The dollar's 70-year dominance is coming to an end

The advantages this system bestows on the US are enormous. “Reserve currency status” generates huge demand for dollars from governments and companies around the world, as they’re needed for reserves and trade. This has allowed successive American administrations to spend far more, year-in year-out, than is raised in tax and export revenue.

By the early Seventies, US economic dominance was so assured that even after President Nixon reneged on the dollar’s previously unshakeable convertibility into gold, amounting to a massive default, dollar demand kept growing.

So America doesn’t worry about balance of payments crises, as it can pay for imports in dollars the Federal Reserve can just print. And Washington keeps spending willy-nilly, as the world buys ever more Treasuries on the strength of regulatory imperative and the vast liquidity and size of the market for US sovereign debt.

 It is this “exorbitant privilege” – as French statesman Valéry Giscard d’Estaing once sourly observed – that has been the bedrock of America’s post-war hegemony. It is the status of the dollar, above all, that’s allowed Washington to get its way, putting the financial squeeze on recalcitrant countries via the IMF while funding foreign wars. To understand politics and power it pays to follow the money. And for the past 70 years, the dollar has ruled the roost.

 This won’t change anytime soon. Something just took place, though, which illustrates that dollar reserve currency status won’t last forever and could be seriously diluted. Last week, seven decades on from Bretton Woods, the governments of Brazil, Russia, India and China led a conference in the Brazilian city of Fortaleza to mark the establishment of a new development bank that, whatever diplomatic niceties are put on it, is intent on competing with the IMF and World Bank.

 It’s long been obvious the BRICs are coming. The total annual output of these four economies has spiralled in recent years, to an astonishing $29.6  trillion (£17.3 trillion) last year on a PPP-basis adjusted for living costs. That’s within spitting distance of the $34.2 trillion generated by the US and European Union combined.

 America’s GDP, incidentally, was $16.8 trillion on World Bank numbers, and China’s was $16.2 trillion – within a whisker of knocking the US off its perch. The balance of global economic power is on a knife-edge. Tomorrow is almost today.

 …The dollar’s status is a big question. Judging the outcome is more akin to star-gazing than scientific economics. But the establishment of this BRIC Development bank, timed to coincide with the anniversary of Bretton Woods, is an audacious and significant move. The world’s emerging giants now have thumbscrews on the West.