Dethroning the almighty dollar

Why would nations voluntarily seek to avoid, or at least explore workarounds, for the most liquid currency with the broadest and deepest sovereign debt complex in the world? My thesis focuses on two prevailing reasons, although there are certainly other explanations.

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First, the recent experience of Russia. Shortly after its invasion of Ukraine Russia had most of its links to the dollar-based trading network SWIFT severed, as well as seeing some $300 billion in US dollar reserves frozen. Those sanctions–unwittingly, I believe–provided a cautionary tale even to current and long-time allies of the United States. The risk that getting on the wrong side of a US policy position could result in a nation’s being effectively shut out of global commerce. This may not have occurred to many nations previously. Clearly many are aware of it now. …

Thus I see the weaponization of the dollar and an increasingly error-fraught monetary policy regime as providing incentives for nations to explore means of alleviating their dollar dependence.

[There’s an argument that it’s better to use our economic leverage rather than our military leverage to punish malefactors. In this case, it’s difficult to argue that we could stand by and do nothing while Russia committed an imperial act of aggression against a peaceful neighbor on the specific and explicit basis of conquest and annexation. However, this action has consequences too, as Earle makes clear. The bigger risk is likely China and its calculation on when it makes sense to use their own leverage on the dollar, though. — Ed]

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