Paul Craig Roberts: The End of US Dollar Hegemony

The Ukrainian crisis has resulted in tectonic shifts in the global economic order in ways unseen since the end of the Cold War. Renowned economist Dr. Paul Craig Roberts sat down with Sputnik to discuss the post-dollar world, how it will affect ordinary Americans, and what, if anything, might emerge in the greenback’s place.

The BRICS countries are making final preparations for next week’s summit in South Africa, with bloc expansion, new economic infrastructure, expanded trade in local currencies and tools to reduce US dominance in global finance among the key items on the agenda.

The creation of a common BRICS currency – something that could dramatically strengthen the bloc’s position in world affairs, has also been under discussion, although the consensus seems to be that more cooperation between bloc giants China and India may be necessary before such an idea becomes viable.

“The great potential for creating a fair and democratic architecture of international relations lies in structures like BRICS,” Russian foreign intelligence chief Sergei Naryshkin said this week on the eve of the BRICS summit.

“It’s no coincidence that this abbreviation sounds like the word ‘bricks’ in English,” the Russian official added, suggesting that the name is a subtle nod to the fact that “these are indeed the building blocks in the foundation of a truly free and equal world,” a multipolar world where national sovereignty, identity and economic development are at the forefront.

The BRICS summit comes amid a stream of recent news reports on efforts taken by individual countries to find alternatives to the dollar for trade, including currency swaps, and growing refusal by countries in the Global South to toe the line of sanctions against Western countries’ adversaries.

Dollar’s Increasingly Perilous Global Position

“The problem with the dollar has been brewing for a very long time. And I think in order to comprehend the kinds of problems the United States is very likely to face in the near future, we need to understand what is going wrong with the American economy and how the dollar has been set up for a serious loss in value,” Dr. Paul Craig Roberts, a veteran economist, author and former assistant secretary of the Treasury, told Sputnik.

“That,” Roberts said, and not never-ending debates about the prospects of a recession, or even who the current occupant of the White House is, is the “pertinent problem” for the United States and the rest of the world today.

The End of US Dollar Hegemony?

Delving into the history of the dollar’s status as a world reserve currency, from the creation of the Bretton Woods Agreement-based financial world order after World War II to President Nixon’s deal with Saudi Arabia to create the petro-dollar in the 1970s, the economist noted that reserve currency status has endowed the US with the power to basically create money and debt out of thin air, and to facilitate economic policies which no other country on Earth could afford to pursue.

“All central banks held their reserves in dollars or in dollar-denominated assets, US Treasury bonds, and today, US equities. So there’s been a huge demand for dollar-denominated assets, financial assets, stocks and bonds, bills that are held as reserves by all foreign central banks. That’s how they settle their trade differences. What this means is that there’s always financing for America’s budget deficits and America’s trade deficits because the dollars are reserves and countries use them to settle their trade differences. And of course, [as] the world economy grows slowly over time, the amounts become larger. So there’s never been a problem with financing US debt – neither the budget deficit nor the trade deficit,” Roberts explained.

Despite $1 trillion+ deficits becoming “a part of American life,” and the US driving itself further into debt by offshoring its manufacturing base to Asia, most US economists, apart from a handful of fiscal conservatives, didn’t seem to mind this state of affairs, perhaps expecting it to last forever.

“But what is changing? Well, we see with the American sanctions on Russia and other countries and the tendency of these sanctions to expand and just be applied anywhere now to any point. What this has done is made other countries realize, ‘hey, holding our reserves in dollars means we’re also under the Americans’ thumb. If we don’t comply with their foreign policies, their financial policies, they can confiscate our reserves as Washington did to Russia,’” Roberts said.

Combined with US efforts to use the dollar to affect adversaries’ ability to engage in international trade, these countries, and others nations, have begun turning to alternatives to American money.

“So we see now a movement away from the use of the dollar as reserve currency. We see countries now focusing on keeping their reserves in gold and in the currencies of their trading partners. And we see now that international balances between countries, that trade differences are being settled in other currencies, in their own currencies, in the currencies of their trading partners. This change is not really dramatic and all at once, but it’s ongoing,” Roberts said, emphasizing the gradual nature of the process.

Unipolar Neoliberal Hegemony as Driver of US Foreign Policy

Roberts believes that the “principle goal” of the neoconservative establishment in charge of US foreign policy is simple – “to prevent the rise of any country that could serve as a constraint on American unilateralism.” But ironically, the use of punitive fiscal tools, whether sanctions against Russia or the trade war against China, has only facilitated the gradual abandonment of the dollar, resulting in America’s long-thought hypothetical fiscal problems becoming “real for the first time.”

“What will happen if [other countries] cease accumulating dollars, they cease buying Treasury bonds to hold as reserves, they cease buying American equities, is these prices of these financial assets will fall. If bond prices fall, interest rates go up and also the dollar’s value in exchange markets will fall. And as the dollar falls, import prices go up. So what the situation is for the United States is rising interest rates, falling value of the dollar, and therefore rising domestic inflation, because offshoring and globalism has made the United States import dependent,” Roberts said.

Unfortunately, the veteran economist said, there seems to be little policymakers can do to stem the crisis, which he’s confident has already begun. And worse yet, neoliberal economists in charge of policy don’t seem to actually want to make any changes.

“It’s already happening. This is a gradual thing and will pick up momentum as it goes and the results will become more obvious. People will rush to get out of the dollar and when that starts, then the process moves quicker. That’s my explanation of what the real situation is. Of course, it’s ignored. There’s no discussion of this. If the Federal Reserve knows about this, there’s no sign that they do. If the United States Treasury knows, there’s no sign that they do. The neoliberal economists pretend nothing really has changed…But what they don’t realize is you don’t need a reserve currency,” Roberts said.

“You take the Russian economy, it’s very powerful because of the enormous energy reserves, because of the enormous agricultural potential. And you look at the Chinese economy, it’s a major manufacturing economy far greater than the United States. These are countries with currencies that have a real basis, and they are not vulnerable in the way that the dollar is,” the economist explained, stressing that “today,” it’s “entirely possible for countries to trade in their own currencies, to settle their trade balances in their own currencies.”

Neoliberal Mythmaking

Roberts dismisses the neoliberal economic argument that there is simply no alternative to the dollar, its convenience or US posturing as a space where the economic rule of law is assured.

“Look, first of all, there’s no rule of law. What happened to the Russian central bank reserves? They were stolen. If you have rule of law, you can’t steal a…country’s bank reserves. What happened to Venezuela’s gold? It was stolen…If there’s rule of law, how do you exclude people from the SWIFT system? How do you impose sanctions on them because you don’t approve of some policy of theirs that has nothing to do with you? So rule of law, I mean there’s no such thing, certainly not in the United States,” the observer said.

Second, Roberts noted, the US is the only country to “spew out” the kinds of dangerous levels of debt “in the many, many trillions,” with no other major power on Earth in the same kind of fix that the US is economically thanks to the “stupidities” of neoliberal economists.

Reserve Currencies as the Domain of Empires

Dr. Roberts made a point to reiterate that the modern world has no need for a reserve currencies, whether the dollar or an alternative, because unlike after WWII, major nations are sufficiently strong economically to get along without one.

“You see, the reserve currency originated under the British Empire. But they dominated the world. You have to remember, the sun never sets on the British Empire. Not only that, they controlled trade, they had these trade agreements that President Roosevelt made them abandon for his support in World War II. So the origin of reserve currency was British power, its worldwide dominance of trade. And with the end of World War Two, president Roosevelt, the Americans dismantled the British Empire and took the role of reserve currency. And they did it on purpose because it gives that country with the reserve currency enormous power. They could pay their own bills by creating money…You don’t have to make things that you sell to others for money in order to pay your bills to people you buy from. You just create money. That’s the advantage of being the reserve currency. That’s the advantage that Washington is set up to lose. And of course, it means it loses its power,” he stressed.

And instead of doing anything to try to prop up the dollar’s status, US policymakers have only scared countries away by threatening to confiscate foreign assets, or deindustrializing America’s own manufacturing base, impoverishing the American class and leaving it a dependent, rather than a self-sufficient nation.

“The kinds of errors the United States has been making are just catastrophic. You can’t make these kinds of errors and survive as a viable economy. And that’s the problem the United States has,” Roberts said.

In place of a reserve currency, Roberts sees potential in gold, in sound currencies of countries with a sound economic policy, and the possibility of countries holding portions of their reserves in the currencies of nations they trade with.

“Now, of course, this raises the transaction cost of settling international payments because…There are fees for exchanging one currency into another. But that’s a lot less of a problem than having a reserve currency that lets the reserve currency finance itself at everyone else’s expense,” Roberts stressed. “You see, the world is not aware of it, but they financed all of America’s wars in the Middle East. They’re financing America’s war in Ukraine against the Russians. That’s what it means to have a reserve currency. The reserve currency is financed by everyone else,” the observer summed up.

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