Economic and financial sanctions often backfire, the most notable example being the weaponization of the dollar against Russia, which triggered a global movement towards de-dollarization, the exact opposite of the strategic intent of the punitive measures.
Despite this historic miscalculation, Senator Marco Rubio of Florida has introduced a bill in Congress to punish countries that dedollarize, aiming to shut out financial institutions that promote dedollarization from the global dollar system.
Rubio's bill, ominously called the “Sanctions Evasion Prevention and Mitigation Act,” would require the US president to impose sanctions on financial institutions that use China's CIPS payment system, Russia's SPFS financial messaging service, and other alternatives to the dollar-centric SWIFT system.
Rubio is not alone in targeting countries trying to dedollarize: economic advisers to presidential candidate Donald Trump have discussed ways to punish countries that are actively moving away from the dollar.
The Trump campaign has proposed imposing sanctions on “allies and adversaries alike who actively seek ways to conduct bilateral trade in currencies other than the dollar,” with violators subject to export restrictions, tariffs and “currency manipulation charges.”
The Awakening of BRICS
U.S. policymakers and financial media pundits were initially against dedollarization, arguing that the dollar is used in about 80% of global financial transactions, a figure that no other currency can even come close to.
However, the financial sanctions imposed on Russia after Russia’s military intervention in the Donbas region of Ukraine in 2022 marked a turning point. The trend towards dedollarization has accelerated and is now almost irreversible.
In May of this year, the Association of Southeast Asian Nations (ASEAN) announced plans to phase out the dollar in cross-border trade and use local currencies instead. Although this announcement did not receive much attention from the rest of the world, ASEAN is a huge trading bloc made up of 10 countries with a total population of 600 million.
Other agreements that circumvent the dollar system include barter transactions: Iran and Thailand trade oil for food, and Pakistan has approved barter transactions with Iran, Afghanistan, and Russia. China is building a state-of-the-art airport in Iran that will be paid for with oil.
Cryptocurrencies are also being used to circumvent the dollar system and avoid the strict scrutiny of American law. Cryptocurrencies like Bitcoin allow individuals to send and receive funds anonymously from anywhere in the world, outside of the traditional banking system.
Dedollarization is a key issue for the BRICS, which is rapidly becoming the world's largest economic bloc.
Until 2022, the BRICS had few clearly defined goals beyond a shared desire to build a power to rival the G7. But the weaponization of the dollar system and the freezing of $300 billion in Russian reserves held in Western banks has given the BRICS a new focus and clarity of purpose.
BRICS began as an unlikely alliance: its five founding members are located on three different continents and have different cultures, political structures and economic systems, but share a common desire to create a multipolar world.
China is a major trading partner for most countries in the world, and it is inevitable that bilateral trade between the two countries will gradually move away from the dollar.
BRICS is economically driven and has no ideological program. It focuses primarily on economic development and cooperation. Its ethos is based on consensus and mutuality.
China is the largest trading partner for most of the BRICS countries and is the linchpin of their economies. As China gradually moves away from the dollar, its trading partners are likely to follow suit to varying degrees.
Oil money
US dominance of the global financial system dates back to 1974, when the US government convinced Saudi Arabia to sell its oil only in dollars. The agreement followed the US decision to default on the gold standard in 1971. President Richard Nixon closed the so-called “gold window” through which dollars could be exchanged for physical gold.
The United States was fighting two wars at once, the Vietnam War and the War on Poverty, and the government was issuing more dollars and bonds than it could back with gold. The petrodollars ensured continued global demand for the dollar.
The agreement required all oil-importing countries to maintain dollar reserves. Oil-exporting countries invested their dollar surplus in U.S. Treasuries and bonds to provide for the continued financing of the U.S. national debt.
The dollar-based price of oil has tied the world economy to the dollar system. Oil accounts for less than 10% of world trade, but is essential for the remaining 90%.
Controlling the world's reserve currency gives the US great power over other nations. It controls the on-ramps and off-ramps of the global financial system and can impose sanctions on nations it deems economically or politically hostile.
In addition, governments can lend to other countries in their own currency. The International Monetary Fund provides loans to countries that need to import essential goods like oil, food, and medicine but lack the necessary dollars.
Lending to countries usually comes with strict neoliberal conditionalities such as opening up the economy, privatizing public enterprises and liberalizing financial markets, with less than optimal outcomes.
Pakistan, Argentina and Egypt are long-time IMF clients, demonstrating that borrowing rarely makes countries prosper. In April this year, Pakistan received its latest $3 billion aid package, its 23rd IMF loan since 1958.
The petrodollars made it easier for the US to repay its debts and led to extravagant spending by the US government. In 1985, just ten years after the petrodollar agreement, the US became the world's largest debtor nation.
In 1974, the U.S. national debt was $485 billion, or 31% of GDP. This year, the national debt is over $35 trillion, or 120% of GDP.
Interest payments on the national debt will exceed $850 billion this year, surpassing defense and social security spending as the largest item in the U.S. budget. Without a major course correction, debt repayments will dwarf all discretionary spending within a few years.
The debt crisis has highlighted growing fears in the United States about dedollarization: Fewer people using dollars means fewer buyers of U.S. government bonds.
Investors have long viewed U.S. Treasury bonds as a safe haven. The bonds offer stable yields and payments are guaranteed by the government. But investor demand for long-dated U.S. securities has been squeezed in recent years. A telltale sign of trouble is the start of a separation between the dollar and gold, which have been trading in a narrow range for years.
The dollar and gold moved in tandem until the Biden administration implemented a massive stimulus package in 2020. Gold did not rise, and the value of the dollar against gold, the historical underpinning of global wealth, fell.
Investor fears are based on simple math: When the U.S. prints more dollars and bonds than it can keep up with economic growth, it creates inflation. If bond yields are 4% and inflation is 8%, bonds are a losing investment, which is bad for pension funds and other long-term investors.
The U.S. bond market is valued at $50 trillion, a huge sum by most standards, but this figure pales in comparison to the nominal value of the global dollar system, which is virtually unfathomable but exceeds $1,000 trillion.
Offshore shadow banking estimated at $65 trillion. Derivatives market is worth $800 trillion. Offshore shadow banking market is $65 trillion. Eurodollar market is between $5 trillion and $13 trillion.
Dedollarization means that many of the trillions of dollars in circulation around the world will gradually be repatriated. As countries move towards multi-currency trade, the demand for dollars will only decrease.
If dollars flow back into the U.S., not only will it spur inflation, it will also reduce the pool of potential buyers for U.S. Treasury bonds, which means higher interest payments and a rise in debt.
Gold vs Bitcoin
Economists and politicians have proposed a variety of measures to reduce the U.S. debt to a sustainable level (thought to be around 70% of GDP), but the deep spending cuts and tax increases required are politically impossible.
Several economists and politicians have proposed a third way to combat the debt death spiral: bolstering the U.S. balance sheet by adding Bitcoin to the national reserve.
The U.S. government already holds over 200,000 Bitcoins through various seizures and bankruptcy cases, and presidential candidate Donald Trump has vowed to keep Bitcoin on the U.S. government balance sheet.
Crypto proponents argue that Bitcoin is still cheap. They predict that its value could reach six figures, up from $60,000 in recent weeks. Crypto bulls have likened the massive purchase of Bitcoin to the 19th century Louisiana Purchase, when the United States bought nearly one-third of the American continent from France for $15 million.
Presidential candidate Robert F. Kennedy Jr. went a step further, proposing that the U.S. government purchase an amount of Bitcoin equal to the nation's current gold reserves.
Bitcoin tracks the dollar price of gold.
The U.S. government currently holds about $615 billion worth of gold, just a fraction of its $35 trillion debt. At current prices, the government would have to buy more than 9 million Bitcoins to match the value of its gold reserves.
Notably, Kennedy Jr. wants the government to back the dollar with a combination of assets such as gold, silver and platinum, in addition to Bitcoin. This “basket” of assets would become a new type of U.S. Treasury note.
It is ironic that Bitcoin is being used to rescue the dollar, a cryptocurrency designed to circumvent, if not undermine, the dollar and the fiat currency system.
Equally ironic is that Bitcoin is primarily denominated in dollars and valued in dollars, meaning anything that happens to the dollar affects dollar-denominated Bitcoin. Gold, on the other hand, is in a class of its own.
If dollars or bitcoins go to zero, their owners have nothing left. If gold goes to zero, their owners still have their gold.
The last reserve currency
Kennedy Jr. is probably right to assume that the dollar needs to be backed by real assets. Without it, the dollar may go the way of the Argentine peso and the Zimbabwean dollar, both of which effectively devalued their currencies to zero. Zimbabwe eventually turned to a gold-backed currency to impose fiscal discipline on the government.
Dedollarization would be the first challenge to the dollar since the Bretton Woods Agreement in 1944, which made the gold-backed dollar the base currency against which all other currencies rested. Given the geopolitical tensions between the BRICS and G7 nations, Bretton Woods II is highly unlikely to happen.
Instead, there will be an increasing number of multi-currency arrangements and at some point a BRICS trading currency will be issued. The BRICS currency units will be asset-backed but digital only. No hard coins or notes will be issued.
Thus, the global monetary system will likely split into three: a dollar-led fiat system, a multi-currency arrangement, and a BRICS-led trade currency. The dollar system will exist in parallel with the other two systems, but it is likely to be the final global reserve currency.
Reserve currencies are a relic from the (neo)colonial era. They primarily benefit corporations and the wealthy. A multi-currency system primarily benefits countries, allowing them to take responsibility for their own future by regaining their monetary and fiscal autonomy.
