Mohammed Tawfiq Allawi
22 November 2017
The US dollar has been fully covered by gold since the adoption of the Bretton Woods System after World War II, there was a real fear in the decision taken after the Second World War in the cover of 100% of the dollar of gold so as not to repeat the same scenario when the paper dollar was collapsed a century and a half ago when the dollar was printed without cover. But in 1971, US President Nixon canceled the gold cover in the so-called Nixon Shock and completely floated the dollar (flotation) in 1973. And the dollar remained strong even after the cancellation of the gold cover depending on the strength of the US economy.
America has been able to impose its economic and monetary hegemony on the world because of the adoption of the dollar as the main currency in global trade, and with the fact that gold represents real value, but difficult to use in business transactions. For example, if a country wants to import goods from another country and pay the value of the goods in gold then it must transfer a quantity of gold by cars or aircraft and provide adequate protection, which in turn takes a period of time and high costs, while the same process can be paid in dollars through informing the US Federal Reserve Bank to transfer the dollar electronically and instantly from the importer’s account to the exporter’s account. The entire process of transfer by Federal Reserve Bank known by the FedWire between two countries through the US does not take more than a few seconds using the RTGS system that entered Iraq also a few years ago.
The problem with this method of exchange of goods in US dollars is the complete control of the US government on all accounts in US dollars, whether on the level of individuals, institutions or countries, so the Soviet Union in the mid-fifties of the last century transferred large amounts of dollars from the United States to Europe through European and Russian banks in Europe so that the dollar has become outside the control and supervision of the US government lest the US government freeze the Russian currency reserves in dollars during the Cold War, and the currency was known as Eurodollar, yes a lot of US banks and institutions then had converted the dollar to Eurodollar to Europe for tax reasons and other reasons. It could even be the Eurodollar stock in America but not subject to the authority and instructions of the US Federal Reserve.
To find out America’s ability to exploit its hegemony over the dollar, it has frozen the entire Iranian reserve of the dollar, which was normally deposited in the US Federal Reserve after the US hostage crisis at the US embassy in Tehran for more than 35 years. These funds were released only after the nuclear deal agreement with Iran.
Now it is China’s role. It is true that the US national product (GDP) is about 19.5 trillion dollars, which is about double the Chinese GDP, which is about 11.8 trillion dollars, but the US exports to the world is about half (about 0.6%) of China’s exports to the world, the Chinese economic growth is three times that of the US economy, and the amount of Chinese debt to the United States of more than 1.25 trillion dollars, and on this basis , the Chinese economy is expected to outperform the US economy in its strength by 2028.
At the end of 2016, Yuan-RMB, at the request of China, became part of a basket of currencies from the International Monetary Fund (IMF) reserve, but became the second currency after the dollar.
China’s reserve surplus is between $ 3.1-3.5 trillion, while the US Treasury deficit at the end of 2017 is about $ 19.8 trillion; the Chinese government’s gold reserves in 2001 were around 400 tons. China then began to buy gold and extract gold from its mines and forbids the export of gold and has not announced its gold reserves now, but economists estimate it to be around 4000 tons.
On September 1, 2017, the world was surprised by an unofficial article in Japan’s largest and most important economic newspaper, the Japanese Nikkei Asian Review, recalling that China plans to buy oil in the future in the Chinese Yuan, which is backed by gold. Whether this article is true or not, whether it is a test balloon or not, there has been no condemnation by the Chinese government and hundreds of articles have been written and dozens of media interviews have been conducted on this matter.
China has made clear in several international meetings and deliberations in international forums that it wants to make the Yuan a global currency equivalent to the US dollar. This means that the fall of the one equation in the so-called petrodollar, the purchase of oil around the world in US dollars only, as agreed between Henry Kissinger and the King Faisal bin Abdul Aziz, 1973, China is the largest importer of oil in the world and therefore can impose its conditions if it wanted, and is expected, as suggested in international forums, the possibility of taking such a step in the next year, 2018.
China’s tendency to impose its currency as a global currency is not only economic dimension, but also has political dimensions. Any deep political dispute between China and the United States enables the United States to freeze the Chinese reserve of the US dollar. If we know that two-thirds of the Chinese reserve is in dollars at the Reserve Bank of the US Federal Reserve, meaning that America, if it differed greatly from China or had any military conflict, could strike China with a two-thirds freeze on its financial reserves. Therefore, China has to find another way to save its currency.
US dollar advocates say no matter how strong China’s economy is, global confidence in the dollar will remain because US fiscal policy is more transparent and more prudent than China’s fiscal policy. Yes, they say the US economy is weaker than the Chinese economy in about ten years, then the dollar could weaken , however, is unlikely to collapse, and they claim that if the Yuan becomes strong, China will lose its advantage in that its goods are cheap and its great ability to compete.
If we review history, the Spanish dollar of pure silver was the first world currency traded in the seventeenth and eighteenth centuries, and then the sterling became the dominant currency of the world economy from the nineteenth century until the Second World War, where it was replaced by the dollar , now the Chinese Yuan is going to rise and may will take the place of the dollar in the future, and as the US dollar collapsed when it was printed without cover at the end of the 18th century, it may come a day when the dollar may collapse and is still printing without cover.
All of what we have said is merely future analysis of global economists, prospects and expectations. The real future remains unknown, but all possibilities are still present and expected. The countries of the region have to pursue , including Iraq where some countries have hundreds of billions of dollars deposited in the US Federal Reserve, global economic and monetary developments to to take the necessary steps for the benefit of their countries in the right time .
Mohammed Tawfiq Allawi
Rawabet Center for Research and Strategic Studies
The above topic can be found in some international media over the last ten weeks on the following links :