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With this series, trying to understand the possible futures of the US dollar supremacy, we have analysed the currency functions (medium of exchange, store of value, unit of account) that make the dollar the necessary currency together with the challenges looming over the petrodollar system, the perspective of the renminbi as a leading international currency and the possible impacts of cryptocurrencies over the international monetary system.
We shall now outline the main lead scenarios (and eventual sub-scenarios) regarding the future of the US dollar supremacy, out of the corresponding set of scenarios covering the whole range possibilities for the future. In the next article, we shall focus our attention on the scenario we deem more interesting in the way it would unfold.
The variables we used to identify our set of scenarios have been highlighted performing a revisited influence analysis with Gephi. Starting from a conceptual map designed on yEd and obtained out of our previous analytical articles, we then used the influence analysis included in Michel Godet’s structural analysis, however revisited to take advantage of the latest centrality measurements available in social network analysis, to select the most relevant variables for our scenarios for the future of the USD supremacy.
Coherently with what we explained in the first two theoretical articles, the most important variable is the attractiveness of USD-denominated assets and their international use, which is both a cause and an effect of the USD supremacy (Leonardo Frisani, “Towards the End of the US Dollar Supremacy? Global Currency Fundamentals” and “Towards the End of the US Dollar Supremacy? How Currency Internationalization Impacts State Power“, 31 Oct 2017 and 20 Nov 2017, The Red (Team) Analysis Society). This variable is crucial because foreign gathering of domestic currency is “the equivalent of an interest-free loan to the issuing country” (Cohen 2015: 21). The major other variables highlighted by our revisited influence analysis are: China continuing to grow fast, the decline of the US economy relative to China’s, the deepening of China’s commercial depth, geopolitical shifts and, naturally, the attractiveness of renminbi-denominated assets.
The main scenarios structuring the whole set are obviously two: the end of the US dollar supremacy, with all its consequences, or its perpetuation. The first scenario then leads to two sub-scenarios: a multipolar currency world, or a renminbi-dominated international monetary system. In the framework of this series, where we have decided to focus only on selected scenarios, rather than to present the whole set covering the entire range of possibility, as we would do in the instance of commissioned work for a specific actor, we did not take into deeper consideration the eventuality of a wider use of the euro, as the EU does not seem ready to resolve its political contradictions. Relatedly, the rupee, India’s currency, has not been included in our detailed analysis because New Delhi will not be a genuine global powerhouse in the foreseeable future. Its economy is still roughly 8 times smaller than the American one (International Monetary Fund 2017). Thus, this case is outside our timeframe.
Scenario 1: The greenback still king
President Donald Trump changes his trade policy approach and international investors welcome the news. Recent tax cuts boost the economy while the Fed provides fiscal stability and a stable inflation. America’s internal market remains the most important in the world as China’s economy slows down. Meanwhile the U.S. global influence is reasserted and finally welcomed anew. The US dollar continues to be considered a safe haven. The petrodollar system, albeit dented, remains operative.
The US dollar therefore continues to be the pillar of the international currency system.
Scenario 2: The end of the US dollar supremacy.
The US dollar domination over the international currency arena comes to an end. This can happen in very different ways. We shall mainly focus on the details involving different terms for our scenarios.
Scenario 2.1: A multipolar currency world
The US economy continues its due course. President Trump’s policies, especially those regarding trade and taxes, however worry investors that, consequently, start to diversify their currency portfolio. China’s growth continues to be strong and steady and its internal market becomes increasingly attractive. Beijing also implements reforms that help the further internationalization of the renminbi. Geopolitical shifts accelerate the break-up of the petrodollar system and oil is increasingly denominated in other countries’ currencies, chiefly the renminbi. The EU strengthens and distances itself from the US, Japan and the UK have a healthy economic and the markets are eager to invest in assets denominated in their currencies, Russia diversifies away from oil and the ruble stops to be effectively anchored to the price of the black gold, India and Brazil grow fast and healthily and, notably towards the end of our timeframe, their currencies start increasingly being adopted. This state of affairs lay the bases for a multipolar currency world.
Scenario 2.2: The rise of the renminbi.
President Trump’s trade policies are finally detrimental to the international stance of the US dollar, while the fiscal stimulus helps growth in the short-term but overheats the system in the medium one. The Fed can not prevent the US economy to be in serious difficulty. The US internal market shrinks and international investors lose their faith in the US. China continues to open up, successfully implements the reform needed to boost the renminbi adoption at the global level. Beijing also further deepens its trade relations with international partners. The petrodollar system collapses as China continues to be the main importer to sustain its impressive energy demand. Beijing takes the place of Washington as the broker of international politics. We enter an era where the renminbi is the cornerstone of the international monetary system.
The next article will focus on the scenario we consider the most interesting in the way it could unfold and its impact and novelty.
About the author: Leonardo Frisani (MA Paris) focuses currently on challenges to the US Dollar supremacy. Beyond that, his specialisation is in European and Russian history, and his main interests are in geopolitics, macroeconomics, climate change and international energy.
Featured image by Geralt, Public Domain.
Cohen, Benjamin J. (2017) Currency Power. Understanding Monetary Rivalry. Princeton: Princeton University Press.
Arcade, Jacques, Godet, Michel, Meunier, Francis, and Roubelat, Fabrice, “Structural Analysis with the MICMAC Method & Actors’ Strategy with MACTOR Method,” The Millennium Project: Futures Research Methodology, Version 3.0, Ed. Jerome C. Glenn and Theodore J. 2009, Ch 11.
International Monetary Fund (2017), Report for Selected Countries and Subjects, World Economic Outlook Database.