Ever since the dollar replaced gold at the center of the global financial system, many outside the US have complained about “dollar hegemony,” and the “exorbitant privilege” conferred on the United States by virtue of this hegemony. What do these phrases actually mean?
Broadly speaking, both are used interchangeably as a euphemism for a handful of economic controls the US has on the global economy, especially the fact that US dollars remain the principal currency held as savings by foreign governments, companies and individuals.
Another aspect of this is the industrialized world’s central payment system that has cemented the dollar’s central role in global finance, which is to say, the SWIFT system.
The Society for Worldwide Interbank Financial Telecommunication, more commonly known by its acronym SWIFT, is the dominant transmission network that connects more than 11,000 major financial institutions. It is a key component of this valued dollar liquidity as it provides the gateway to the Federal Reserve window (the means through which the world’s leading financial institutions borrow money).
Although Brussels-based (and ostensibly neutral in a political sense), the board is dominated by US financial institutions, and US federal law gives the American government the capacity to shut down access to the system as part of its arsenal of potential sanctions. The US has done that in the past with countries such as Cuba and, more recently, Iran.
Here’s the problem with that: Any attempts by the US authorities to politicize or unilaterally shut down access to the SWIFT system as a means of securing US policy objectives, as they are doing today to Iran (and possibly Russia later), risks backfiring profoundly as far as preserving dollar hegemony.
This is why:
- The more the US seeks to sanction so-called “bad actors” by cutting off their access to SWIFT, the less the system itself will be viewed as a neutral international interbanking network, rather than an instrument of arbitrary US power, and subject to the capricious whims of the US government.
- As more and more countries begin to see SWIFT in these terms, it will inevitably induce moves to create an alternative. This will further diminish dollar liquidity, as well as enhancing liquidity for alternative currencies as they lend their support to this new system.
Economic network theory speaks of “positive networking externalities.” These emerge as an increasing number of other users use a network and therefore enhance its overall benefits to all users. The corollary also applies as it relates to “negative externalities,” whereby the system’s benefits (“marginal utility” in “econ-speak”) diminish in line with a decreasing number of users. Should these negative externalities begin to afflict SWIFT, this will inevitably reduce dollar liquidity and, hence, worsen the ongoing prospects of dollar hegemony.
The Trump administration might well contend that all it is doing is punishing a few rogue members of the global community. But it appears to be only Washington that acts here as judge, jury and executioner
The administration of US President Donald Trump might well contend that all it is doing is punishing a few rogue members of the global community. But it appears to be only Washington that acts here as judge, jury and executioner. Certainly that’s the case as far as Iran goes, where the European Union, China and Russia take a decidedly different view.
From these countries’ perspective, America’s politicization of SWIFT creates an ominous precedent. One day it might be Iran, but the next day, it could well be Russia, or somewhere else.
In spite of Trump’s purported affinity for President Vladimir Putin, his recent actions (pulling out of the Intermediate-Range Nuclear Weapons Treaty, selling more weaponry to Ukrainian nationalists) suggest a more aggressive tack with Moscow, which has also induced Putin to consider alternatives to SWIFT and enlist other nations as part of this effort, notably China. With their newfound cold-war enthusiasm directed against Russia, Democrats are also catalyzing this impulse on the part of Putin, so this is now a phenomenon that transcends the volatile US president.
As far as China goes, Putin is pushing on an open door, as that country’s leadership is increasingly concerned about the growing trade war with the US, against a backdrop of an emerging new cold war, this time with Beijing, not Moscow. The conflict is already extending well beyond trade, if US Vice-President Mike Pence’s recent speech is anything to go by. Discussions of an overt containment strategy have become mainstream and bipartisan (even former US president Barack Obama used to talk about “containing” the rise of China).
Consequently, China’s leadership has every incentive to join Russia in searching for alternatives to a US-dominated financial system. That would introduce a new complicating variable to the existing structures, if successful.
Economist Perry Mehrling rightly notes that “debts are promises to pay money, and money is the means of settling debts.” There is a corollary to that: If you impact the payments system in a manner that complicates the resolution of debt repayment, the whole money pyramid can become unstuck or, at the very least, unreliable, prompting the need to search for alternatives, especially when dealing with the world’s largest creditor.
At least in the case of Russia, or China, or Iran, we are looking at countries with a long-standing history of rivalry and strategic competition with the US. The new variable, however, is the increasing American antagonism to the EU, notably Germany, which is now channeling Europe’s increasing concerns about America’s reliability under Trump.
The ambiguous results of America’s recent midterm elections do not dispel growing European anxiety that Trumpism is here to stay (even pre-Trump, many chafed at the dollar’s dominance, and the euro itself was conceived in part as an instrument to reduce the dollar’s dominance globally). In any case, as the Financial Times’ Gideon Rachman has observed, the EU is not ideologically well predisposed to the sort of unilateralism that characterizes American nationalism, given that “its organizing principle is the creation of international laws that limit the sovereignty of national governments.”
As that relates to a potential subversion of SWIFT’s political neutrality, German Foreign Minister Heiko Maas has acknowledged that work has begun on creating a new European payment system independent of the dominant existing SWIFT system. This was confirmed by University of Hull Professor of International Business Law Christopher Bovis:
“The European Commission has been developing a system, a parallel system to SWIFT which will allow Iran to interface with European financial systems, European clearing systems, using the nominations supported and created by the European Investment Bank based on the euro.”
One immediate aspect of the EU’s diversification strategy is working to establish “a special-purpose vehicle to safeguard trade with Iran, as a US crackdown on Tehran’s oil and finance sectors came into force.”
Unfortunately, it hasn’t yet gained much traction, as most European banks and businesses are loath to risk sanctions from the US market, even as the EU pledges that the Luxembourg-based SPV will help to insulate them from fines and worse (and German mercantilism also complicates matters, as it makes it harder for other nations/businesses to net save in a currency other than US dollars, much as America’s ongoing current-account deficits effectively means “exporting” dollars to foreigners, making the dollar more liquid and hence facilitating net saving in that currency).
But Trump does represent another order of magnitude for Berlin. The next German leader after Chancellor Angela Merkel may not share her instinctive caution and might well move to pursue alternative payment systems more aggressively. And if Beijing is on board, given China’s status as the world’s largest global creditor, it will certainly catalyze these changes more quickly.
No question, though, the ship has already left the harbor, moving us closer to the day when King Dollar no longer stands alone at the apex of the global financial system. Ironically, this is another instance where “America First” impulses may well give rise to “America Last” results.
This article was produced by the Independent Media Institute, which provided it to Asia Times.