient settlements and clearing in conditions of multipolarity. The ability for digital currencies and wallets to support near real-time cross-border transaction settlements was tested in late 2021, and cross-border use of the digital RMB continues to expand as part of the phased test-rollout of China’s digital currency. China is at the forefront of the design and development of digital technologies, which will undergird the emergent transnational architecture. But a digital currency is only one half of the equation; money - as a means of payment - is only meaningful in the context of continuous circuits of capital accumulation and transformation, so that exchange must always involve a counterpart. This implies the need to develop a synchronized architecture that can support the capture, storage and dissemination of information about the real economy that can deliver data instantaneously as the counterpart to money flows. Blockchains “with Chinese characteristics” are the technical bedrock for this kind of global digital supply chain architecture.

Unipolar sugar high in context - so, how did we get here? 

The USD’s reserve status conveyed to the American government “exorbitant privileges.” That’s how former French President Charles de Gaulle described it in 1965. Indeed, de Gaulle was skeptical that a national currency could be sustained as a neutral medium of exchange and circulation, remarking that it was not possible for the USD to be “an impartial and international trade medium… It is in fact a credit instrument reserved for one state only.”

In the 1960s, the U.S. embarked on a series of ambitious national and global initiatives. John F. Kennedy launched a space program in 1961; Lyndon Johnson pursued his Great Society in 1964-1965. Meanwhile, the U.S. had entered an arms race with the USSR and was ensnared in an increasingly expensive ground war in Asia. Ultimately, the Vietnam War was paid for with increased taxes and inflation. Global creditor nations, led by the French, became concerned about the US wherewithal. The French sent a warship to New York harbor in early August 1971 to collect gold from the New York Federal Reserve Bank. Inflation and indebtedness arose as the accumulated consequences of funding war efforts. Richard Nixon suspended the gold peg on August 15, 1971. A deal was cut with OPEC in the latter half of the 1970s, which effectively created the “petro-dollar.” Thereafter, trading for OPEC oil would be denominated only in USD. No USD, no oil.

The USSR collapsed in 1991. Thereafter, the US security was never more settled. The world had become unipolar. With the wind in its sails, invested with the zealotry of millenarianism, the U.S. embarked on an intensified program of global military interventions. Between 1989 and 2019, the U.S. initiated on average 3.7 military interventions per year, a rise from the annual average of 2.4 interventions between 1946 and 1989. Between 1990 and 2022, according to Statista, US public debt increased from US$3.2 trillion to US$30.9 trillion. According to Jeffrey Sachs, a good half of this debt is due to the “US government’s addition to war and military spending.”

History’s rhyme, and the perfect storm of de-dollarization

By 2001, the USD’s reserve status constituted 73% of foreign reserves of the world’s major central banks. At the time, the G7 economies’ aggregate GDP (not including the EU) made up about 70% of the global economy in nominal terms. It has been declining ever since.

The 2008 Global Financial Crisis (GFC) exposed fissures in the institutional and structural fabric of U.S.-style finance capital. In the quest for greater and faster yields, financialization had rapidly detached the “exchange value” of fictitious capital circuits from the grounded crystallization of “use value.” Financialization led to the expansion of complex webs of fictitious capital, whose modus operandi was wealth accumulation via the motions of liquidity, i.e., exchange value, in advance of future production of use value. Fictitious capital comprises claims on future production; it is a necessary part of capital accumulation as it enables the acceleration of production and transformation. The structural problem occurs when the proportions of fictitious capital become incompatible with the real production capacity of economies.

Since the early 1990s, the quantum of value validated in anticipation of future valorization has constantly grown relative to the quantity of wealth actually produced. Inflation had already emerged in the late 2010s across the transatlantic economies due, in large part, to the novel monetary responses to the financial crisis, and was fueled by increased money supply in response to the COVID-19-related slowdown and associated disruptions to supply chains. The disruptions to global energy markets resulting from G7 and EU sanctions against Russian oil and gas exports from early 2022 consolidated the underlying inflationary pressures.

A “perfect storm” of de-dollarization has emerged.

In an effort to tame inflation, in May 2023 the US Federal Reserve increased interest rates to the highest levels in 16 years. Domestic monetary policy imperatives trumped global impact concerns. De Gaulle’s skepticism was justified. The USD could not straddle the demands of being a domestic currency and a global reserve. The Triffin Paradox had reared its ugly head. Recent US rate increases are expected to have severe impacts on developing economies, whose debts are denominated in USD, as argued in a recent World Bank Working Paper.

The gradual declining share of USD in central bank reserves over the past three decades reflects to some extent the need to manage these risks, but the composition of reserves has taken a rapid turn away from the USD in the last 12+ months. The increasing weaponization of the dollar and its associated institutions, e.g., SWIFT, has created the conditions in which national central banks will expand their alternative currency hedges. According to data presented by Jen and Freire, the USD’s share of global reserves fell during 2022 at 10 times the average rate of the past two decades. When adjusted for inflation, the USD has lost about 11% of its market share since 2016 and twice that since 2008. The aggressive use of sanctions has contributed to de-dollarization; and de-dollarization further undermines the authority of unilateral USD-based sanctions. The “time of peak US sanctions has passed,” as Agathe Demarais pithily summarizes in her 2022 book “Backfire.”

(Image by jcomp on Freepik)

The revenge of the digitalized real economy

Since 2001 when it joined the World Trade Organization, China has become the world’s largest trading nation, and the largest trading partner of more than 140 nations. In the 2000s, it grew trade with the mature transatlantic economies of the U.S. and the EU. However, for the past over ten years, China’s trade profile has evolved so that ASEAN is now China’s largest two-way trading partner, surpassing the EU in 2021. The Belt and Road Initiative (BRI), launched in 2013, has opened the way for expanded trade with many developing nations in the Eurasian continent, extending to the countries of West, East, and Africa. The trade preference index between China and BRI countries has increased approximately 8% faster than has been the case for non-BRI nations leading to recent data suggesting that China’s trade value with BRI nations now exceeds that with both the U.S. and the EU.

Real economy value flows underpin the utility of currencies. Money exists as a medium of circulation in complex economies characterized by divisions of labor, by acting as a standard of account. Money balances fill the gap between the sale and purchase of commodities. To support liquidity, China has established a growing network of currency swap arrangements with counterparty central banks, many associated with the BRI. China has expanded its financial architecture into various equities markets, opening up channels for liquidity on the capital accounts side. Cross-border agreements on financial product regulation harmonization, together with access to open RMB trading (Hong Kong and Hainan) provide mechanisms to further improve liquidity.

Trade growth with China, and amongst developing nations themselves, is creating the material conditions necessary to support bilateral trade denominated in national currencies. The RMB’s use will no doubt reflect China’s role as a major trading nation; but the emerging pattern would for now appear to be one of currency multipolarities rather than the RMB usurping the USD. In due course, a non-national currency for cross-border settlements is on the cards, as mooted by some members of BRICS. Such considerations may draw on the historic lessons of Keynes’ 1943 proposal for the bancor, which had enlivened discussions amongst central bankers in China during the late 2010s.

Ultimately, value is anchored in real commodities of use. Functional exchange requires systems that deliver confidence not only in a currency’s liquidity, but also in the credibility of the counterpart to the exchange - that is, the products, people and processes themselves, and the information about those things. Digitalization of supply chains is the counterpart to the development and use of national digital currencies for cross-border trade. China is a leader in the development of digital currencies. Supply chain data, collected, stored and disseminated across dependable systems free from malfeasance and capricious alterations, makes possible the intensified flow of value across borders. This is what blockchains with Chinese characteristics are, in part, all about. That China has launched the National Blockchain Centre (May 2023), aiming to train 500,000 specialists in blockchain technologies, speaks directly to the centrality of distributed ledgers to the new national and global supply chain architecture.

Currency multipolarity is so much more than the dilution of the USD’s footprint. It is about a new architecture of cross-border value flows anchored by data systems in which participating nations and their actors can be confident, and which integrates the expanding physical infrastructure of transportation and logistics, with the digital ecosystems of devices, standards, blockchains, big data computation and automation. Currency multipolarity and digitalization go hand in hand.

There remain many uncertainties as to the precise shape of the evolving institutions of currency multipolarity. However, one thing is certain: the era of the USD as the single global reserve is reaching its end. The longue durée of structural evolution continues to unfold.

The above contents only represent the views of the authors, and do not necessarily represent the views or positions of Taihe Institute.

Keywords 关键词：

[1] Currency multipolarity 货币多极化

[2] Digital currency 数字货币

[3] Non-national currency 非国家货币

[4] Petro-dollar 石油美元

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太和智库线上英文刊物《太和观察家》（TI Observer）致力于促进中外沟通交流，弥合 “理解鸿沟”。

TI Observer (TIO) is an online monthly English publication produced by Taihe Institute. TIO is dedicated to promoting transnational interaction and mutual understanding, thus bridging the gap of misunderstanding and bringing China and the world closer to each other.

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