US Dollar's Supremacy Challenged
The period was the 1940s and the world economy needed a savior which was found in the form of the US Dollar and is accepted as the reserve currency. There were World wars, global economic crises, and whatnot. But how was the US Dollar rising to the top and continues to do so? And then there exists the present threat to its autonomy.
Background (Why/how dollar rules)
The two great wars caused havoc in which Europe put in all its resources and manpower resulting in a national debt crisis. Whereas the US participated first as merchants and only much later as actual participants. As the tide settled down with the end of WWII, most of Europe was debt-stricken with the US holding 75% of the world’s monetary gold and the USD being the only currency backed by gold. The US seized the opportunity through two phases. In the summer of July 1944, 44 countries such as the UK, France, Australia, etc. signed the ‘Bretton Woods Agreement’ under which they agreed to peg their currencies to the dollar. The Bretton Woods said that the dollar would be backed by gold such as that 1 ounce of gold=$35 and if a country owned dollars, they could redeem it for gold from the US. This built trust in global trade. Now, how was it supposed to work? For instance, if India received $1 Million from Bangladesh, India knew that it can be exchanged for gold from the US. But if the trade happened in Bangladeshi Taka, then today maybe 10000 Bangladeshi Taka=1gm of gold but if Bangladesh prints out more currency and declares 10000 Bangladeshi Taka=1gm of gold, it would collapse the entire bilateral trade. In addition, huge loans and financial support were given to war-hit countries through the setting up of the IMF and the World Bank (Congress, 1945). This was the first phase and the USA’s unfolding love affair with oil kicked off the second phase. Back in the 1930s and the 40s, the Saudis were unaware of the fact that they were sitting on a goldmine and were not rich back then having just discovered oil. Only the American and British companies had the technology to extract the oil reserves of the Middle East. An American company drilled into a huge oil well in Saudi Arabia in 1938. After being bombarded by Italy in WWII, the Saudis were in utmost need of protection, and Franklin Roosevelt, realizing the importance of world development on oil, seized the opportunity. This led to the famous ‘Petrodollar’ Agreement.
On Feb 14, 1945, the Saudi King agreed to sell oil only in dollars in exchange for military security/equipment from the USA (Amadeo, 2022). Then the entire OPEC started following the same route in the 1960s. There have been waning and waxing of the petrodollar’s extent due to derailment attempts by Iraq’s Saddam Hussain, & Muammar Gaddafi, they have been invaded, assassinated, and decimated by self-presumed bearers of world peace, the US. Even when the US gold reserves dropped by 55% from 1945 to the 1970s and the Bretton Woods collapsed when President Nixon stopped the USD’s convertibility to gold, the SWIFT trade network had been built such that the US banks hold reserves of foreign countries which stand at 7 trillion dollars (Seth, 2022). What is done with the $7 Trillion? It is simply invested in the American economy. As the geopolitical scenarios and world economy face turbulent times, the US Dollar’s supremacy stands challenged.
‘OPEC+’ gives 2Mn Hit
The Janus-faced US felt an abrasion when on 5th October 2022 the Organization of Petroleum exporting countries and its allies like Russia, or the OPEC+, majorly led by Saudi Arabia & Russia, declared to cut their oil production by 2 Million barrels a day accounting for 2% of the entire world’s oil supply leading to a global supply-demand mismatch (Bland, 2022). What OPEC+ gets out of it? Simple, higher inflated prices. Earlier in the past year, oil prices were around $80 per barrel and the Ukrainian war spiked it to $110 per barrel, the highest in 14 years, due to Russia being the 3rd largest oil producer. After things started settling down, at the end of Sept. 2022, the prices had again come down to $85/barrel which was almost similar to pre-war levels. The $80 odd price was a post covid recovery figure during which the prices had fallen to $20 per barrel. These scenarios primed OPEC’s fear that the oil prices would continue to go down even after the war and if the nightmares come true with the 2023 recession, they would not have an option but to settle for a dirt cheap price of $20-$30 due to falling demand. A dichotomy to ponder is that generally augmenting oil prices lead to a recession and OPEC is trying to inflate prices under the fear of recession. Coming back to the US, there is a cost of living crisis to deal with inflation touching a peak of 9.1%, the highest in 40 years. And over the period, Russia’s revenue from energy exports has only increased due to the purchases from the USA’s European allies. The US started mulling over the NOPEC bill (a proposal to put sanctions on OPEC). It turns out it is not the first instance of NOPEC being discussed in the US houses. Whenever they tried it out earlier, they were quite ‘literally’ bullied by the Saudis. As it stands, Saudi Arabia is the US’s biggest arms importer by a huge margin, so, the King can get weapons from Russia, but where else can the US fulfill its oil greed? With these gradual changes, if the Petrodollar is dead and the Saudis opt for say, Ruble to sell their oil, it could be a serious hit for the US dollar and the 7 trillion dollars as reserves of other currencies. It is certainly not as simple as it sounds, the US and Europe continue to be the biggest importer of Saudi oil and the Saudis are majorly protected by the American troops. But, it is evident that the Middle East attempts to move away from the Dollar.
RBI Says Rupee is good ‘enough’
The de-dollarization is certainly not a novel attempt. In the 1990s, Latin America attempted to move away from the dollar. Venezuela paid for oil with Chinese yuan due to the US sanctions. Chile has continued to avoid dollarization after the 1980s. Under Saddam Hussain, Iraq attempted to sell oil in Euros and Libya lobbied for a pan-African gold standard. The 2007-08 crisis helped the US to maintain its hegemony. Riyadh was upset with the US withdrawing support from military intervention in Yemen and also Biden raising the economic sanctions on Iran thus adding fuel to the fire in the Saudi-Iran War. The rise of the BRICS against the Western G-7 is another stride. There have been talks of Saudi joining the BRICS which could bring a third of the global GDP, over 25% of the global oil output, roughly 40% of the global iron production, and about half of the world’s agricultural production together. Based on the basket of the BRICS block, a separate reserve currency is under the talks (Jones, 2022). In the decision, China could have a larger say as it holds the largest foreign exchange reserves in the world. During the COVID period and continuing till now, the US has also been involved in heavy currency printing. America printed 3 trillion dollars in just 3.5 months but guess what strangely while in other cases of currency printing, countries experienced hyperinflation in case of U.S., inflation barely touched nine percent in fact this had a reverse effect whereby instead of inflation increasing just in the U.S. inflation actually got exported to other countries all across the world. World leaders including the US opposition leaders have been skeptical of it. The left media created demon Donald Trump also went on to remark that their currency was crashing and would soon no longer be the world standard, which would be their greatest defeat in 200 Years. Therefore, now, learned people around the globe have started realizing that it is not the USD getting them through but actually adding on to their economic burdens. At the end of the story, generally, everyone has had enough of the US, no longer do we need a housing crisis of the US spreading onto the entire world economy. As 2023 looms with a recession, it leaves the US dollar at a ledge, will it continue to be the ‘King’?
And All the Other Happenings
The de-dollarization is certainly not a novel attempt. In the 1990s, Latin America attempted to move away from the dollar. Venezuela paid for oil with Chinese yuan due to the US sanctions. Chile has continued to avoid dollarization after the 1980s. Under Saddam Hussain, Iraq attempted to sell oil in Euros and Libya lobbied for a pan-African gold standard. The 2007-08 crisis helped the US to maintain its hegemony. In the past few years, the US has been toing and froing. Riyadh was upset with the US withdrawing support from military intervention in Yemen and also Biden raising the economic sanctions on Iran thus adding fuel to the fire in the Saudi Iran War. The rise of the BRICS against the western G-7 is another stride. There have been talks of Saudi joining the BRICS which could bring a third of the global GDP, over 25% of the global oil output, roughly 40% of the global iron production, and about half of the world’s agricultural production. Based on the basket of the BRICS block, a separate reserve currency is under the talks (Jones, 2022). In the decision, China could have a larger say as it holds the largest foreign exchange reserves in the world. At the end of the story, generally, everyone has had enough of the US, no longer do we need a housing crisis of the US spreading onto the entire world economy. As 2023 looks with expectations of the recession, it leaves the US dollar at a ledge, will it continue to be the ‘King’?
By Madhav Goel
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