The Global Economy in Turbulent Times

CHAPTER 66 US Dollar: Cracking at the Seams¹

My previous chapter dealt with the international monetary system (IMS): why the world monetary order is in disorder, and why free movement of capital underpinning the IMS is increasingly being challenged. This chapter concerns the basic anchor of the IMS—reserve currency role of the US dollar—and why it will give way to rapidly rising pressures toward multipolarity, that is, the concurrent pulling of forces emanating from more than two growth centers. According to the new World Bank report,² “Global Development Horizons 2011—Multipolarity: The New Global Economy,” the World Bank expects the newly emerging BRIIKs (Brazil, Russia, India, Indonesia, and Korea) to join the ranks of China as new drivers of growth toward a multipolar world by 2025. It expects US$ to lose its solitary dominance in the global economy by 2025 as the euro and renmimbi (RMB) established themselves on an equal footing. Today, none of them has a currency that is used for reserve accumulation, invoicing, or exchange rate anchor. The status quo remains centered on the US dollar. But change is in the air. In 1991, G-3 (the United States, eurozone, and Japan) accounted for 49 percent of world trade, and the BRIICKs (including China) only 9 percent. By 2010, G-3’s share had fallen to 29 percent, while BRIICKs’ share rose beyond 30 percent. Without doubt, the postwar structure reflecting the dominant position of advanced nations is in the midst of fundamental change. ...