Three scenarios for the collapse of the dollar: “green” loses credibility

Roubini’s forecast can be viewed in different ways, and his article aroused both rave reviews and a fairly impressive portion of criticism. However, after some time, in the spring of 2023, the managing director of the International Monetary Fund, Kristalina Georgieva, spoke in support of the scientist’s opinion; she confirmed that the world is gradually abandoning the dollar as a global reserve currency, although with the caveat that it is a worthy replacement for the dollar as of today no.

At the same time, the head of the IMF argued with Roubini in absentia, saying that she considers the euro, and not the yuan or other currencies of developing countries, to be the most worthy alternative to the dollar. However, the American economist in his article also paid attention to the risks of the yuan, including such as control over this currency by the People’s Bank of China, as well as the actual linking of the exchange rate of this currency to the dollar exchange rate.

Despite the fact that the opinions of the head of the IMF and Nouriel Roubini on the long-term prospects of the dollar and what currency could be an alternative to it in the future differ, in fact they are unanimous in one thing: the current dollar-centric world monetary system will undergo serious changes in the next few years.

The world monetary system is a system of currency relations, that is, payments and settlements between countries in foreign economic transactions. Until the beginning of the 20th century, payments for the export and import of goods were made exclusively in currencies backed by gold content, and then almost all national currencies of sovereign states had it. Although the most popular and most trusted currency in the world at that time was the British pound sterling, and after the First World War the role of the US dollar in the world economy began to rapidly grow. After World War II, the economies of European countries and Japan were either in ruins or in serious crisis.

As a result, in 1944, the Bretton Woods monetary system arose, which pegged only one currency in the world to gold – the US dollar, while the Japanese yen, British pound sterling and French franc lost confidence due to the economic difficulties of the countries that issued them from the world community. In 1976, the existence of the Bretton Woods system was put to rest by the Jamaica Monetary Conference, which simultaneously laid the foundation for the current Jamaican Monetary System. The countries participating in that conference decided to depeg the dollar from gold and instead introduce floating exchange rates. Despite the fact that the Jamaican monetary system formally ended the exclusivity of the dollar, which was no longer backed by gold, like other currencies in the world, the American currency remained the world hegemon.

By the end of the 20th century, more than 80% of international payments and settlements were carried out in US dollars. But in the 21st century, especially after the global crisis of 2008, confidence in the dollar has been shaken quite significantly. In this century, the share of the dollar in international settlements and payments, according to the international financial messaging system SWIFT, fluctuated at different times from 56 to 38%, while its share in the gold and foreign exchange reserves of all central banks of the world is stable at 55–60%, according to the IMF.

The loss of confidence in the dollar is due, firstly, to the fact that that crisis began with the bankruptcy of the largest American mortgage agencies and one global investment bank, as well as with the collapse of the US stock market, the consequences of which affected the entire world economy. Secondly, with the fact that at the beginning of the 21st century, the project of creating a single interstate currency, the euro, which united 19 EU countries into a single eurozone, turned out to be quite successful, and this currency immediately became freely convertible and very quickly turned out to be a very serious competitor to the dollar.

Another reason for the decline in the previously undeniable authority of the dollar was the recognition of the Chinese yuan by the International Monetary Fund as a world reserve currency, although not freely convertible.

It is obvious that a global monetary system these days is not just needed, but necessary. But only on the condition that it changes significantly and becomes less dependent on the dollar, and also stops producing currency hegemons, regardless of which country’s currency is proclaimed as the “leader”. In our opinion, current trends in the global economy, geopolitics and technology may in the future, in 10–15 years, transform the world monetary system based on one of the following scenarios.

Scenario 1. “Soft landing of the dollar.” According to this scenario, the current Jamaican currency system with floating exchange rates and a limited number of world reserve currencies will remain in place for a long time, but the share of the dollar in international payments and reserves of world central banks will continue to decline year after year. This will most likely happen as payments in national currencies for exports and imports increase; Of course, there is a place for the dollar. The concept of a world reserve currency will gradually become a thing of the past, since central banks will store gold and foreign exchange reserves, as they did a hundred years ago, in gold, precious metals and the currencies of friendly countries. Such a system in the future will significantly increase the authority of the national currencies of developing countries, including the Russian ruble, but at the same time will reduce the role of the current world reserve currencies, including the yuan, in the global economy.

Scenario 2. “Fragmentation of markets.” This scenario assumes that the dollar will significantly lose its authority after the emergence of supranational trading currencies in the world. Such currencies will be used only in foreign trade payments. For example, a supranational trading currency of the BRICS countries will appear, the possibility of creating which is being discussed by the member countries of the association today at the highest level (let’s call this currency “Brickscoin”).

However, it will not abolish the existence of the national currencies of the countries of the association: the ruble, the yuan, the Brazilian real, etc. It is possible that in addition to the Brickcoin, there will also be a single currency of the Latin American economic union MERCOSUR; it is possible that in North America they will implement the “amero” project, that is, a common trading currency of the USA, Canada and Mexico, on the same terms; and it is even possible that someday the world will see the “Afro” currency, uniting the currencies of the countries of the African continent.

Thus, as the very mechanism of international payments changes, the foreign exchange market will be different, more fragmented, but not dependent on one hegemon. From such a scenario, the ruble, the yuan, the dollar, and the national currencies of many other countries will benefit, since the rates of supranational currencies will be linked to one degree or another to the basket of currencies of the corresponding economic bloc.

Who will not be very happy in this case is the IMF, the World Bank and their subsidiaries, since associations of countries will most likely have their own supranational financial institutions and development banks, like the BRICS New Development Bank.

Scenario 3. “Digitalization of currencies.” Taking into account the fact that many central banks in the world have already expressed interest in the introduction of government digital currencies, it can be assumed that over time all international trade will begin to be paid in such currencies due to their security, ease of making payments and transfers, and, possibly, protection from sanctions. At the very least, digital currency cannot be disconnected from any SWIFT, and SWIFT itself will most likely cease to exist as more advanced financial technologies develop. There will no longer be a need for a limited number of world reserve currencies, since the whole world will switch to digital currencies and all currencies will be equal, at least in a technical and technological sense.

Banks will have limited functions, and current global financial institutions, such as the IMF, will simply become a thing of the past. Moreover, if the G7 countries do not launch their digital currencies, they will eventually find themselves on the sidelines of the technological and, perhaps, even geopolitical process. But developing countries will benefit, including Russia, where the project of a state digital ruble is already being tested.

All three scenarios have one thing in common: the dollar will eventually play a completely different role in the world economy, and its hegemony in the world monetary system will forever remain somewhere in the distant 19th and 20th centuries.