One of the most significant trends in the global economy in recent years has been the decline of the US dollar. It is a trend that has far reaching consequences for all the inhabitants of this planet.
It is partly because the US dollar has declined so much in value since 2003 that the price of oil — a lot of the oil trade is denominated in the dollar— has shot up. According to an analyst, “against a basket of currencies, the dollar has fallen by 25 percent since 2003, and considerably more since its peak in 2001.” What this means is that the dollar value of a barrel of oil today is much more than it was 5 years ago. Of course, there are other reasons why the price of oil is escalating.
Since oil is the lifeblood of contemporary civilization, the steep price hike has impacted upon all areas of life. With the higher cost of living, not only the poor but even those who are at the lower echelons of the middle class are struggling to make ends meet. The increase in food prices on a global scale, for instance, is linked to oil. The rising costs of both food and oil— it has to be reiterated— are directly connected to the decline of the dollar.
The adverse consequences of the declining dollar go beyond oil and food. Since the US runs huge trade deficits with countries like China and Japan, the declining dollar will not be in the interest of the latter. Neither will it be in the interest of countries which hold most of their foreign exchange reserves in the dollar. A number of them are already feeling the effects of the diminishing value of their reserves.
It is not surprising therefore that countries are converting part or whole of their reserves into other currencies, notably the euro. Some oil producing countries are also switching to other currencies. Expectedly, these moves have further weakened the dollar.
The US is not happy about this, though a weaker dollar may boost its exports and reduce its trade deficit marginally. The US knows that it is the dominant position of the dollar that enables it to exercise global financial and economic hegemony. It is because the dollar is the world’s reserve currency that the US has so much political clout in the international arena. This is why the dollar has been described as one of the two principal pillars of US global hegemony, the other being its military power.
It explains why the US leadership was so incensed when the late Iraqi President, Saddam Hussein, abandoned the dollar and switched to the euro in 2000. He also converted Iraq’s 10 billion reserve fund at the UN to euro. Commentators have argued that it was partly because of these decisions that the US and British governments pushed hard for the invasion of Iraq which at the time of the currency switch was already under tough UN sanctions.
Since 2002, Iran, currently the world’s second largest oil exporter, has converted all its foreign exchange reserves to a basket of currencies, excluding the dollar. In the second quarter of 2008, it went further and decided to denominate its entire oil trade in currencies other than the dollar. Is it any wonder that Israel, the US’s closest ally, has become more bellicose in its threat to attack Iran in recent weeks? Of course, as in the case of Iraq, there are also other motives behind attempts by the US, Israel and their other Western allies to bring Iran to its knees.
For the US, any move by a major oil exporter to wean itself away from the dollar is a direct challenge to its hegemonic power. Look at its continuous manoeuvres to undermine Venezuela’s democratically elected president, after Hugo Chavez placed a portion of his country’s oil trade out of the dollar’s orbit. It is not difficult to fathom why the US is so obsessed with perpetuating the oil-dollar nexus. It is partly because most of the oil trade —- more than any other trade — is denominated in the dollar that the US currency is able to dominate the world economy. In fact, it was the US’s agreement with Saudi Arabia in 1974 that the oil trade would be denominated in the dollar which gave a huge lift to the dollar’s reign. The US will fight tooth and nail to ensure that that reign continues.
But the supremacy of the dollar must end if US hegemony is to end. US hegemony— like all hegemonies in history— has been a bane upon humanity. It has brought death and destruction to millions through wars and conflicts. It has widened the gap between the ‘have-a-lot’ and the ‘have-a-little’ right across the globe. It has reinforced global authoritarianism and stymied the growth of global democracy and international law. It has given rise to antagonism and antipathy between civilizations, especially between the Western and Muslim worlds. It has denied equality and respect to civilizations and cultures outside the West. It has led to global environmental degradation and a global climate crisis. Global hegemony has also provoked a vile and vicious reaction from a fringe within the Muslim world in the form of global terror.
This is why citizen groups in both the Global South and the Global North should campaign with greater vigour to bring global hegemony to an end by weakening the role of the dollar as the world’s reserve currency. More oil producing countries should be persuaded to switch from the dollar to other currencies. In international trade, countries should shift to other currencies which are more conducive to their short and long term interests. If foreign reserves are still in dollars a concerted endeavour should be made to convert them into other currencies which will at least protect their value. Citizen groups should also encourage their governments and corporations to accelerate regional trade and investment which could be conducted in their own currencies. Some Latin American States, such as Cuba, Venezuela and Bolivia are showing greater enthusiasm for regional cooperation with the ultimate goal of ensuring that their continent is liberated once and for all from US dominance and control. Cuba and Venezuela have even stepped up barter trade, the former’s health expertise in exchange for the latter’s oil which minimises altogether the role of money. Intra-ASEAN (the Association of Southeast Asian Nations) trade and investment have also increased significantly in recent years With the emergence of China and India as important economic players, ASEAN and other states in Asia should consider using one of the major Asian currencies for regional trade and not continue to depend upon the US dollar.
Quite apart from all these efforts, citizen groups should demand comprehensive reform of the international financial system. This is the right time to make this demand. They should make it abundantly clear to all and sundry that the dollar can no longer serve as the world’s reserve currency. It has to be replaced. Shouldn’t we start working now — even if it takes a few decades— towards a common world currency which is not linked to any particular nation or region that can be used for international trade? Why shouldn’t we let our imagination run ahead of reality at a time like this?
Dr. Chandra Muzaffar is President of the International Movement for a Just World (JUST) and Professor of Global Studies at Universiti Sains Malaysia, Penang, Malaysia.
27 June 2008