OPINION:
The United States prints the world’s money, and Western sanctions are teaching Russia and Iran some hard lessons, because foreign banks, businesses and nonaligned governments have found it costly to run afoul of our Treasury.
When the French bank BNP Paribas pleaded guilty to processing $9 billion in oil transactions involving Sudan, Iran and Cuba, it paid a hefty fine and was barred from dollar clearing transactions for one year for its oil and gas finance business.
That’s a tough spot for a multinational bank whose customers expect seamless services.
Similarly, other foreign banks such as Standard Chartered in London have found it unpleasant to run afoul of the U.S. Treasury.
U.S. shares of global gross domestic product and exports are 15% and 10%, but the dollar is used for payment for half of global trade.
The U.S. dollar is the vehicle currency for about 90% of foreign exchange transactions. When a Chilean importer buys Vietnamese apparel and pays in dong, his agent trades pesos into dollars and then those dollars into dongs, because a market between pesos and dongs would be too thin to be reliable.
Foreign businesses write cross-border contracts in dollars to protect against local currency fluctuations, and they maintain significant dollar-denominated checking accounts.
Because storing money in non-interest-bearing accounts is expensive, foreign businesses and investors hold large amounts of short-term Treasury securities.
Central banks hold dollars, yen, pounds, euros and yuan and government securities denominated in those currencies. The dollar accounts for 55% of central bank reserves. And despite boasting much greater exports, the Chinese yuan’s share of reserves is less than 10% of that.
Chinese President Xi Jinping promises that his country will dominate the world by 2049 and is flexing his diplomatic muscle — for example, by brokering the normalization of relations between Iran and Saudi Arabia.
Presumably, domination would include replacing the dollar with the yuan in global trade and finance, but the U.S. legal and financial systems have characteristics that for now permit the dollar to trump the yuan.
The dollar is freely convertible into other currencies. The yuan is reasonably so for trade, but for capital flows, it’s tightly regulated.
Businesses can’t hold yuan-denominated securities with confidence that those are marketable with the yuan are convertible into other currencies. In contrast, the supply of globally traded U.S. Treasury securities is much larger than Chinese government debt, and the markets for U.S. securities are liquid and accessible.
Historically, the dollar has been well managed. To the extent that its value against other currencies fluctuates, it exhibits what has been called the “smile” pattern.
The dollar’s value against other currencies peaks in times of global economic distress or recession and falls during expansions. Consequently, businesses can sell dollar securities at favorable terms when they are most likely to need cash in other currencies.
The U.S. legal system offers investors security. They are safe from arbitrary sovereign appropriation and can hold U.S. equities, bonds and real estate with confidence to store wealth.
The foreign exchange market for the dollar and other Western currencies is undergirded by SWIFT — a consortium of major banks, mostly domiciled in the United States and reliable NATO and Pacific allies — that enables seamless currency trades.
U.S. sanctions have unsettled developing and emerging economy governments. After all, if one of their companies runs afoul of U.S. or other allies’ trade restrictions on Russia or anyone else, it could get caught in the same net as BNP Paribas did.
Brazil has agreed and Saudi Arabia is considering accepting yuan in payments for exports to China, but in the end, those yuan won’t buy Japanese robots or German automobiles. They will have to go back into the dollar payments system. It would be just an expensive detour around the dollar’s vehicle function.
Similarly, the BRICS nations — Brazil, Russia, India, China and South Africa — are studying an alternative currency system. For such arrangements to work, China would have to create a payments system akin to SWIFT and link it seamlessly to the dollar system.
All this could change if the U.S. deficits grew out of control and the Federal Reserve were forced to print more money than is consistent with controlling inflation. Then dollar-denominated securities would no longer offer a reliable store of value to global businesses and investors.
But China would have to offer an alternative by making its currency and national debt fully convertible and accessible to foreign investors. And create confidence that its legal system would protect bondholders’ and foreign investors’ property rights — especially in periods of economic distress when they are most likely to need cash.
China offers its autocratic, socialist-market polity as a superior alternative to democratic capitalism. For Mr. Xi to make the yuan a viable alternative to the dollar, he would have to create legal protections and embrace reforms that would make China much more like a Western capitalist society.
• Peter Morici is an economist and emeritus business professor at the University of Maryland, and a national columnist.
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