The economic route from real to virtual and the weakness of the real economy have seriously hollowed out the material basis of the US dollar and damaged the real value and credibility of the US dollar.
The over-issued dollar has no corresponding value subject matter to rely on, and multiple factors such as the ** chain crisis have made the inflation rate in the United States go all the way up, once exceeding 9% in 2022, which not only seriously affects the public confidence and domestic economy in the United States, but also makes the world realize that the true value of the dollar is depreciating sharply.
On the one hand, the United States uses the status of the dollar as the world's currency to manipulate the production of global physical resources, and even uses currency to directly "harvest" the world's goodsOn the other hand, it uses the hegemony of the US dollar to engage in sanctions and isolation, and uses currency to control and suppress competitors' goods.
The financial war between the United States and Russia is essentially a war between goods and currencies under the dollar system. Judging from the results, the narrative logic of the United States using the status of the dollar to control the flow of global resources has cracked, and more and more countries have realized that the basis of their survival and development dependence is goods rather than currency, and more and more countries have begun to anchor the resources and industrial products related to their survival and development, rather than the dollar whose real value has shrunk, and they do not want their goods to be "harvested" by the dollar
According to a recent report by the International Monetary Fund (IMF), about 110 countries around the world have undergone one form or another form of "de-dollarization".
In the long run, goods are the material basis, who has a complete and complete industrial system, stronger scientific and technological innovation capabilities, more advantageous status, more recognized values by the world, whose currency can occupy an important position in the world, this is an unavoidable law.
Text |Sun Qifang, Chen Wenlin.
Yamal LNG project facility in Yamal-Nenets Autonomous Region, Russia (photo taken on April 7, 2023) Photo by Cao Yang.
Money originated in the era of barter in primitive societies. In order to facilitate the mode of exchange and reduce the cost of transactions, people fix a substance as a general equivalent - money. Later, with the evolution and formation of the international economic pattern, the connotation of credit was gradually recognized, and modern money was born. Tracing the origin and development of money, it can be seen that goods and currencies are interdependent, goods are the support of currency, and currency is for goods.
However, today, as the world's main currency, the US dollar has shown different characteristics: its operation law is increasingly deviating from the traditional monetary meaning, showing a trend of goods and currency, that is, the US dollar is still popular around the world, but it has gradually lost the value support of resources, industrial products and production systems. As a result, its true value is being widely questioned.
The real value of the dollar continues to shrink.
People question the true value of the dollar, first of all, because the hollowing out of US industry has led to the lack of real economic support for the dollar.
At one time, the United States had the highest manufacturing capacity in the world, especially after the end of World War II, when the United States became the "king of production" in the world, and in 1945 Pennsylvania alone produced more steel than Japan and Germany combined. However, since the 70s, the United States has been pushing for the transfer of low- and middle-end industries, and has gradually lost its global dominance in large-scale industrial production, technology and efficiency, and the problem peaked between 2000 and 2010, when the United States lost a third.
1. Millions of jobs.
Today, the manufacturing recession is a major constraint to sustainable growth, job creation, and technological progress in the United States. Therefore, the revitalization of the U.S. manufacturing industry has become the focus of recent policies. But reviving U.S. manufacturing won't happen overnight. According to the U.S. Bureau of Economic Analysis, as of the second quarter of 2023, the U.S. manufacturing industry added about 228 trillion US dollars, accounting for only 10% of GDP, and the industries with higher contributions to GDP are mainly concentrated in finance, real estate, business services, education and other fields, of which finance, real estate and business services contribute as much as 32%. As of 2022, the full-time and part-time labor force in the U.S. manufacturing industry is about 12.8 million, accounting for only 82%, more jobs are concentrated in retail, healthcare, education and other industries.
It can be seen that the weakness of the U.S. manufacturing industry continues, and the service industry is still the main force supporting U.S. economic growth and employment. The economic route from real to virtual and the weakness of the real economy have seriously hollowed out the material basis of the US dollar and damaged the real value and credibility of the US dollar.
On a related note, the GDP of the United States may seem beautiful, but a closer look reveals that the value of the dollar has far exceeded the real value of the wealth it corresponds to.
The U.S. economy grew in the first three quarters of 2023. 2%, far exceeding market expectations. But in fact, the problem of water injection into the US GDP has been around for a long time.
Unlike China's "production method", the US GDP is calculated using the "expenditure method". The production method calculates the total output of each economic sector separately, and sums it together after deducting its intermediate losses to obtain the total value addedThe law of expenditure calculates the total amount of expenditure spent by the whole society on the purchase of final products, minus the difference in imports. Generally speaking, the expenditure method yields a larger value than the production method, because the production method often ignores the contribution of service sectors such as finance, education, and health care to economic growth. For the United States, the service sector is the backbone of its economic growth, contributing more than 70% of GDP. This means that the GDP of the United States is not supported by material production, and its "content" is so insufficient that the value of the dollar has far exceeded the real value of the wealth it corresponds.
People question the true value of the dollar, and because in recent years too many dollars have been overissued, these dollars have no corresponding value subject, so it causes inflation and the dollar depreciates sharply.
After the outbreak of the subprime mortgage crisis in the United States, the Federal Reserve implemented quantitative easing. The U.S. injects a lot of liquidity into society through over-issuance of money to stimulate domestic investment and employment. Since 2008, the Fed's balance sheet has ballooned from $920 billion to $7$8 trillion. Especially after the outbreak of the new crown epidemic, in order to save the economy, the United States launched unlimited quantitative easing and lowered the federal benchmark interest rate to around zero. The Fed's balance sheet has doubled in two years, reaching nearly $9 trillion in 2022, and the size of US M2 has soared to 21$9 trillion (currently down to $20.)$7 trillion).
The consequences of currency over-issuance came as expected. In the past two years, the excess dollar has neither flowed to the domestic real economy, nor has it "harvested" enough manufacturing capacity in other countries, resulting in it only idling in the financial sector. The over-issued dollar has no corresponding value subject matter to rely on, and multiple factors such as the ** chain crisis have made the inflation rate in the United States go all the way up, once exceeding 9% in 2022, which not only seriously affects the public confidence and domestic economy in the United States, but also makes the world realize that the true value of the dollar is depreciating sharply.
American-style "financial governance" has suffered a crisis of confidence.
At present, the international community not only questions the true value of the US dollar, but also questions the US dollar-based "financial governance" model: on the one hand, the United States uses the US dollar as the world currency to manipulate the production of global physical resources, and even uses the currency to directly "harvest" the world's goodsOn the other hand, it uses the hegemony of the US dollar to engage in sanctions and isolation, and uses currency to control and suppress competitors' goods. It is embodied in:
First, for many years, the United States has used the over-issuance of currency to inflate its real estate and capital markets to maintain economic growth, and whenever a crisis is approaching, it will often adopt large-scale fiscal stimulus measures and issue unlimited treasury bonds to force the world to pay for it.
At present, the total US national debt has exceeded $33 trillion. The budget outlook of the Congressional Budget Office nearly doubles in size over the next 30 years. By 2053, the U.S. national debt will exceed 180% of GDP. The real purpose of the United States for a long time is not to stimulate and improve the production efficiency of its real economy, but to play a monetary game - to inject the printed dollars into the world and collect "seigniorage" from the world. Charles de Gaulle, the former French **, pointed out more than half a century ago that "the United States, with its super-privileges and tearless deficits created by the dollar, plunders the resources and factories of other peoples with worthless waste paper." "Specifically, the U.S. uses a 100-dollar bill, which costs only about 17 cents, to get other countries to actually provide the U.S. with goods and services worth $100.
Second, when it is necessary to control inflation, the United States adopts a monetary tightening policy, raises interest rates aggressively, and affects the production of other countries, and even the overall economic situation through **, exchange rates, financial markets, etc.
In the past two years, after the Federal Reserve has taken aggressive continuous interest rate hike measures, the world has begun to emerge a "wave of interest rate hikes", such as the European Union, the United Kingdom, Australia and other countries and regions have raised interest rates, this situation often drags poor countries into debt crises, such as Sri Lanka, Ghana and other debt problems. At the same time, the high interest rate environment created by the US interest rate hike will also lead to a contraction of global demand through cascading transmission, thereby dampening consumption and investment and hitting the output of the real economy in other countries.
Third, the United States has abused the hegemony of the US dollar and its global financial infrastructure by virtue of its status as the world's leading settlement currency and reserve currency, imposed sanctions on other countries, affected the flow of goods, and stirred up the global economy.
Since almost all commodities need to be settled in US dollars, the United States will often cut off or stop US dollar loans and US dollar clearing services for the targets of sanctions, and will also require financial institutions of third parties (international organizations or allies) to participate in sanctions to amplify the effect of sanctions, or remove the targets of sanctions from the US dollar circulation system through the US dollar and the Society for Worldwide Interbank Financial Telecommunication (SWIFT). In addition to this, the United States will freeze the overseas assets of the targets of sanctions. Since the outbreak of the Russia-Ukraine conflict, the United States has worked with its allies to impose a series of sanctions on Russia, including excluding some Russian banks from SWIFT, freezing Russian dollar assets, and adding Russian-related entities to the sanctions list of the Office of Foreign Assets Control (OFAC) under the US Treasury Department.
All these operations have made the international community gradually realize the truth of American-style "financial governance": the hegemony of the US dollar and its financial system are "absolutely self-interested", and its essence is to coerce other countries to obey the political and economic strategy of the United States, and the means of operation have no bottom line. With this deepening of understanding, American-style "financial governance" is facing a serious crisis of confidence.
"De-dollarization" war.
Different from the situation expected by the United States, after Russia was sanctioned, it timely launched a series of self-help and countermeasure policies such as strengthening foreign exchange settlement and sales control and restricting the assets of unfriendly countries in Russia, which achieved good results, and the ruble exchange rate also stopped the trend for a long time.
The fundamental reason why Russia has not been crushed by the extreme pressure of the United States is that Russia has abundant energy and grain reserves, which can be used as support or collateral for the ruble. Therefore, Russia tied natural gas to rubles and demanded that the export of natural gas be settled in rubles. According to data published by Russia**, Russia's oil and gas budget revenues in 2022 reached 25 trillion rubles, an increase of 28% year-on-year. It can be seen from this that the American "currency" has not succeeded in suppressing the circulation of Russian "goods".
The financial war between the United States and Russia is essentially a war between goods and currencies under the dollar system. Judging from the results, the narrative logic of the United States using the status of the dollar to control the flow of global resources has cracked, and more and more countries have realized that the basis of their survival and development dependence is goods rather than currency, and more and more countries have begun to anchor the resources and industrial products related to their survival and development, rather than the dollar whose real value has shrunk, and they do not want their goods to be "harvested" by the dollar
After recognizing the underlying logic, the world has launched a "de-dollarization" movement, which includes not only the vast number of developing countries in Asia, Africa and Latin America, but also some core allies of the United States. According to a recent report by the International Monetary Fund (IMF), about 110 countries around the world have undergone one form or another form of "de-dollarization".There are mainly the following forms:
The first is to sell off U.S. bond assets. For example, in September 2023, the total size of U.S. Treasury bonds held by foreign investors fell by about 0.0 percent$1 trillion, a new low since May, shows that the outside world has strengthened the risk aversion of US bonds.
The second is to increase holdings. Against the backdrop of ongoing geopolitical tensions and declining dollar credibility, countries have aggressively increased their holdings**. According to the latest report from the World Association, in the first three quarters of 2023, the net purchases of global central banks reached a record 800 tons, and net purchases for the whole of 2023 are expected to hit another record high.
The third is diversified monetary arrangements. Many countries have promoted non-US dollar currency settlement, and more than 30 countries have begun to use RMB in foreign trade settlement or investment, reducing the proportion of US dollar settlement. For example, in March 2023, China and France's TotalEnergies completed their first LNG RMB settlement transaction. India, the United Arab Emirates, Malaysia, etc., and Russia, India, Iran, etc., have also begun to settle in their own currencies.
In addition, with the rapid development of digital technology, central bank digital currency projects in various countries have shown exponential growth in recent years, which also provides new possibilities for "de-dollarization".
Affected by the above actions, some indicators of the US dollar have shown a downward trend, and the dominant position in international reserves, ** settlement, foreign exchange trading, commodity pricing and other aspects has declined.
The future of world money.
In this competition between goods and currencies, a major change in the international monetary order is brewing. In the short to medium term, it may be difficult to substantially shake the dominance of the US dollar, but the international monetary system will inevitably develop in the direction of multipolarity.
Goldman Sachs has warned that the current dollar is similar to the British pound back then, compared with the dominance of the dollar in the global payment system, the United States' share in the global ** is very small, and geopolitics is developing in a direction that is not favorable to the United States. When the material basis of "goods" is lost, the status of "currency" is like a castle in the air.
However, the credibility of the US dollar will not collapse overnight with its long-term accumulation, and the United States will do its best to maintain the hegemony of the US dollar, and has also strengthened relevant measures in recent years. Since 2021, the United States has passed fiscal stimulus bills such as the Infrastructure Investment and Jobs Act, the CHIPS and Science Act, and the Inflation Reduction Act to attract manufacturing back, in order to rebuild the material basis of dollar hegemony. At the same time, the United States also promotes the formation of the "Global Infrastructure and Investment Partnership", "Indo-Pacific Economic Framework", "India-Middle East-Europe Economic Corridor", etc., in order to consolidate its dominant position in global investment, to some extent, in order to consolidate the hegemony of the dollar.
Nonetheless, as emerging markets grow in importance in the international political and economic system, the economic scale and geopolitical advantages that underpin the dollar's centrality will continue to erode.
According to data released in March 2023 by Acorn Macro Consulting, a British economic research institution, the proportion of BRICS countries in global GDP reached 31 in purchasing power parity terms in 20225%, more than 30 for the G77%。After the expansion, the weight of the BRICS countries in the global economy will further increase. Countries with abundant goods, prosperous goods and huge markets, with the comparative advantage of goods over currency, will inevitably no longer use the US dollar as the only world currency. As economies thrive and international influence grow, emerging markets urgently need a more secure and efficient monetary system, rather than a situation where the dollar dominates.
Regional powers have begun to explore the creation of regional currencies. In 2023, the leaders of some South American countries said that they are studying the launch of a common currency in South America and will invite other countries in the region to join in order to promote the region** and reduce dependence on the US dollar. Malaysian Prime Minister Datuk Seri Anwar Ibrahim proposed to China the idea of creating an "Asian currency**" to reduce its dependence on the US dollar. As the rift between the United States and traditional oil producers deepens, the petrodollar mechanism will be more challenged in the future.
There is a lot of speculation about the future of world money. A consensus is that in the long run, goods are the material basis, who has a complete and complete industrial system, stronger scientific and technological innovation capabilities, more advantageous status, more recognized values by the world, whose currency can occupy an important position in the world, this is an unavoidable law. (Sun Qifang, assistant research fellow, Institute of American Studies, China Institute of Contemporary International Relations;Chen Wenlin is an assistant researcher at the Institute of World Economy, China Institute of Contemporary International Relations
Outlook, No. 52, 2023).