War and dollars

Little by little, we are getting closer to the first global conflict in the post-Cold War period. Two certainties that helped maintain world stability during the Cold War (although dangerous in their own right) are gone: the nuclear balance of fear ("mutually assured destruction") and the supremacy of the US dollar, which many consider a financial nuclear weapon.

These instruments of explosive physical and financial power had a special, common property: none of them could be realistically used.

Using those instruments essentially meant self-destruction due to ricochets, collateral damage, and unintended consequences. And that is why the power attributed to them was abstract rather than concrete.

Yes, the problems arising from the dominance of the dollar have been visible for a long time. And so much so that people who predicted his doom are ignored like the boy from the story who shouted: "Wolf, wolf!" In the late 1960s, the economist and Nobel laureate Robert Mandel rightly spoke out against the theorists of the fall of the dollar (who in his day were mostly living in France) and published a triple prediction that seemed incredible at the time. Mandela's forecast looked like this: the USSR would collapse, Europe would move to a single currency, and the US dollar would remain the leading international currency during his lifetime. In all three cases Mandel was right (he died two years ago).

However, the dollar is more sensitive to financial turbulence today, which is especially noticeable in bond markets that are critical of the long-term US government debt. Some of these problems are, of course, technical. But they are also political at the same time. If it weren't for the uncertainty surrounding the long-term US fiscal position, the markets would be calm. Today, the administration of President Joe Biden realizes some state investments, and that at the very moment when the US Congress has completely lost its functionality. This raises doubts about the government's ability to maintain the work of state services and pay off debts. Increased fiscal obligations (which help boost the pace of economic growth) and political gridlock are likely to become long-term features of US governance.

The dollar proved vulnerable also because the rest of the world began to better understand the basics of the US strategy to protect Ukraine from Russian aggression; their Middle East diplomacy (now derailed by Hamas); and also in efforts to preserve the myth in the Taiwan Strait.

It is, of course, about the dollar. As Juan Sarate, the former US Deputy National Security Advisor, noted ten years ago, sanctions work very well against small and relatively isolated states; however, the greater the goal, the greater the damage that sanctions cause to the one who introduces them.

Another reason for the newly detected vulnerability of the dollar is that many Americans have become extremely suspicious of hyper-globalization and hyper-financialization. Speaking publicly on behalf of many, Nobel laureate Angus Deaton has published a book in which he harshly criticizes other economists who have contributed to the creation of a world so unequal that it has begun to provoke revolts and revolutions. In his opinion, the situation in contemporary America is reminiscent of the disintegration of society in the last years of the USSR.

The presidential elections in the USA in 2024 will unite all these elements of dollar chaos - especially if a recession starts at the same time. With so much financial turbulence, this scenario will increase the appeal of those who advocate for America to abandon the leading role and political positions it has held since 1945. It should be noted that the Biden administration has preserved most of the tariffs introduced under Trump, and the US negotiations with the EU on reducing tariffs and opposing steel exports from China in accordance with WTO norms have - failed. There is a very real danger that both Democrats and Republicans will base their election campaign on promises of a turn against globalization.

It is obvious that the international community needs to improve the rules governing financial diplomacy along the lines of the norms developed during the Cold War nuclear arms race. In 1969, the world's superpowers began taking steps to make the world safer under the Strategic Arms Limitation Treaty (SALT). That long process led to the signing of the Strategic Offensive Arms Reduction Agreement (START I and II). Deterrence and limitation of the use of nuclear weapons remain a top priority for the international community, but this agenda must be complemented by the goal of preventing financial self-destruction.

To stop the transformation of global financial channels into "nuclear weapons" we must return to the themes that dominated the agreement after 1945. At the Bretton Woods conference and the UN conference in San Francisco, economy and security were seen as two sides of the same coin. However, the close relationship between the UN and the Bretton Woods institutions (IMF and World Bank) had a downside. The five largest shareholders of those international financial institutions were supposed to be the five permanent members of the UN Security Council. However, the right of veto that was given to the permanent members of the SB destroyed the effectiveness of that body, and now the spirit of the right of veto entered the Bretton Woods institutions in the form of the rule of voting by qualified majority ("super majority").

Therefore, the simple majority decision-making model would enable the establishment of a judicial procedure that would deal with the consideration of financial penalties (including confiscation of assets) for rogue states such as Russia. Negotiations on the limitation of financial armaments could follow the negotiations on SALT, and their culmination would be an agreement on the reduction of financial armaments.

This must be one of the main priorities today. Increasing the reliability of the international monetary order will make it possible to increase security, create a strong global capacity to deal with incidents that disturb the peace, and stop the alarming increase in the frequency of such cases.

The author is a professor of history and international relations at Princeton University

Copyright: Project Syndicate, 2023. (translation: NR)