The dollar as a universal power

by René Zeyer

“Follow the money” – this advice is said to have been given to the Watergate reporters whose research led to the resignation of US President Richard Nixon by their most important informant. In fact, this was an invention by the Hollywood film adaptation of this splendid journalistic achievement. Money is the most important fuel in the world economy today. More precisely, the US dollar is. But like any fuel, it is also explosive and dangerous.

Anyone who in former times protested against US imperialist hegemony was threatened with gunboats, leather jackets or, more abstractly, with the “big stick”. This is still the case today, but there is another instrument of domination, which plays an increasingly more important role, and has the advantage that it is not as martial as a military intervention. Amongst others, Swiss financial institutions had to painfully experience this in the tax dispute with the US. When they were confronted with allegations of having conspired with their US clients to evade taxes, the obvious first response was to seek clarification in court as to whether this charge was rightly or wrongly made. Even experienced bankers were not really aware of the existence of the International Swaps and Derivatives Association (ISDA). This organisation publishes model contracts that regulate and automate the continual flow of dollars between banks. And these name an indictment in the US against a house of money as an immediate termination clause.

Dominant in trade

For this reason, no single financial institution worldwide has yet dared to resort to legal action against allegations made by US authorities. In the constitutional state of the US this is of course available to any defendant. In the case of banks, however, going to court means immediate death, as this would cut off the money house concerned from the trade in dollars. And nothing works without dollars. Foreign exchange transactions with the US dollar on one side account for more than 80 per cent of all transactions worldwide. The euro, yen and franc trail far behind. All trading in US dollars must run through a clearing house in the US, even if the trading partners have nothing at all to do with the US. In addition, the most important raw materials such as crude oil, gold or silver are invoiced in dollars. Absurd but true: If, for example, Russia delivers natural gas to Ukraine, the deal will be settled in dollars.
At the latest since, after the end of gold dollar convertibility in 1973, the US agreed with Saudi Arabia that oil billing would take place exclusively in the US currency, the greenback has been dominating the world’s most important commodity; hence we refer to the petro dollar. And not only conspiracy theorists appreciate the theory that the Iraqi dictator Saddam Hussein did not provoke his downfall by the invasion of Kuwait or poison gas attacks in his own country, and certainly not by the alleged production of weapons of mass destruction, but by the announcement that he would convert Iraq oil trade from dollars to euros.
Although there is no reliable data base on the dominance of the dollar in world trade as a whole, it is obvious that it is by far the most commonly used currency – also bilaterally outside the US. As an investment currency, for example, the US dollar dominates the balance sheets of the world’s most important central banks. In global currency allocation, the dollar accounts for over 60 per cent of foreign exchange reserves. For all US dollar transactions, the central banks depend on access to the Fedwire US clearing system, which is operated and controlled by the US Federal Reserve.
These are all technical processes that normally take place in a silent and automated manner, like in a machine room. Worldwide, forex trading has by far the largest volume in this context; we are talking about more than $ 5 trillion daily (which is a number with twelve zeros).
It should be noted, however, that in all this, the US has the red button at its command; just press it once and the machinery comes to an immediate stop. With fatal effects on the entire economy of a country affected. Cuba is the country which has the longest experience with the prohibition to use US dollars. Ever since 1961, the use of the US currency has been forbidden in connection with this last island of socialism. Anyone who violates this ban must reckon with heavy fines, a painful experience not only known to the Swiss bank Credit Suisse, which paid a fine of $ 526 million in the year 2009, for violating US sanctions against Cuba, Libya and Iran.

Threat of sanctions

In the context of the resumption of sanctions against Iran, the use of dollars is being made more difficult for that country. In addition, the head of the Iranian central bank, Valiollah Seif, has even been added to the list of terrorist supporters. The US accuses the Iranian National Bank of facilitating payments in dollars to the Lebanese Shiite militia Hizbullah. According to US Secretary of State Steven Mnuchin, this is a terrorist organisation. The attempt to stop the use of the dollar for all forms of terrorist or criminal activity, such as drug trafficking, may be welcome, but US control of the world’s most important currency has further implications. Russian oligarchs subject to US sanctions, such as Viktor Vekselberg, also realise this.
As a kind of collateral damage, no financial institution, and no company in the world, dares to trade with a partner who is affected by US sanctions. Here, the ban on the use of US dollars has an additional viral effect, as it would theoretically be possible to replace it with euros, yen, francs or any other convertible currency. But since basically every internationally active company also trades in the US or in the dollar area, it will rightly fear indirect sanctions, even if its actions are completely legal within their own national legal framework. The European Union is currently facing this dilemma, as it intends to maintain the nuclear agreement with Iran but will be unable to protect European companies maintaining their trade relations with Iran from US reprisals.
As long as US military and – more importantly – monetary dominance remains, there will only be one world power. Given the state of the eurozone, the euro will be unable to establish itself as a second world currency alongside the US dollar. Nor will the yen, not to mention the ruble. Only the complete convertibility of the Chinese currency renminbi will create a bipolar world of money. Until then, there is no cure against the United States’ supremacy.    •

Source: “Basler Zeitung” of 18 May 2018

(Translation Current Concerns)