Strategic forecasting is not an exact science, especially when it involves phenomena whose behavior is shaped by several variables. Hence, exploring the future of monetary hegemony is a challenging task that requires considering both geopolitical and financial factors. After all, history provides countless examples that international financial governance and monetary affairs operate like mirrors that reflect the parallel correlation of geopolitical forces prevailing in the international system. That usually means that hegemonic reserve currencies are issued by the most powerful states. Thus, in this case the corresponding projections need to transcend the disciplinary scope of traditional economic science.
Even though it can be enduring, the global monetary order needs to be understood as a process that is always in flux. Far from being static, it is continuously evolving. In other words, there is no such thing as a perpetual hegemony, either geopolitical or monetary. Therefore, even though the current position of US dollar seems solid at a first glance, alternative prospects deserve to be taken into account, particularly in a context in which the greenback faces structural challenges and is being targeted by a myriad of Washington’s strategic rivals.
Some analysts hold that an international monetary transition can be relatively peaceful and gradual. However, since the stakes are too great, it would be unwise to assume that the outcome will not be shaped by an increasing level of geopolitical tension. In fact, it looks like – more than ever before – strategic competition is unfolding in the field of finance. It could even be argued that the first shots have already been fired in this highly unconventional battle space.
Nevertheless, it is not clear what will happen once the American dollar is no longer the dominant currency. There are several alternative plausible scenarios that need to be examined. In order to envisage them, it is essential to highlight that nature abhors power voids. Moreover, it must be pointed out that the conditions mentioned in these scenarios are not necessarily mutually exclusive. Actually, elements of them can co-exist.
First Scenario: Continued Supremacy of the US Dollar
The United States is still the world’s most powerful national state. Its might is felt in the domains of military affairs, geopolitics, intelligence, industry, energy, science, culture and technology. It is even described as a “financial superpower.” Even if its position has been eroded by setbacks, imbalances, and weaknesses, it is foreseeable that the strength of the US dollar will not be matched anytime soon.
Furthermore, as a matter of policy in terms of grand strategy, Washington has done everything in its power to preserve and enhance the dominant role of its currency as an international unit of account, store of value and medium of exchange. The American dollar is undeniably the lifeblood of trade, banking, business and finance all over the world. Besides, it must not be forgotten that even though the greenback is a fiat currency, it is backed by US power projection capabilities, including a formidable nuclear arsenal. Likewise, even hypothetical contenders are rather feeble. At least for the time being, their critical mass lacks a strong gravitational pull. Their implementation would demand a substantial degree of technical and political collaboration – something that for the time being appears elusive.
Moreover, the fact that monetary reserves held by central banks are mostly denominated in US dollars provides a disincentive against attacks on the US currency. In other words, “sinking” the greenback might – either directly or indirectly – trigger dire financial, economic, and fiscal dislocations that could engulf the attackers themselves.
Nonetheless, appearances can be deceiving. Potential challengers could become increasingly bold and assertive in order to establish their own parallel financial and monetary circuits. it must be borne in mind that sometimes countries sacrifice their legitimate economic interests for the sake of victory. Plus, Moscow and Beijing know that the role of the dollar is one of the cornerstones of US national power, so it is hardly surprising that it is in their crosshairs.
One way or another, the prospect of prolonged geopolitical and financial unipolarity is a profoundly ahistorical notion. In the grand scheme of things, trying to freeze structural change is a demanding endeavor that requires vast amounts of military, economic, and political resources. In other words, it paradoxically represents a self-defeating struggle. The power of empires inevitably declines after reaching their zenith. Accordingly, they are often the victims of their own success. Their currencies follow a similar trajectory.
Moreover, the dollar’s position is severely compromised by irresponsible monetary policies – like endless quantitative easing – and a growing spiral of indebtedness, something that is eroding the confidence it entails, an attribute that used to be taken for granted. In fact, some analysts claim that the US dollar has been on life support since the global financial crisis that broke out more than ten years ago. Therefore, there are reasonable doubts and uncertainty about the monetary reliability of the US dollar in the long run.
Additionally, the ultimate fate of the dollar hegemony depends on foreigners and their willing to underwrite such an “exorbitant privilege” in an interdependent world. Yet, Washington is not exactly powerless and it is logical to assume that it will not relinquish such an asset without a fight. In this context, even covert operations – which are often undertaken in order to derail or at least to delay structural trends – constitute a tool that can be used to protect the supremacy of the greenback in the coming decades.
Finally, another card that the US can play in case of dangerous geo-financial turmoil is to resort to its gold reserves in order to back the greenback with the yellow metal once again. This would entail a return to representative money.
Second Scenario: Replacement by another National Currency
As a matter of statecraft, China has been assertively promoting the internationalization of the yuan, also known as renminbi, a measure intended to enhance Chinese national power in the realm of finance. In fact, it has used many tools – including institutional frameworks, bilateral trade, the development of financial hubs, business platforms and investment agreements – in order to advance its international position and projection. Beijing regards the general atmosphere of global financial and monetary uncertainty as a window of opportunity to strengthen its currency and to downgrade the currency of its top strategic rival: the greenback.
Therefore, China intends to challenge the US monetary hegemony, even if that means the creation of a system of parallel structures conceived to bypass the dollar. That would increase Chinese geoeconomic weight in commodity markets, the international flow of capital, institutional influence and national prestige. Hence, the rise of the renminbi is a sign of China’s increasing economic strength.
Accordingly, the yuan is currently positioned as a rising currency, but it is still too early to tell whether it is capable of overtaking the US dollar as the world’s reserve currency. It can potentially become a competitive challenger, but one that would have to overcome substantial structural issues if it intends to catch up.
If Beijing wants to remake global finance, then it would need to forge a consensus with other economic heavyweights. After all, being the issuer of the world’s top reserve currency is a privilege that entails important costs, including the responsibility to act as a senior military provider of international security. This is usually related to the development of formidable maritime power projection capabilities, a condition that is necessary in order to ensure the flow of international trade through secure sea lanes. Hence, any great power that is interested in crippling the hegemonic role of the greenback needs to carefully calculate the repercussions associated with the geopolitical burden that comes with being the issuer of the world’s dominant currency.
Third Scenario: Geo-Financial Bipolarity or Multipolarity
Even if it is not entirely clear who or what will eventually inherit the dollar’s coveted position, the possibility of a transition towards a bipolar or multipolar monetary order is real. In fact, more than one monetary unit can act as reserve currency. A remarkable precedent was the time when the Byzantine solidus and the Islamic dinar co-existed as international reserve currencies for several centuries during the Middle Ages.
This configuration would mean the bifurcation of the current financial and monetary order into two or more competing systems, each with its own dominant currency, gold reserves, financial institutions, banking entities and payments mechanisms. This would reflect the emergence of multiple geopolitical and economic nerve centers. In other words, the current monetary hegemony would be followed by a more fragmentary structure. However, in this case the dollar could still act as the reserve currency of one of these blocs. Accordingly, this would likely mean an increased financial Lebensraum for currencies like the euro, the yuan and the pound sterling, amongst others.
Finally, one of the main consequences of this would be pronounced regionalization. Local currency blocs could also rapidly constitute regional trade blocs.
Fourth Scenario: Rise of a Multilateral Currency
It is possible that the US dollar loses its privileged status without being replaced by a clear successor. A possibility that arises from this reasoning is the birth of a multilateral currency. The most feasible candidate would be something called “Special Drawing Rights,” an artificial asset created as a unit of account by the International Monetary Fund, and whose value is tied to a basket of several currencies. Hence, they have been described as the monetary equivalent of Esperanto.
However, the adoption of SDRs as the new international reserve currency would have to face significant obstacles. For instance, they can only be used by states, but not yet by either companies or individuals.
In geopolitical terms, this idea might be attractive in case the global balance of power is reasonably stable. Moreover, it would prevent the structural distortions commonly associated with unipolar monetary hegemony. In fact, this option’s underlying basket could even be widened so it also includes the currencies of emerging markets. Therefore, the emergence of SDRs as international money offers valuable opportunities for those interested in disabling the dollar’s supremacy, but without worrying about the disruption of financial stability.
Interestingly, Libra – the cryptocurrency Facebook intends to launch – would represent a multilateral currency, but one which is managed by a private company. Only time will tell if such plans go as expected, especially considering that this project has sparked heated debates about its implications for national security, personal privacy and the challenges it poses in terms of crafting a monetary policy related to currencies issued by national states with diverging geopolitical and economic interests.
Fifth Scenario: A New Gold Standard
In the grand scheme of things, the so called ‘demonetization’ of gold – the quintessential monetary substance throughout history – is a fairly recent development. The latest version of a global gold standard was dismantled when President Nixon refused to deliver gold in exchange for dollars, as was agreed when the Bretton Woods framework was forged through multilateral negotiations.
However, the prospects of an eventual restoration of a gold standard are being discussed nowadays. This is hardly surprising after the sharp financial crisis that took place a decade ago. Other factors worth taking into account are the intrinsic volatile nature of contemporary financial markets – which are vulnerable to several kinds of disruptions – the systemic accumulation of unpayable debts, and the implementation of monetary policies that, far from correcting structural imbalances, are actually deepening them. This reality fuels reasonable doubts about the long-term prospects of fiat money, in general, and the monetary hegemony of the US dollar, in particular.
Besides, the redefinition of certain financial dynamics as issues that are being dealt with in terms of high strategy because of their ramifications in the field of international and national security is also a phenomenon that cannot be overlooked. Even though the dollar’s position still seems safe for the near future, the hypothetical rise of a parallel financial order anchored to gold as a monetary unit is a possibility that needs to be considered, especially when there are geopolitical incentives to diminish the dollar’s global dominance.
It is too early to tell if gold can replace the US dollar at some point within the next few decades, but at least it is clear that the aureus metal’s singular attributes enhance its prospects. After all, it has become once more an attractive asset for national states, companies, and even individuals.
In the debate concerning the future of monetary hegemony, it has been argued that a global financial order based on gold as its cornerstone could lead to an international system more stable in terms of geopolitical tension or even military conflict. For instance, the late Swiss banker Ferdinand Lips explained that, since gold is an asset whose value is determined by its natural scarcity, it promotes fiscal responsibility and sound monetary policies, which would limit the possibility of resorting to endless credit and perpetual debt – both closely associated to fiat money – in order to artificially inflate military budgets and, consequently, war expenditures.
If gold reassumes a central role in worldwide financial markets as a result of a multilateral consensus negotiated amongst the great powers – this could happen in the aftermath of a new major financial crisis of international proportions – some players would evidently be better positioned than others. In this scenario, perhaps the golden rule would apply. In other words, the players that control the largest gold holdings would have the chance to define the essential rules in the structural rearrangement of global financial governance.
Sixth Scenario: Stateless Currency
The recent proliferation of cryptocurrencies – a product of the Fourth Industrial Revolution – is seen by some as a game-changer that has given credence to the idea that, at some point, one of them could eventually become the new dominant global currency. So far, none of the cryptocurrencies that have been launched is issued by a central bank. In other words, they are not backed by the national power of any state. Without such fundamental ingredient, it is unlikely that a stateless currency can become the world’s top monetary standard. However, that does not mean that governments will not be able create cryptocurrencies as digital twins of their own paper money.
Moreover, the exchange rate of existing stateless cryptocurrencies (like Bitcoin) is so volatile that –instead of acting as reliable and stable stores of value – they operate like speculative assets. Hence, it seems that at least the first generation of cryptocurrencies will only act as a medium of exchange in very specific markets, including some of the deepest corners of the so-called “dark web.”
Seventh Scenario: Systemic Meltdown
As seasoned financial experts explain, financial and monetary crises are a lot like nuclear chain reactions. If they are not effectively contained in a timely manner, their impact can be catastrophic in terms of depth and scope. Thus, this is by far the most ominous scenario. An abrupt monetary collapse can unleash widespread chaos derived from a widespread destruction of wealth.
Actually, there are noteworthy precedents. For instance, the fall of the Roman denarius was not only a key driver in the decline of the Roman Empire. It was also a process that played a role in the breakdown of society and order that ended up in a stark civilizational regression.
This sounds almost apocalyptic, but that does not make it impossible. In fact, an escalating geopolitical conflict fought in the financial sphere can provoke this very outcome, even if that is not what the contenders intended in the first place.
When it comes to assessing what to expect in the esoteric realm where geopolitics meets finance, there is no crystal ball. It is therefore hard to anticipate with a high degree of accuracy what the future will bring regarding the present monetary hegemony. However, it is possible to assess the prospects of plausible scenarios. The scenarios described and examined above illustrate that there are several possible outcomes, all of them heavily shaped by complex geopolitical, economic, financial, and even technological realities.
*This article was originally published on February 20, 2020.