Currency swaps weaken dollar hegemony

It’s not just Ukraine, Taiwan and Gaza. From tensions in the Horn of Africa to echoes of Baltic sabotage in the Black Sea – and from the Sahel through Bangladesh to bloody repression in Latin America – there is nothing inherently reductive in claiming that no major conflict today, be it hot or cold, can be fully understood without reference to the wider context of a shift away from US hegemony, and Washington’s efforts to counter the same.

People are like, “Yeah, always blaming the US, just because it runs a globe-spanning empire which dominates the planet with violence and coercion and works continuously to keep all the other countries subjugated to it.”

It’s like saying, “sure we’re trapped in a room with a tiger, and yes your leg is missing and you have a large bite out of your torso, but you can’t blame ALL that on the tiger.  Some of it might be Steve’s fault. Steve’s kind of a jerk.”

Caitlin Johnstone

Two interconnected realities have underwritten that hegemony. The first is America’s massive arms-spend for wars far from its shores and borders. This reality is enabled by the second: a monetary ace card, courtesy of Bretton Woods 1944 and Nixon’s 1972 decoupling of dollar from gold, creating what French premier Valéry Giscard d’Eistang called an exorbitant privilege. ¹

The three countries most in the cross-hairs of the hegemon are China, Russia and Iran. All have powerful deterrents. Iran, should she be left with nothing to lose, can and would annihilate the Western beachhead which is Israel, its nuclear status notwithstanding. ² For their part neither China nor Russia have invested in the means of wreaking destruction on far off countries but, on top of being nuclear powers, both have defence capabilities – highly sophisticated AI and clear superiority in hypersonic missiles – to make overt US attack an act of extraordinary folly. This, alas, does not rule it out but that’s a story for another time. The scope of this post is limited to Washington’s second sphere of hegemony, dollar dominance.

As noted in a September post, erosion of that last poses an existential threat not to ordinary Americans but to a rentier  oligarchy whose responses are increasingly extreme and, even on their own terms, irrational. As in a Greek Tragedy, that oligarchy’s moves to halt dollar decline serve only to expedite it. The non Western world – having noted the seizure, on pretext after risibly transparent pretext, ³ of dollars and even gold held in the West by Venezuela, Russia, Iran, Afghanistan and other states incurring Washington’s ire – is concluding that a shift from dollar dependence is an idea which has found its time.

However difficult and risky that shift.

Until recently the global south saw no viable alternative, but Western defeat in Ukraine, and a BRICS alternative nearing critical mass, ⁴ are changing the game. Is now the time, governments in the “developing world” are asking, to ease ourselves free of Uncle Sam?

This is the overarching context not only for global conflict but for shifting allegiances in arenas for now esoteric and easily overlooked, but laying down strong markers for the attentive. Take last week’s news of a currency swap line between China and Saudi Arabia (KSA). It follows hard on the heels of China’s brokering in March, to fury in Washington, of a rapprochement between KSA and Iran, and was analysed this week in the Indian business daily, The Financial Express:

On November 21, 2023, China and Saudi Arabia solidified their economic partnership by entering into a local-currency swap agreement amounting to approximately $7 billion. This move comes at a time when nations in the Middle East and emerging markets are actively seeking avenues to divert a greater portion of their non-oil trade away from the US dollar …

Read the full piece here … 

A swap line allows a country to borrow in one currency, while agreeing to repay in a different currency. Here it means KSA borrowing dollars from China, to be repaid in yuan.

The significance is examined in a post by Tom Luongo, a chemist turned market analyst who blogs at his Gold Goats ‘N Guns site. ⁵ He takes us back ten years to when China threw a lifeline to a Russia under economic assault from the Obama Administration following Crimea’s vote to leave Ukraine. Bear with me while I set the scene.

1. Taking the dollar off the gold standard was seen at the time as a blow to US prestige and sold as a temporary measure to offset the costs (heroically and unfairly borne by the lead nation of the ‘Free World’) of its war on the Vietnamese people. It took some time for the unprecedented advantages of a floating dollar, with no attendant loss of reserve status, sank in. As a 2019 LSE paper, Weaponising the dollar, put it:

   Problems of excessive dollar dependence were recognised at Bretton Woods. The leverage of a dollar-dependent world was also recognised, [Keynes’ proposal of a neutral ‘bancour’ got short shrift from the Americans] and characterised by Valery Giscard d’Estaing in 1974 [a year or two after Nixon decoupled dollar from gold] as “an exorbitant privilege”, enabling the US to run trade and fiscal deficits virtually without limit. [Demand for fiat, “magic money tree” dollars was assured whatever the health of the US economy.]

   But efforts to punish Cuba, isolate the Soviet Union and China, and starve communist regimes of funds were an integral part of Cold War strategy, designed  to avoid war while precipating economic collapse, which happened in the Soviet sphere but not in China. The present strategy of weaponisation seems by contrast to be designed to provoke a war. (Edited)

   Those efforts to “starve communist regimes of funds”, reprehensible in their own right, did much to cement the notion – as deeply held by the politically clueless as it is widely invoked by the politically self-serving – that “socialism has been tried and doesn’t work”.  The LSE paper is a short and easy read which explains dollar weaponisation and offers prescient clues as to to why, over the four years since its publication, the global south has grown more restless in its search for an out.

2. See former UN weapons inspector (and before that US Marine Intelligence Officer) Scott Ritter’s twenty minute podcast: Iran can destroy Israel with non nuclear weapons in a regional war. Much the same point is made by former UK diplomat Alastair Crooke at 12:40 in this video.
3. The pretexts for US confiscations of foreign reserves are not in the main transparent to a propagandised West but the lesson – it’s not safe to hold dollars – is not lost on leaders in the global south.
4. The Bezos owned Washington Post rubbishes such talk. BRICS raging against the dollar is an exercise in futility, it sagely informs us, while Britain’s Financial Times warns of sinister intent in Beijing. I’m minded not only of these geniuses’ resounding failure to see 2007/8 coming, and of the fifteen years they’ve spent predicting imminent economic meltdown in China, but of the 1963 retort of Mandy Rice-Davies apropos Christine Keeler and John Profumo: well they would say that, wouldn’t they?
5. Thanks to steel city reader Jams O’Donnell for alerting me to Tom Luongo’s post.
6. The infantilisations of Western media made it easy to zero in on Ms Nuland’s dismissive “fuck the EU”  and so side-line the more significant revelation of a US Assistant Secretary of State ruling on the acceptability or otherwise of potential replacements for Ukraine’s incumbent leader. Still, that “fuck the EU”  does shed useful light, all things considered, on the intellectual and moral stature of the Straussians.
7. The Crimean referendum saw 97% of an 83% turnout vote to join the RF. That said, vote or no vote it is inconceivable that Moscow would let a US puppet close in on its naval base at Sevastapol. No great power, least of all the USA in comparable circumstances, could allow such a thing.
8. US-KSA relations, often referred to on this site as a Faustian Pact, merit a dedicated post. Here it suffices that a toxic cocktail – of (a) KSA’s exceptionally high dollar exposure, (b) Washington’s long history of throwing yesterday’s allies under a bus and (c) a recent upping of its willingness to launch monetary attacks – leaves Riyadh increasingly wary. The 2017 proposal, reported in Israel’s liberal Haaretz, to buy Russia’s formidable S400 air defence system – a deal KSA ultimately withdrew from in the face of carrot and stick inducements we can only guess at – should be seen in this light. (A hedge-betting Ankara already had S400s despite Turkey being in NATO.) As should this year’s game-changing rapprochement with Iran. In no other non Western state are moves, however partial or hesitant, to loosen ties with the US empire more telling.
9. In October 2023 a paper – Saudi Arabia: Background and U.S. Relations – by the DC based Congressional Research Service reported a 2:1 trade deficit ($23bn imports, $16bn exports) with the KSA. Sanctions by Washington – which has a way, on show recently when India declined to sanction Russia over Ukraine, of suddenly discovering human rights violations the moment a regime displeases it – could suck dollars out of the KSA overnight. While the announced swap line of $7bn is small potatoes, as a shot across the bows of Wall Street and Washington it serves as the  canary – if you’ll permit me a third metaphor – in a coal mine whose methane levels are fast rising.