Since World War II, America’s geopolitical supremacy has rested not only on military might, but also on the dollar’s standing as the world’s leading transactional and reserve currency. Economically, dollar primacy extracts “seignorage” – the difference between the cost of printing money and its value – from other countries, and minimizes US firms’ exchange rate risk.
Its real importance, though, is strategic: Dollar primacy lets America cover its chronic current account and fiscal deficits by issuing more of its own currency – precisely how Washington has funded its hard power projection for over half a century.
America is increasingly viewed as a hegemon in relative decline, China is seen as the preeminent rising power. Even for Gulf Arab states long reliant on Washington as their ultimate security guarantor, this makes closer ties to Beijing an imperative strategic hedge. For Russia, deteriorating relations with the United States impel deeper cooperation with China, against what both Moscow and Beijing consider a declining, yet still dangerously flailing and over-reactive, America.
Beijing has struck numerous agreements with Brazil and India that bypass the dollar. China and Russia have also set up ruble-yuan swaps pushing America’s currency out of the picture. But if Beijing and Moscow – the world’s largest energy importer and producer respectively – drop dollar energy pricing, America’s reserve currency status could unravel. That would undermine the US Treasury market and seriously complicate Washington’s ability to finance its vast and still fast-growing $17,500 billion of dollar-denominated debt.
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