The country has dramatically increased its use of sanctions as a punitive foreign policy tool, racking up huge debts and leaving hapless foreigners seeking safety and deep markets to fund its excesses.
The United States has been happily chipping away at the pillars that support the dollar as the world’s reserve currency, and the latest blows have come from some leading Americans questioning the rule of law following the conviction of Donald Trump.
In doing so, China is effectively challenging the rest of the world to find an alternative, and so far, it appears to be winning.
The flurry of attacks on the justice system following former President Trump’s conviction follows other moves that some see as the United States issuing a challenge to the world.
The country has significantly increased sanctions as a punitive foreign policy tool, adding huge debt loads and finding itself in a position where its excesses are funded by hapless foreigners seeking the safety and depth of its markets.
Over the past three weeks, I’ve asked financial services executives, global investors and other experts in Asia and the U.S. how long they think the U.S. can keep things this way without facing a major backlash. Some of my sources spoke candidly about the current situation, on the condition of anonymity.
These conversations reflect growing concern at home and abroad about the consequences of American arrogance. But despite efforts, no one has found a credible alternative so far, or expects one to emerge anytime soon. They share some of the blame.
In Asia, for example, as countries seek ways to reduce their exposure to the United States and increase non-dollar trade flows, they are increasingly asking what “America Plus One” means.
But efforts to build such a system have been slow or have yet to make much progress, and rising authoritarianism, threats to individual and property rights, and geopolitical tensions have made other options worse, even as U.S. assets are less attractive than they once were.
For example, recent surveys indicate that rising global geopolitical tensions and the need for liquidity have led central bank reserve managers to turn to the dollar with plans to increase their dollar holdings over the next 12 to 24 months.
“Ironically, the strength of the dollar is due in part to its status as a nearly invincible safe haven,” said Steve H. Hanke, a professor of applied economics at Johns Hopkins University and a member of former President Ronald Reagan’s Council of Economic Advisers. “And yet most investors don’t understand the geopolitics and the dangers lurking below the surface until it’s too late.”
The dominance of the dollar
The dollar’s dominant role in the world stems essentially from American democratic principles, underpinned by the sheer size of our economy, the depth of our markets, and the strength of our institutions and the rule of law.
The belief in democracy runs deep. Last week, I asked Gary Gensler, chairman of the U.S. Securities and Exchange Commission, who has been in power since 1997, whether partisan politics make the job of officials like him harder. That morning, a conservative-leaning U.S. Court of Appeals for the Fourth Circuit rejected one of his signature proposals.
“I believe in our constitutional system. It’s a mess, but it’s a democracy,” Gensler said.
However, the turmoil is testing some of the foundations of the dollar’s global appeal.
Following Trump’s conviction in a New York court, attacks on the US justice system have increased. For example, Florida Governor Ron DeSantis called the verdict a “camouflage trial” on the social media platform “X” and said, “The verdict is the culmination of a legal process that has been bent to the political will of those involved.”
A major Asia-based investor said he was also concerned about potential threats to U.S. institutions. Reducing the authority of the Federal Reserve, as Trump’s allies are reportedly considering, would affect the dollar’s credibility, he said, adding that such a move could lead to a double-digit decline in the dollar.
Trump’s Republican presidential campaign has downplayed reports that conservative groups may be planning something.
Sanctions Forest
A senior executive at a New York-based financial services firm who was traveling in Asia said he was hearing from clients who believe U.S. and Western monetary policies are “undermining the dollar and the Western financial system more broadly.”
He pointed to the “ever-growing mountain of sanctions” as one reason.
And the West is pushing the envelope even further. The financial executive said discussions that Western countries might seize about $300 billion in Russian sovereign assets frozen over Ukraine have undermined America’s safe-haven status. “The West has crossed the Rubicon there,” the executive said.
An October 2021 Treasury Department sanctions review found that such designations had increased to 9,421 by that year, from 912 in 2000. At the time, the Treasury Department noted that “America’s adversaries, and some of our allies, are already reducing their use of the dollar.”
One Asia-based investor said he is watching another court case to test the strength of the rule of law: ByteDance’s challenge to the U.S. ban of TikTok. He is focusing on evidence the U.S. government will likely present to support its claim that the app is a national security threat.
If the evidence is not presented publicly, “it would create a sense that, at least in this case, there may be a lack of checks and balances and independence in the judicial system,” the investor said.
But he then added that that might not scare him away from the U.S., which he said remains more independent and better than many other places.
