Lan Cao (Chapman University, Dale E. Fowler School of Law) has posted Currency Wars and the Erosion of Dollar Hegemony (38 MICH. J. INT’L L 101 (2016 Forthcoming)) on SSRN. Here is the abstract:
A currency war is being waged against the dollar-based international economic system established in Bretton Woods after World War II. Much attention has been paid to the use of force and threats to the peace in Iraq, Afghanistan and Syria. But there is little law scholarship that examines threats to the dollar and the dollar-based system. And yet, challenging a country’s currency means challenging it on multiple fundamental fronts. Stocks, bonds, commodities, derivatives and other investments are all priced in a nation’s currency. If the dollar is undermined, the American economy itself and the existing international economic system are also undermined.
The U.S. dollar has unquestionably been the world’s international reserve currency for decades. But its supremacy is being contested. Dollar hegemony has been part and parcel of American economic and military power. It has given the U.S. government and U.S. consumers enormous benefits. Americans traveling abroad can be assured that dollars will be accepted and welcomed, often without having to convert dollars into local currency. Most international trade is set in dollars, even if the exports are not destined for the U.S. Oil is priced in dollars so oil-consuming countries must accumulate dollars, mostly by exporting their goods and services to receive dollars needed to pay for oil. The world’s central banks hold trillions of dollars of U.S. treasury bonds. The dollar is “as good as gold,” although it has not been backed by gold since 1971 when the U.S. stopped redeeming dollars for gold at a fixed rate of $35 dollars an ounce. Still, the demand for dollars and dollar securities has remained high. Consequently, the interest rate the U.S. has to pay on these securities is relatively low. This allows Americans to have easy access to credit – live beyond their means and borrow at lower interest rates for homes and automobiles. The U.S. government can finance larger deficits longer and at lower interest rates even during the 2008 financial crisis.
For reasons discussed in the Article, including Quantitative Easing (“QE”) pursued by the U.S. Federal Reserve as a response to the financial crisis in 2008, dissatisfaction with the dollar-based system has deepened. Frenetic dollar printing via QE, resulting in U.S. export of inflation abroad, has spawned food riots and revolutions in the Middle East and exacerbated preexisting cracks in the system. In the past, many countries have resented the dollar’s “exorbitant privilege” but have obediently lined up to support the system. Things are different today. U.S. allies are less dependent on the U.S., and there are serious economic rivals (Russia and China) acting in concert with countries such as Brazil, India, and South Africa (BRICS) to pose a serious challenge to the dollar-based system.
This Article examines various events that might seem unconnected and disparate but which together, once the dots are connected, reveal not only fractures in the system but also concerted efforts to undermine the dollar. Russia, China and other countries have begun establishing alternative non-dollar-based systems. Bilateral and multilateral trade is being conducted by various countries in a currency other than the dollar. But more threatening to the dollar’s supremacy is the decision by many to sever the dollar-oil link, which would decrease global demand for dollars. BRICS countries have established a new development bank to rival the World Bank and the IMF, using their own currencies rather than the dollar. China has been accumulating gold and even Western European allies are repatriating gold stored in the U.S. back to their territories.
The dollar and other rival currencies may be up one moment and down the next. The purpose of this Article is to look at long-term trends and warn about fundamental fault lines and global headwinds that are not immediately obvious – all the more necessary when the economic snapshot of American markets, and relatedly of the dollar, appears more rosy than it really is.