The global financial crisis in 2008 and the unprecedented quantitative easing that followed it triggered a debate over sustainability of the USD as global reserve currency. The simultaneous fiscal crisis in peripheral Europe, especially in Greece, also created doubts over the sustainability of the European Union with a common currency. The debate subsided materially over the next one decade, as the US Federal Reserve (Fed) and Government initiated a corrective action to taper the monetary stimulus and balance the fiscal account. The situation in Europe also improved as the troubled economies of Greece, Italy, Portugal, Iceland, Spain etc. stabilized due to the combined efforts of the European central Bank (ECB), IMF and respective national governments. The European economy even endured the BREXIT rather calmly.
The onset of Pandemic in early 2020 however undid most of the corrective actions undertaken by the central banks, multilateral agencies and governments. The US Government and Fed unleashed a much larger stimulus, substantially expanding the Fed balance sheet and fiscal deficit; while many major economies, especially the emerging economies, managed the situation in a much more calibrated manner.
Notwithstanding the fiscal and monetary profligacy of the Fed and US government, the USD has endured its strength relative to most emerging market currencies. The broken supply chains across the world due to the pandemic led to severe shortages of everything leading to very high inflation worldwide. The suffering in most emerging economies due to inflation created a sentiment against US dominance on the global economy.
A strong US economic response to the Russian aggression in Ukraine since early 2022, including freezing USD assets of many Russian businesses, further exacerbated this sentiment. Russia and its allies like China and Iran; and major trade partners like India have shown interest in development of a non-USD trading mechanism. The traditional US allies like Saudi Arabia, Mexico, Brazil and even France have raised questions on continuing US dominance over global economic order, besides showing interest in non-USD trading mechanism.
Though the details of a non-USD global trade mechanism are still sketchy, the debate is intense. Maybe like many previous occasions, this debate would also subside as inflation peaks out; US Fed and government embark on a credible course correction; Russia withdraws its forces from Ukraine and a sense of normalcy returns to the Sino-US trade relations.
Or maybe over the course of next decade, we shall see the emergence of a neutral currency that may act as the medium of exchange for international trade not involving the US or its close allies, while the trade with the US continues to be done in using USD.
Or maybe we shall see multiple trade blocks using non-USD currencies to settle trades within their respective blocks; while using USD or some other acceptable currency for trades outside their block.
All these conjectures are presently predicated on the premise that the US as a global power is declining in terms of its technological edge; financial strength and geopolitical supremacy. There is evidence of economies like China and India gaining technological edge; and the US losing its geopolitical supremacy. In the past one decade, both India and China have shown remarkable progress in digitization of their economies and space program to back faster and superior digitization. The complete failure of the US led alliance in resolving Russia-Ukraine conflict; China bringing Saudi Arabia and Iran closer; and Afghan Taliban pursuing a foreign policy independent from the US and its ally Pakistan influence are some signs of declining US geopolitical supremacy. It however remains to be seen if this decline is structural or is just a reflection of poor confidence of the global community in the present US leadership.
I posses no competence to comment on sustainability of the USD as global reserve currency for long. Therefore, it would be preposterous on my part to speak about impact on the global economy, should USD lose its only “global currency” status. Nonetheless, I must say that this will be a major global event, no less than a world war. And in a war like situation strong leadership is what matters the most.
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