Much of the world's trade is conducted in dollars. This fact is broadly connected with the idea that the USA is not a nation like other nations, but is somehow above the fray. It acts as world policeman and world banker. This is basically a result of the settlement that ended WWII. There are some signs that these arrangements are gradually coming undone.
The advent of a US president who believes in "economic nationalism" suggests that the cost of being exceptional is becoming too much for the US to bear. The size of US government debt gets greater and greater and no relief is in sight.It is difficult to see how there could be. Without going into details, the US is caught in a number of inter-connected vicious circles that keep pushing the debt up.
A new arms race seems to be starting which suggests that world leaders are worried. This is also bound to be astronomically expensive. The US can get away with being heavily in debt for a while because of its special position. Money flows into the US from many places, but a number of these creditors, most notably China, must now feel that the US is not a wholly reliable place to store its credit. China is gradually increasing its challenge to US sea power and as that story develops, it is going to look less and less wise for China to have so much of its asset reserve invested in its rival.
These observations raise important questions.
- If China took its investment out of the US, there would almost certainly be a sharp drop in the dollar's value. When less people want something, the price falls. Alternatively, if the US tried to prevent China pulling out, by say, freezing Chinese assets in the US, other investors in the US would probably take flight.
- If the value of the dollar became more volatile, major international traders would look elsewhere for a reliable currency in which to do business. This could be the euro, the yen, the yuan, or some other arrangement. However, the loss of its position as banker to the world would itself have a severe effect upon the US economy.
- When there is a serious dip in the US economy it has major repercussions for everybody else. Since the last crisis, some countries have struggled to insulate themselves a bit better, but there can be no doubt that a downturn in the US is a downturn everywhere.
The basic questions therefore are
- Can the world go on indefinitely with the present system? - Probably not.
- If this is the case, are countries already quietly trying to wean themselves off dollar dependency? And, if so, is this not likely to hasten the coming of the tipping point? Also, if it becomes more publicly obvious that countries are pulling out, how big is the risk of a panic?
- How soon and how drastic is the transition likely to be? - One fears that it could be very sharp indeed. Is a soft landing even possible?
It may well be that we are living in something of a fool's paradise at the moment, assuming that all will go on as it always has done, while the foundations are weakening towards a point of sudden collapse.
A modern money system is essentially a system built on faith. At the moment, the world trading system rests heavily upon faith in the ability of the USA to go on supporting the system. If that faith falters, we are all in big trouble.