US abusing global dominance of dollar

The Nobel Prize-winning economist Ronald Coase argued in 1960 that if property rights are defined, secure and transferable, individuals will ensure that resources go to their highest valued uses.

Professor Daniel Benjamin, from the Property and Environment Research Center in Montana in the United States, drew on Coase, in 2006, to reason vigorously that clear, enforced property rights are fundamental in shaping prosperity.

A pivotal aspect of modern property rights is that they must be protected against any irregular expropriation by government, Benjamin said, stating a widely accepted view across the developed world and well beyond.

Since World War II, modern economies depend hugely on having reliable access to a reserve currency that offers a stable trading regime. Despite the insistent championing, dating back centuries, by the West of the paramount importance of property rights, there is deep and growing concern that Washington has now begun an assault aimed at the very foundations of this hallowed regime.

There are two primary facets of this ambush: the way in which the US dollar is being openly exploited, and the more direct attack on the core security expectations associated with property rights. In both cases, this recklessness is aimed at securing certain fervently framed political ends.

Many commentators have looked askance, over the last several years, at how Washington has increasingly misused the immense economic power that comes from running the world's established international currency.

After the Russia-Ukraine conflict began, Jim Rogers, a US investment commentator, said that the US dollar is now being used as an instrument of war－and that it is set to die. Around the same time, Anthony Rowley, a veteran journalist specializing in Asian economic and financial affairs, castigated the Western world for what he argued was a resort to frenzied, vengeful sanctions, many dollar-related, in response to the same war.

As the terrible conflict in Ukraine has developed, an intense rash of property confiscations related to very wealthy Russians living in the West have unfolded.

The role of money, as a primary store of wealth, is now consciously being undermined. Consider two recent examples of rash, currency-based political leveraging that shows what Washington thinks is acceptable today, once it "unfriends" certain governments.

In February, Washington commandeered $3.5 billion, or about half of all Afghanistan public reserves held in the US, to help the families of victims of the Sept 11,2001, terror attacks. This astonishing confiscation was legalized by using a White House executive order. The Taliban government in Kabul, meanwhile, is still denied access to the other $3.5 billion, while wretched, mass misery in Afghanistan has reduced families to selling their children in order to secure food.

Next, according to the Financial Times, Russia's foreign exchange reserves of over $600 billion were recently largely rendered useless (a positive development, apparently) following the imposition of currency-related sanctions by the US and others, as the conflict in Ukraine began.

As Rogers said, the world's reserve currency is no longer what we thought it was－that is, a neutral store of value－but has been put to work as a weapon of war. The core aspects of property rights specified by Coase－definition, security and transferability－no longer apply without reservation to all owners of US dollars. Certain owners may now abruptly discover that their rights have been gravely compromised because they fall into a denounced category, solely determined by Washington.

Yet the US assumes that the rest of the world will go along with its own currency-based imperial behavior, and will tolerate whatever may follow. Other states have been advised (or threatened) that similar high-handed sanctions may be applied if they, too, are precipitously downgraded by the White House. Meanwhile, discussion is already underway about draining those Russian reserves to repair Ukraine.

We should briefly note, too, how Washington has used the status of the US dollar not just to borrow cheaply but also to borrow massively increased amounts: When you lend to the United States, you lend to a borrower already burdened by eye-watering, increasing levels of debt.

The US is progressively confirming that it is an untrustworthy steward of the world's reserve currency. For now, though, there is no choice but to live with the dominant international standing of the US dollar. The incentive to work on substitutes has, however, been hugely amplified. Various experiments are already afoot, including: potential direct currency swaps (India and Russia, for example);and the further development of sovereign-backed digital currencies. People are also studying the creation of new ratings agencies.

The renminbi, as the currency of the world's largest trading economy, is almost certain to play some role in this coming transition, especially once it becomes fully convertible. One primary lesson to be learned from this alarming, politicized use of the US dollar is that any future replacement needs to be robustly managed as a neutral global currency.

How long will it be before we see change? Sooner than expected, says Rogers. We still cannot sharply perceive the end of the international dominance of the US dollar. And the beginning of that end is not yet clearly in view. But we are most probably witnessing the end of the beginning of this decline.

The author is a visiting professor on the faculty of law at Hong Kong University.