Policy Research in Macroeconomics

Globalisation, a pandemic and the US dollar

As published on Progressive International  on Monday, 11 May, 2020

She said, “My name’s Flo, and you’re on the right track
But look here, daddy, I wear furs on my back
So if you want to have fun in this man’s land
Let Lincoln and Jackson start shaking hands

I reached in my pocket, and to her big surprise
There was Lincoln staring her dead in the eye
On a greenback, greenback dollar bill
Just a little piece of paper, coated with chlorophyll

Ray Charles, 1957.  


Things are falling apart. Mere anarchy is loosed upon the world. Globalisation cannot hold.

We know that because Henry Paulson, once CEO of Goldman Sachs, and then US Treasury Secretary during the last crisis, is rallying the world’s capitalists to defend globalisation from reshoring, protectionism and immigration controls. Paulson understands that this is a war of ideas. He warned in the columns of the Financial Times that “the impending battle will pit forces of openness rooted in market principles against those of closure across four dimensions: trade, capital flows, innovation and global institutions.”

This “impending battle” is already skewed in favour of the world’s creditor class — backed as they are by central bankers, and in particular by the Federal Reserve, deploying its most potent weapon, the US dollar, that “ little piece of paper, coated with chlorophyll.” Their actions have made clear that there may be no international committee to save the people from a global pandemic, yet there is an international committee creating a “giant safety net” to save private finance from the pandemic. Central bank governors have engaged in decisive, expansive and internationally co-ordinated action to save rentier capitalism even while the governments of Presidents Trump, Bolsonaro, Modi and Johnson clown around, grievously mishandling the Covid-19 crisis. The rise of nationalism and protectionism that has raised these authoritarian leaders to power, coupled with extraordinary central bank action in support of Wall St and the City of London, are all reactions to, and consequences of, negative externalities that are globalisation’s hall marks: connectivity and integration. The pandemic too is a consequence of the systemic health risks inherent in the connectivity and integration of the globalisation project.

Where do progressives stand on this international battlefield of ideas regarding globalisation and monetary policy? Judging by the level and tone of western public debate, progressives are on the margins of the pro- and anti-globalisation arena. Both the Jeremy Corbyn-led election campaign and the Bernie Sanders presidential bid in the United States offered sound analysis, deep compassion and sincere solidarity for the victims of globalisation and climate breakdown. But their campaigns often focused on domestic issues — health systems, affordable housing, nationalisation of the railways, kindness to the poor and homeless — and ignored both the globalised financial infrastructure that makes reform of these sectors virtually impossible, and the political establishment that will fight to the death to defend the system.

This ignorance of the injurious elements of the international monetary system and its impact on the Global South muffles debate and inhibits “radical possibilities.” After all, it is not possible to transform a system, to re-design an international financial architecture, when that system is not understood, discussed and debated.

To decide where we are going, in other words, we must understand how we got here.

How did we get here?

In contrast to recent experience of international crisis, the trauma of the Great Depression and the Second World War led to much public debate about the international financial system. John Maynard Keynes was a regular contributor to the popular press, including the right-wing Daily Mail, and engaged the public with frequent radio broadcasts on macro economic policy. President Roosevelt did the same. The 1944 Bretton Woods Agreement was an outcome in part, of these debates, and led to the building of an international financial architecture designed to manage and stabilise the imbalances in both trade and finance that had disrupted the world system, raised political tensions and led to a catastrophic war. The architecture helped manage trade imbalances worldwide for almost thirty years. It ensured individual currencies were tethered to an asset of fixed value. This prevented currency speculation and ensure a nation’s specie reflected the strengths and needs of the domestic economy, not the interests of capital markets in the international economy.

However, soon there were strains and stresses. As early as 1963, Robert McNamara cautioned that US overseas military spending had become so massive as to threaten what he called “the gold cover” of the U.S dollar. In his magisterial study of the economic strategy of American empire, Michael Hudson relates that in May 1970, Secretary of the US Treasury David Kennedy warned that if foreign countries did not make it feasible for the United States to increase its exports, Congress might restrict imports into the United States. “In essence,” writes Hudson, “he was stating that as US private capital continued to take over the industries and companies of Europe and Asia, establishing a US deficit in its balance of payments on capital account, the nations that were forced into a surplus position by receiving these dollars should increase their imports from the United States in amounts equivalent to the US cost of seizing control of their industries and enterprises.”

Frustrated in this goal by stubborn allies like President de Gaulle, Nixon unilaterally and without consultation dismantled the Bretton Woods System by suspending all further sale of US gold to foreign central banks. Henceforth the $61 billion of liquid debt owed to foreigners would be paid only in the form of “a greenback dollar bill, a little piece of paper, coated with chlorophyll.” With gold payments suspended, the foreign overseas debt of the United States was, in effect, repudiated. Although it is never described as such by economists and historians, Nixon’s action — ‘the Nixon Shock’ — led, at the time, to the largest sovereign debt default in history.

From thereon, foreign currencies would be convertible not into a safe asset whose value was fixed, but into paper US dollars. And instead of gold, US short-term debt (Treasury bills) would in future be held among the monetary reserves of foreign central banks. In other words, the short-term debt obligations of the United States government were then substituted for gold, to ultimately became the world’s official monetary reserve.

But Nixon had more to do to consolidate the United States as global hegemon.

The de-linking of the dollar to gold in 1971 had led, predictably, to a fall in the value of the dollar. Revenues earned by oil-producing countries now purchased less in international markets.To add to the distress of Middle Eastern oil producers, the US backed Israel in the Arab-Israeli war of 1973. In response, the oil cartel (OPEC) dramatically raised the price of oil. Massive earnings from Middle Eastern oil sales flooded into western banks and financial institutions, which reported net average annual growth rates of deposits of between 25-30 percent. Higher oil prices combined with post-Bretton Woods financial deregulation triggered inflation worldwide.

And so William Simon, newly appointed US Treasury secretary, and his deputy, Gerry Parsky were tasked by President Nixon and Henry Kissinger to negotiate a deal with the Saudis.The goal was clear: to persuade the Saudi King to invest the revenues from his oil fields in US debt.The SaudiKing Faisal bin Abdulaziz Al Saud demanded just one condition in exchange:the country’s Treasury purchases, its financing of the US deficit, should stay “strictly secret,” according to a diplomatic cable obtained by Bloomberg from the National Archives database.

The Saudis secret was kept for more than four decades, and the arrangement made the Saudi Kingdom one of America’s largest foreign creditors. It has proved a useful diplomatic weapon, and it helps explain the US government’s reluctance to investigate the brutal assassination of a Washington Post journalist and Saudi dissident, Jamal Khashoggi in 2018. In April 2016, Saudi Arabia warned it would start selling as much as $750 billion in Treasuries and other assets if Congress passeda bill allowing the kingdom to be held liable in US courts for the Sept. 11 terrorist attacks, according to the New York Times.

The dollarization of fossil fuels transformed the international system, and led to the creation of the petrodollar — the “key to the functioning of neo-colonial money,” as former Ecuadorian minister and Progressive International advisor Andres Arauz has argued.

The ‘Nixon Shock’ and the petrodollar were central to the creation and maintenance of the global hegemon. Both contributed to the deregulation, connectivity and integration that financialised and carbonised the global economy. In that sense today’s economic, ecological and health crises are, in large part, a consequence of geopolitical decisions taken back in 1971.

What is the current international monetary system?

If today’s international monetary system is the outcome of US government decisions, it works effectively to protect the interests of the globalised rentier class — just as the gold standard of the nineteenth and early twentieth century protected global interests based in the City of London.

At the apex of the system stands the Federal Reserve: issuer of the world’s reserve currency. The US dollar is the central, load-bearing beam of the international monetary architecture.

As such, the Fed is now the sole source of global liquidity, providing dollars (via ‘swap lines’) not only to every bank and creditor in the world, but also to a chosen few of the world’s central banks. Those excluded from this imperious largesse include most low-income countries, but also China.

Despite its official mandate, the Fed’s mission in these times is not the security and prosperity of the domestic economy over which its governors preside, and from which they derive their mandate. Instead, the Fed is effectively a publicly backed institution whose operations are driven effectively by private authority, almost completely insulated from democratic oversight or accountability.

Increasingly the varied and numerous interventions of both the Fed and other central banks are undertaken to protect just one class operating in the international system: creditors, investors and speculators. To take one jargon-heavy example, the liquidity injections of the Federal Reserve — aimed at supporting private capital markets — are actually undertaken in the shadow banking sector, through repo market operations (where, as in a pawnshop, collateral is temporarily swapped for cash) rather than through the time honoured practice of open market asset purchases in exchange for liquidity.

In other words, the Federal Reserve and other central bank operations now provide security and protection to a global rentier class, including private equity (PE) firms that “harness secrecy to fleece investors and taxpayers.” Rather than borrowing in their own name, risk-averse PE firms loaded up target companies with debt, and then as ‘shadow banks’ began lending to US households and firms. When the coronavirus pandemic sent “credit markets into a tailspin in March”, the PE firm Apollo, having avoided taxes, then lobbied hard and successfully to be bailed out by the taxpayer. The Fed’s spectacular and unprecedented interventions in March, 2020 as Trevor Jackson argues, was “to flood financial markets with cash as quickly as possible, so banks could keep lending, buyers of stocks could keep buying, and institutions could keep making their debt payments” (Emphasis added).Far from deflating the global debt bubble, the Federal Reserve is keeping debt, and its owners, buoyant.

It is also why, despite its awesome power, the Fed has not succeeded in managing a deeply unstable global economy. Indeed it may have contributed to economic failure. As the IMF explains in the 2020 Global Financial Stability Report, the Fed turned a blind eye as private credit markets expanded rapidly after the 2007-9 global financial crisis, reaching $9 trillion globally. Simultaneously weak regulation by central bankers lowered borrowers’ credit quality, and weakened underwriting standards and investor protections. These risky credit markets — in high yield (‘junk’) bonds, leveraged loans and private debt — continued to show stresses through early April, despite the Fed’s massive cash injection.

So, in the interests of international creditors, the Federal Reserve is propping up heavily over-indebted firms, when the real economy gives every indication of spiralling downwards into deflation. Who benefits from a deflationary spiral? You guessed it: the rentier class. As prices and wages fall, the value of debt rises, as does the cost of servicing debt.

Deflation now haunts the global economy. Even while it triggers falling prices, profits and rising unemployment, it enriches creditors. That is because deflation “involves a transfer of wealth from the rest of the community to the rentier class,” as wrote Keynes in A Tract on Monetary Reform, “just as inflation involves the opposite… It involves a transference from all borrowers, that is to say from traders, manufacturers, and farmers to lenders. From the active to the inactive.”

What are the consequences for the Global South?

As a result of the fickle and volatile actions of global investors, emerging and frontier markets experienced the sharpest portfolio flow reversal on record, according to the IMF. $100 billion of capital outflows over the last few weeks of March and early April, 2020 crushed the currencies of low-income countries, while simultaneously inflating the dollar’s value. Because the US dollar alone is recognised by international markets for the payment of vital imports, its strength increased the cost of dollar-denominated imports. This in turn led to trade and capital account imbalances, which then prompted the ghouls of the global economy — western-based rating agencies — to downgrade countries that were victims of capital flight. Downgrades in turn raised borrowing costs and tightened credit availability at a time when global markets for poor country commodity exports were already weak, cutting their income. Simultaneously weakened currencies raised the cost of purchasing vital equipment and pharmaceuticals from abroad.

Impoverished countries were effectively sacrificed on the cross of the US dollar.

That recent stampede of capital and its impact on the lives and livelihoods of millions of people in the Global South has gone largely unremarked in progressive circles. But capital flight on the mere whim of investors, coupled with the subsequent strengthening of the US dollar, are not accidental nor inevitable consequences of the pandemic. The virus, after all, portends greater economic failure in the United States than in many emerging markets. Nor can it be explained directly by sudden changes in the economic circumstances of the countries trampled down by investors’ rush for the exit. Instead, it is a consequence of the international system’s design— an international financial architecture purposed to accommodate the whims, no matter how irrational, of investors, and to protect the interests of creditors.

Can the IMF ride to the rescue?

Across the universe of commentary on ‘what is to be done’ about the international financial crisis induced by Covid-19, there is a near consensus on the need for the International Monetary Fund (IMF) to take a greater role. In particular, many advocate for the IMF to issue billions of dollars worth of Special Drawing Rights, distributing them to its members’ central banks. These SDRs, as they are known, have become a go-to solution to fixing the problem of dollar liquidity in the context of the present pandemic.

But from a progressive perspective, there are real downsides to bequeathing this great power on the IMF.

First, the institution is not trusted by debtor nations because of its sustained defence of the interests of international creditors — both sovereign and commercial creditors. The IMF acts as agent on behalf of creditors and imposes policy conditionalities on countries whose specific purpose — while often disguised as ‘stabilisation programmes’ — is to generate resources for foreign creditors, and ensure the latter do not make losses on loans to sovereign governments.

Second, the issue of SDRs by the IMF is simply another way for low-income countries to acquire dollars from the currency hegemon – via the IMF, not the open market.

Furthermore, the hegemon’s voting power at the IMF allows it to veto any proposals to allocate SDRs deemed inimical to US interests — as defined by the American President. Hence the Trump administration’s decision to veto, “for now,” the impassioned plea by for an increased allocation of SDRs reportedly “because it does not want to give China and Iran access to unconditional extra reserves.”

What changes to the international financial system are needed?

If we are to win the battle of ideas — if we are to reverse hyperglobalisation and its cruel preference for rentierism over the interests of people and planet — then progressives must develop a plan for dismantling the current system, and building a new, more just, democratic and ultimately sustainable international monetary architecture.

This begins with challenging dollar supremacy.

One objective that should be explored is the possibility of creating a system in which all currencies could be used in international as well as domestic transactions, regardless of the size of the economies in which they are issued. As Jane D’Arista argued in 2003, “the international reserve asset (the world currency) itself must respond to the need for inclusiveness: its value must be based on a trade-weighted basket of currencies of all member countries.”

At the apex of a progressive international monetary architecture will be a bank: an international institution that facilitates transactions between nations or regions of nations. It could use its powers to discourage countries that build up ‘overdrafts’ — deficits in their trade, and discipline member countries that build up massive surpluses — because one country’s surplus is another’s deficit. By that means it could help to end the current global imbalances where countries like China and Germany have large trade surpluses, but the US, Spain and Britain have unsustainable deficits. Such imbalances are politically and economically destabilizing.

But it could do more. It could hold the securities (government bonds) of member countries and use these assets or reserve holdings to generate additional liquidity. In other words, safe sovereign collateral assets would enable the bank to do what the Fed currently does, create liquidity and play the role of ‘lender of last resort’.

Fundamental to the health of the international system will be its democratic oversight and management — not by private authority, but by public authority. Finance must once again be made servant, not master of the global economy, the European economy or any national economy.

These ideas may seem utopian, but establishment figures — sensing the gravity of the present juncture — are moving quickly to adopt more radical ideas. “Multiple reserve currencies would increase the supply of safe assets, alleviating the downward pressures on the global equilibrium interest rate that an asymmetric system can exert,” former Bank of England governor Mark Carney said recently. “And with many countries issuing global safe assets in competition with each other, the safety premium they receive should fall.”

Carney proposes an alternative: a new Synthetic Hegemonic Currency (SHC) that would be best provided by the publicsector, perhaps through a network of central bank digital currencies. “An SHC in the International Monetary and Financial System (IMFS) could support better global outcomes, given the scale of the challenges of the current IMFS and the risks in transition to a new hegemonic reserve currency like the Renminbi. An SHC could dampen the domineering influence of the US dollar on global trade. If the share of trade invoiced in SHC were to rise, shocks in the US would have less potent spillovers through exchange rates, and trade would become less synchronised across countries. By the same token, global trade would become more sensitive to changes in conditions in the countries of the other currencies in the basket backing the SHC.”

It would be hard to describe Carney, who earned his stripes at Goldman Sachs, as a progressive. But the fact that Carney is pushing these novel ideas only goes to show how far progressives must move to reclaim the international financial system as their own terrain of struggle.

The left has very little to say about a world economy now governed effectively by unelected and unaccountable technocrats. On the contrary, some on the progressive end of the political spectrum applaud central bankers’ rescue of risky and often reckless creditors. Adam Tooze recently enthused thatthe Fed had createda“giant public safety net… stretched out across the financial system.”Many other commentators and economists joined in the adulation, which reminds this author of the accolades of the 1990s and early 200s awarded to the infallible ‘maestro’ of the US and global economy, Alan Greenspan.

This enthusiasm for technocratic and essentially undemocratic solutions can be explained in part by the failure of economics. “Financialisation is the least studied and least explored reason behind our inability to create a shared prosperity,” Rana Foroohar argues in her book Makers and Takers (2016). And that helps explain why progressives fail to grasp the structure and purpose of the international financial system and its gains for the rentier class. It also explains the awe with which technocrats at central banks are now regarded by many, and the myopically domestic focus of most left-wing economic debate. Not to mention the absence of serious concern for the crises facing low-income countries.

It is high time we organised to better understand, and to transform the system.


Transformation of the international financial system is urgent if the world is to reverse the harm done to both human societies but also to the ecosystem by the current rampant system of exponential economic ‘growth’ and capital accumulation via financial rentierism.

The current breakdown of the international capitalist system makes a transformation well within the range of ‘radical possibilities’. But let us not forget: the crisis can either be resolved by conflict — with the hegemon drawing on its almighty military power — or by reasoned and progressive transformation of the system.

The big questions we face are these: First, why are progressives not at the forefront of this debate? Second, how to expand public education and understanding of the system and its consequences? Third, how to mobilise public support behind a progressive solution to the current crises?

Perhaps this Progressive International, by convening a global dialogue at this critical juncture, can answer them. Perhaps together we can end our dependence on “the greenback dollar bill,” which after all is “just a little piece of paper, coated with chlorophyll.”

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