Opinion

Globalised dollar, dollarised world

S. GURUMURTHY | Updated on September 20, 2013

The dollar has globalised so massively because the US entered into deals to get back the trillions it had sent out. The euro cannot replicate the dollar because of Europe’s current account surplus.

The rupee has been on free fall for 18 months now. From Rs 45 to a dollar in January 2012 to over Rs 60 now — 33 per cent fall. The cause is India's current account deficits for a decade. Economic theory says that borrowing abroad to fund current account deficit and servicing the debt depreciates currencies, causing capital flight.

The theory evidently works on the rupee. But, shockingly, it works on the dollar the other way round. Recall the debate in US in 2005 on the issue of current account deficit and dollar value.

US ran current account deficits of $4.5 trillion from 1977 to 2004 — and $740 billion (6.5 per cent of its GDP) in 2005 alone. Yet, conventional economic predictions of fall of the dollar and flight of capital did not come true.

Two Harvard economists Ricardo Hausmann and Federico Sturzenegger, therefore, theorised that the predictions failed because of an unseen dark matter operating in the US economy. The dark matter, they said, was that as the US was a secure, hi-tech and high-skilled nation, it attracted world's huge surplus savings at cheap interest and re-invested it for higher returns. Therefore, the dollar value did not fall.

The US current account deficit soon doubled to $9.2 trillion by 2012 — equalling two-thirds of the GDP it had added for 35 years (1977-2012). Yet, trade-weighted index value of the dollar did not fall; but, yes, rose by three times between 1971 and now.

Why does the universally valid economics work perfectly to depreciate the rupee, but act the other way round on the dollar despite pervasive US current account deficits? Because of the dark matter? The too simplistic dark matter logic conveniently, so completely, sidesteps the darker phenomenon of dollars in trillions globalised by US geo-political design. The sidestepped fact explains the paradox better.

Territorialised currencies circulate within their political boundaries as most national currencies are. And convertible national currencies that circulate outside their borders are deterritorialised, but none of them globalised on such colossal scale as dollar. Here is the story of the globalisation of the dollar — in brief. It happened in four stages.

The dollar story

The first stage was under the Breton Woods multilateral contract. On the US promise to give one ounce of gold in exchange for $35, the world accepted dollar as common tender.

This created two types of demand for the dollar outside US. One, as necessary medium of exchange for world trade — for all. And next, as gold-rated investment option — for some. Result: By 1960, some 40 per cent of the dollars minted by the US had deterritorialised into stocks outside. In 1971, the US killed the Breton Woods contract in one shot by refusing to exchange gold for dollar.

The helpless dollar holders could not divest their huge stocks. Because, as well-known economic historian Barry Eichengreen put it, that its effect would have been the same as “a queue of depositors forming outside a bank” — and bankrupted both the US and dollar holders. But, soon, the US devised a geo-political strategy to manage the crisis. It ensured that dollar holders keep their stocks. Even ask for more!

Petrodollars in plenty

The US cut a political deal with Saudi Arabia — the biggest oil exporter — that the latter sell oil only against the dollar and invest the surplus oil sale dollars back in America and, in return, the US protect Saudi oil fields.

Other oil exporting nations followed Saudis. By making dollars compulsory for oil import, the US ensured that global demand for dollars increased. Oil buyers kept up the demand for dollars. And oil sellers deposited their surplus dollars back in the US.

This has recycled trillions of petrodollars back in the US as private and official investments. The contractually-managed petrodollars multiplied deterritorialisation of dollar stocks in stage two. In stage three, the US opened its market to the likes of China in return for their agreeing to invest their export surplus back in the US — a modified version of petrodollars recycling — which massively globalised the dollar.

In stage four, having already built titanic stock of dollars outside, the US created tsunami of phony dollars in trillions that has virtually colonised the world of finance ( Business Line, June 13). This designed and gigantic globalisation of dollars has left in the rest of the world's balance-sheet a stake of $38.5 trillion in the US economy — in cash, forex reserves, investment into the US and by the US outside and in derivates of over 15 times that amount.

Cash dollar

The first stake is cash dollar. A study (2007) by Bank of International Settlements (BIS), supported by the US Fed’s earlier work (1996), shows that, from 1980 onwards, two-thirds of the dollars issued by the US was circulating outside.

In 28 years to 2012, the US physically shipped dollar notes for $455 billion outside. Now, out of $1.19 trillion minted dollar stock, about $770 billion roam outside the US, transacting multiple trillions of (obviously unrecorded) business.

Forex reserves

The second stake is forex reserves of central banks of all countries, which vaulted from $3 trillion in 2001 to over $11 trillion in June 2013. Over 60 per cent of reserves (other than China’s and Saudis’) is known to be in dollars.

According to Brussels Institute of Contemporary China Studies (March 29, 2013), over 60 per cent of China's forex too is in dollar assets. And with most of Saudi forex stock ($629 billion) believed to be secretly in US assets, the dollar's share of world's forex reserves is over $6.6 trillion. The third is private foreign investments into the US economy — in equities, bonds and loans — of over $15 trillion. On the three accounts, the US owes the rest of world $22 trillion-plus. The fourth is US investment of $16.5 trillion outside, which others owe to the US. So, by payables ($22 trillions) or receivables ($16.5 trillion), the world has stake of $38.5 trillion in the US economy.

Without reckoning euro dollar holdings ($2.1 trillion) and others’ dollar holdings (not known) both outside the US, $38.5 trillion is two-and-a-half times America's GDP. And more than half of the world's. Further, the Word Trade Organisation reports (May 2012) that some 86 per cent of $700 trillion world's financial derivatives — $600 trillion — are in dollar terms.

This mother of all tallies, ten times global market-cap and GDP, exposes the near total dollarisation of global finances. These sums, disconnected from the real economy, will rise by 50 per cent by 2020, say studies. QED: All talk of de-leveraging is gas.

It needs no seer to say that dollar has globalised so massively because the US contracted — not attracted as the Harvard scholars would believe — the trillions it had sent out, back to the US.

The dark matter of contractual dollarisation of the world is energised by the huge credit-card enabled shopping by the US households which live beyond means. US faithfully implements Walt Rostow's philosophy of five stages of growth from “traditional societies” to “the age of mass consumption”. According to US anthropologist Marshall Shallins, Rostow meant “shopping as the culmination of human evolution”.

Shopping, even as it torpedoed US current account and household finances year after year, alone drives three-fourths of US GDP. If the US stops shopping, it will start sliding. The US lured developing nations to sell goods to the US homes on perennially post-dated cheques.

Those countries have no option but to lend money to the US because they suffer from “savings glut”, theorised Alan Greenspan, shockingly. On such spurious logic, from the 1990s, the US co-opted the world into its fold through US households shopping on credit, current account deficits and recycling dollars — enabling the dollars globalise in trillions, and as its mirror effect, pervasively dollarise the world.

Shop or slide

What started of as crisis management by the US in 1970s to ‘contract’ to recycle petrodollars has now turned into invasive currency internationalism on its own motion. But why then could the euro, for example, not attempt it? Simple.

The US current account deficits in trillions globalised US dollars in trillions. With Europe's current account in surplus, the euro cannot replicate the dollar. QED: Only a nation that runs massive current account deficits can pervasively globalise its currency.

Regardless of the monetary chaos that the invasive dollarisation has exposed the world to (a topic by itself), even a seer cannot predict where this galloping cancer of phony finance disconnected from the real economy will lead or end.

The continuing game of globalised dollar and dollarised world is a time-bomb ticking. Yet, the US and the world are lost in the bliss of honeybees fallen into a honey pot. Neither of them can get out of it nor can either survive being in it longer. The 2008 crisis did shake and wake up the world to the risk. Yet, the US, hallucinating recovery by pumping phony money into banks which is like giving “yet another drink to the already drunk”, still believes in dollar's TINA (There Is No Alternative) status.

Asian societies with non-Western lifestyle need to stop and see where the highly leveraged US living on debts funded by others’ savings is headed, and plan to de-risk themselves. If they casually accept the status quo, they may eventually have to commit Sati with the US. But the US may still survive, doing down others like it did in 1971.

(The author is a commentator on political and economic affairs, and a corporate advisor.)

Published on July 11, 2013

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