Though the phrase “There is no alternative” is usually associated with Margaret Thatcher and her unflinching defence of democratic capitalism, its origins go back to the 19th century, to Herbert Spencer. Laying the groundwork for the Iron Lady, Spencer first used the exhortation “There is no alternative” to criticise the growing softness in conservative thinking in Britain in the 1880s.
Spencer — and not Charles Darwin — was also the originator of the phrase that best describes the evolutionary process of natural selection: “survival of the fittest”.
Today the phrase “There is no alternative” — often known by its acronym Tina — is frequently used to suggest there is no alternative to the US dollar. In many of the functions performed by money, this still holds true. But, as noted below, the US dollar is no longer all-conquering in all those functions. This is especially so in Asia.
Why is this subject of paramount importance? Because not only will weakening the centrality of the US dollar in the world of finance affect our everyday lives but, by first questioning and then undermining the exorbitant privilege the US enjoys through the dollar’s status in today’s world, it would fundamentally risk reorienting the structure of the global economy. This would initiate collateral damage across multiple parts of the prevailing geo-economic order. Such disruption is unlikely to happen in an orderly manner.
What would happen if the US were no longer able to settle its nearly $1-trillion annual current account deficit with printed money mostly in the form of Treasury bills and bonds, IOUs that nearly everyone knows will never be repaid? It would be akin to putting spending restrictions on the previously unlimited credit card that US consumers have thus far made use of while shopping for goods and services from abroad.
This “overspending” on those goods and services — the US’s current account deficit — plays a gargantuan role in the pattern of today’s world trade: the US’s almost $1-trillion deficit in 2024 will account for more than 60% of all such deficits worldwide. Remember the US only makes up 4.2% of the world’s population.
Were the US currency’s dominance in financing this imbalance in trade to be compromised, this status decay would probably, albeit hesitantly, spread to the realm of capital. No wonder Donald Trump is livid about the (very remote) possibility of BRICS establishing its own currency: such an instrument might represent the thin end of a wedge that could eventually widen into questioning the US dollar’s paramountcy in every sphere, but most especially in the ability of the US consumer to live on the forever credit granted to it by foreigners.
Read more: Unseating the US dollar is not in the pipeline for BRICS countries, SA reiterates
Income statements and balance sheets
Those of you who have read my previous pieces will know that, in broad terms, I characterise global finance as a Venn Diagram of interlocking ecosystems.
One ecosystem is centred on the world of finance, which is itself focused on the US as the undisputed capital of capital: US stocks make up a 65% weight in MSCI’s All Country World Index, with the Bank for International Settlements noting that US bonds total 42% of all debt securities outstanding worldwide.
The other ecosystem is centred on the world of trade, where there is now no clear leader. Yes, China produces more than 30% of the world’s manufactured goods, but trade flows still mostly “speak” US dollar. That said, in Asia, they “speak” dollar increasingly with a Mandarin accent.
These twin ecosystems of the Venn Diagram intersect — very logically — where trade account meets capital account: in a nation’s balance of payments. On a global scale, they overlap where the aggregate surpluses of nations running current account surpluses meet with the aggregate deficits of those running current account deficits.
By accounting definition, the opposite is also true: they overlap where the aggregate deficits of those nations running capital account deficits meet with the aggregate surpluses of those running current account surpluses. (Thus, by running more than 60% of the world’s current account deficits, the US receives from abroad more than 60% of the world’s capital account surpluses, effectively the world’s net internationally mobile savings. If the dollar is to remain “stable”, these two aggregates must broadly cancel each other out.)
One colleague insightfully suggests that the trade ecosystem leans towards focusing on the income statements of the world whereas the capital ecosystem is more geared towards understanding the balance sheets of the world.
Thus, when viewing the world through the lens of capital, the US does indeed have a strong balance sheet. However, balance sheets cannot stand alone: offsetting the US’s lopsided and deficient income statement requires the continued forbearance of the “kindness of foreign strangers”, especially through the ongoing provision of their net savings.
As noted, the ecosystem of capital lives and breathes the US dollar: few conversations involving capital are held in global finance where the denominator is not the currency of the US. And, until recently, the same could be said of the ecosystem of trade: for much of the period since 1945, there has been no practical alternative to trade financing other than via the medium of the US dollar.
But, while the dollar is still the dominant player in today’s world trade facilitation, it is no longer the only “oxygen” in that trade ecosystem. This is very apparent in Asia’s trade patterns. Perhaps this is unsurprising given that China’s foreign trade today is conducted more using the renminbi than the US dollar. India too is settling an increasing percentage of its foreign trade in both rupees and other Asian currencies. Greater Arabia is also open to such arrangements.
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The role of money
Economists will tell you that there are four functions of money: as a store of value, a unit of account, a standard of deferred payment, or a medium of exchange. When one distinguishes the use of the US dollar according to each of this quartet, the Tina claim, while still strong in some functions, is weakening in others.
These four functions of money can — very approximately — be apportioned between these two ecosystems as follows. In that of capital, money can mostly be seen as:
- A store of value: a currency that maintains its value over time, allowing assets denominated in that currency to achieve the same end.
- A unit of account: a monetary counting mechanism used especially in the measurement of the capital value of financial assets.
- A standard of deferred payment: a monetary denominator of debt capital, allowing goods and services acquired “today” to be paid for “tomorrow”.
Very approximately, the above three functions are most likely to affect the measurement and composition of the asset-related “balance sheets” of the world.
By contrast, in the ecosystem of trade, money can mostly be seen as:
- A medium of exchange: money that is acceptable in exchange for goods and services, domestically and internationally.
Again, very approximately, this function is most likely to record the trade-related “income statements” of the world.
Of course, there are overlaps between function and ecosystem — a Panda bond is a loan denominated in Chinese renminbi being used as a standard of deferred payment — but for now these overlaps are generally the exception.
However, the “muddying of the water” at the edges of the four functions is growing, a fact largely unseen and so unacknowledged by those who inhabit only the ecosystem of capital and speak only the language of the US dollar (most probably, this will include some of the readers of this article).
A healthy travel schedule — beyond the West and especially into Asia — makes the realisation of these growing exceptions much easier to see and comprehend. Much of Africa and Latin America are also fast moving into China’s commercial orbit, and similar exceptions in these two regions are now increasingly commonplace.
Read more: In the rapidly shifting world of geoeconomics, the Rest is getting tired of the West
Before commenting on how each function is currently performing, it is important to note that there are competing financial agendas being pursued by foreigners, agendas that collide before determining the overall international standing of the US dollar. The most important distinction is between how foreign official institutions view the US dollar in contrast to foreign private sectors.
As a general observation, foreign private sector institutions — dominated as they are by players investing money mainly within the ecosystem of capital and especially into the US as well as Western multinationals — have a much more favourable view of the US dollar than do foreign official institutions.
That noted, within the latter category, Western official institutions are still more inclined to support the pre-eminent status of the US dollar than are those foreign official institutions outside the West and again, especially in Asia.
It is Asian central banks that have been, in recent years, by far the largest buyers of gold to add to their foreign exchange reserves, thus qualifying the previous norm of automatically recycling their current account surpluses into US dollar assets. Indeed, many of these Asian official institutions now shy away from being, on a net basis, not just a buyer of US equities but even of US fixed interest instruments: Bank of China holdings of US Treasuries peaked at $1,300-billion in 2014 but are now down to $772-billion.
So how is the status of the US dollar faring as a store of value, a unit of account, a standard of deferred payment and as a medium of exchange?
These questions will be answered in Part Two. DM