Suddenly, US assets are less attractive. Aggressive easing measures by the Federal Reserve has significantly diminished the USD’s rate advantage in an era of its own ballooning debt. Is the reign of the USD over and the rise of the European Union connected to a global reshuffle of power and wealth – accelerated by a pandemic?
It has taken just a few months for the world to change as dramatically as it has, and in so doing, weaknesses in the global system that no-one cared to scrutinise seemingly appeared from nowhere. But, of course, they were always there. Just like in 2008, when economists warned of the American bank-led financial crisis that plunged the world into economic and political chaos, the pandemic – warned about for years by scientists, also took us all by surprise. When the Brexit vote was delivered in June 2016 and Trump’s election victory was confirmed later the same year – it surprised everyone – including even, the people who voted for them.
Who would have predicted in 2015 that well over half the world would be ruled by populist leaders and that the USA would stoke a dangerous trade war with China forcing allies across the world to start picking sides?
Who would have predicted that wearing facemasks in a pandemic would polarise entire nations on the basis of freedom when civil society stood by for years and watched governments and police forces deploy illegal society-wide privacy abuses through facial recognition systems?
Today, we should be mindful that big change is on the agenda of every influential government in the world.
Another surprise is the question mark over the US dollar as the world’s reserve currency. Many speculate that as over 60 per cent of all global foreign exchange transactions are conducted in USD, it would not be possible for it to be replaced. And even if it was, by what? Yet, many organisations and countries are now using non-dollar denominated methods of exchange. China, Russia, India and many of their various allies are moving further and further away from the USD. The EU has found ways to trade in alternative currencies to bypass America’s overuse of financial sanctions. These sanctions, exercised as little more than economic leverage for political advantage now worry many countries around the world (1).
Gold has surged predominantly because America has failed the pandemic test. The trajectory of the precious metal for the near future looks set and has already confidently marched past its all-time high of $1917 an ounce in 2011. Many countries without the benefit of stable currencies and political systems are now buying gold and shying away from US bonds – with predictions that government gold-holding will double in the next 20 years. And in 20 years, there will likely be no mineable gold left to dig out (2).
Stephen Roach, the American economist who serves as a senior fellow at Yale University’s Jackson Institute for Global Affairs, was formerly chairman of Morgan Stanley Asia and its global chief economist. Roach says that – “An overvalued US dollar is ripe for a sharp decline, owing to America’s rapidly worsening macroeconomic imbalances and a government that is abdicating all semblance of global – or even domestic – leadership. And the European Union’s approval of a joint rescue fund is likely to accelerate the Euro’s rise.”
Harold James – Professor of History and International Affairs at Princeton University and a senior fellow at the Center for International Governance agrees and says “the US is like the Soviet Union in its final years“. James echoes Roach by saying that – “The United States is reeling from catastrophic failures of leadership and long-suppressed socioeconomic tensions that have finally boiled over. For the rest of the world, the most important development is that the hegemony of the US dollar may finally be coming to an end.”
The downfall of the USD would see America itself in rapid decline. We should be mindful that the Pound Sterling was a global reserve currency up to 1956 before Britain’s catastrophic decision over Suez. Back then 55 per cent of global reserves were held in Sterling. America took full advantage and forced the Pound out. Today Sterling accounts for just 4.3 per cent of global reserves.
The 2015 Nobel laureate in economics, Angus Deaton, believes that America’s malevolent and incompetent president has perfectly demonstrated the failure of not just of money management but of democracy – “Inequality is often cited as the cause of many social ills. As if America’s economic inequality weren’t bad enough, its institutionalised representational inequality has now severely undermined the effectiveness of its democracy.”
Another surprise is that predictions that the political arrangement of the European Union would fracture and its currency the Euro would disintegrate, have been replaced with a renewed confidence due to its handling of the Covid crisis. It rose to the occasion when it needed to the most.
Its defining moment was the historic agreement reached in July on a €1.2 trillion European Union recovery fund and loans structure – dubbed Next Generation EU. It changes everything. As Roach says, it will have – “profound and lasting implications for both an overvalued US dollar and an undervalued euro.”
It’s obvious to say now but 2020 should be seen as the year that changed everything. America has squandered any opportunities that a world in crisis may have provided. The European Union no longer sees the USA as a trusted ally.
Roach confirms that the Next Generation plan will draw critical support from large-scale issuance of pan-European sovereign bonds. To interpret – this means that “Europe is now on the map as the backer of a new risk-free asset in a world that up until now has only known only one: US Treasuries.” In the meantime, global reserves of the Euro has just reached 21 per cent and for every per cent it rises, holdings in the USD will fall.
In the meantime, as the EU gets both politically more potent and has a rock-solid plan for a post-Covid world, Britain – once the world leaders in diplomatic manoeuvring has taken sides – and picked the loser. In political circles, senior Conservative party MP’s are now quietly praying that Joe Biden will win the election in November and turn America’s fortunes around. Either way – the damage has been done for the USA. Trust has been hoovered up by the political vacuum that Trump’s hypocrisy created.
In normal times, Brexit would present itself as a golden opportunity for level headed, experienced politicians and negotiators. But the basis of its stance is the EU buckling under the threat of the UK agreeing on a trade deal with America. The complete lack of political competence has led to both objectives ending in failure. This is what happens when populists are elected based on nothing more than false promises. Britain is facing years of an economic, political and diplomatic winter if a hard Brexit occurs (3).
The recent publication of the Russia Report in Britain says a lot about a country that was used to punching way above its weight. The report focused on Russian meddling in Britain’s democracy. It deliberately steered clear of Brexit and of criticising the Johnson government over its blatant manipulation of electoral laws. The Russian Ambassador to London fro 2011 to 2019, Alexander Yakovenko, returned to Moscow last year to be awarded the Alexander Nevsky Order of Merit from Putin himself. He is widely reported to have told colleagues in the Kremlin after a decade long campaign to undermine the UK – “We have crushed the British to the ground. They are on their knees and will not rise for a very long time.” Yakovenko is one of the world’s most highly experienced and skilled diplomats with an impressive curriculum vitae (4).
The only actions Britain can take to stave off this impending disaster are now simply unreachable as the country heads towards the autumn with the threat of another Covid outbreak, of Brexit and economic meltdown due to its over-reliance on the ‘services’ industry.
The pandemic has accelerated the decline of both Britain and America. The new world order will be dictated by the political rise of the European Union and the economic muscle of China. And while Britain and America fight their internal demons with civil society completely polarised on everything from economic ideology to falling standards of living, the European Union and China are now looking to the future. Both see something different, and neither wants aggression to define that path.
The EU sees a green future with carbon-neutrality at the heart of its economic growth – backed by a strengthened fiscal union. Being the worlds largest trading bloc it intends, at arm’s length, to manage both China and Russia for mutual benefit – and keep the peace. The EU pivot towards Asia is decisive. It will, on occasions falter but that’s where the future is.
America will continue to abdicate all former responsibility of its global leadership as it concentrates on deglobalisation, decoupling, and trade protectionism. Britain will stumble from one crisis to the next as an inter-generational conflict emerges over Brexit that craters the standard of living of the young. In the meantime, the European Union looks fully set to rise to the new challenges of the decade ahead.
About the Author
Graham Vanbergen is a publisher, author (Brexit – A Corporate Coup D’Etat), and journalist.
References
1) https://data.imf.org/?sk=E6A5F467-C14B-4AA8-9F6D-5A09EC4E62A4
2) https://www.marketwatch.com/story/in-20-years-the-world-may-run-out-of-minable-gold-2015-03-30
