Dollar as the reserve currency

Galbraith  discusses history and some possibilities for the future in this time of flux.

the dollar has by now been de facto the primary world reserve asset for over a hundred years

On August 15, 1971, the curtain came down on the gold-exchange standard, and it rose – though we did not know it yet and thought otherwise at the time – on the neoliberal era. Devaluation, export controls, the wage-price freeze, and fiscal stimulus à outrance – these were Keynesian and even wartime measures that seemed to signal a mass conversion of Richard Nixon’s coterie to full employment, price stability, and managed trade.

it fell apart in 1973 when the stimulus ended, controls were weakened or lapsed, oil prices spiked, and the resulting general inflation was met by high interest rates, spurring a new slump in 1974. At that point pre-Keynesian dogmas re-emerged in an updated toga.

up to now the dollar-based order has been supported mainly by instability elsewhere and the lack of a credible alternative or compelling reason to create one, or where such reasons are felt, the ability to do so. With a large and liquid market for debt, the US Treasury bond remains the refuge of first resort even when a financial upheaval originates within the United States, as was the case with the sub-prime debacles of the 2000s and even today.

Enter China 

The China that one sees with trained but unfiltered eyes does not so easily fit into … simple boxes. It has the following key characteristics:

• it is a very large, administratively decentralized, internally-integrated economy, regaining in these respects attributes that were already familiar to Adam Smith;
• it has a plethora of organizational forms – public, private, joint venture, state, provincial, municipal, township and village.
• These are financed by a state-owned banking system that provides elastic support to activity in the interest of maintaining social stability, a paramount goal, and that has a large portfolio of non-performing loans to show for it.
• The state at various levels enjoys substantial control of the land, hence has the capacity to earn land rent, and is capable of spurring and directing major investment projects, in urban construction, water management, electrical power and mass transportation, including roads, air travel and most recently high-speed rail.
• The larger economy is capable of absorbing technologies from the West as well as of creating its own, and of meeting the standards of Western markets, thus having solved the consumer goods quality-control problem of historical socialism, and, finally,
• China remains somewhat insulated from the predations of international finance by a large foreign currency reserve and the continued application of capital controls.

The Chinese model has succeeded, by trial and error, over a bit less than 50 years, in eliminating mass poverty, in creating an urban world that is largely secure, with an educated, healthy population. In 2020 it succeeded in mobilizing that population to defeat the Covid-19 pandemic – so far, anyway – as no Western society, except New Zealand, was able to do.

Conclusion: A Dual System Has Arrived

A tentative conclusion is that the dollar-based financial system, with the euro acting as a junior partner, is likely to survive for now. But there will be a significant non-dollar, non-eurozone carved out for those countries considered adversaries by the United States and the European Union, of which Russia is by far the present leading example – and for their trading partners. China will act as a bridge between the two systems – the fixed-point of multi-polarity.