The decline of an empire

The status of the US dollar was hard earned

The US had earned the right to have the dollar as the reserve currency through responsible and consistent behaviour, the ability to reinvent itself and lead innovation decade after decade, the quality of the institutions it built and nurtured, and the commitment to building a foundation that emphasised principles of fairness and the rule of law, both internally as well as in external dealings.

How does the world obtain the dollars to shore up their reserves and conduct trade? Countries earn dollars when the US consumes as if there were no tomorrow and imports on a large scale, resulting in huge trade deficits for it and surpluses for those exporting to the US.

The nations that ran up surpluses didn't 'cheat' and nor is the US a gullible babe in the woods. The US loved it and lived life king-size, beyond their means, for the last eight decades.

A country immune to a balance of payments crisis

Normally, when a country runs a trade deficit, the automatic correction mechanism that kicks in is the depreciation of its currency which makes its goods and services more competitive and imported goods more expensive. But neither the US nor the world seemed to care. The demand for the American currency continued to soar, and the biggest American export was not their goods, but their currency. The dollar reigned supreme, and in the process, slowly but steadily eroded and killed American competitiveness in manufacturing, reflected so visually by the term, the 'Rust Belt' to refer to the manufacturing hubs in the US, from a prior era, that created much of America's prosperity in the past.

China underwrites much of America’s excesses

So, what did countries that accumulated billions of US dollars do with their hoards? They happily lent it back to the American government by buying their bonds and treasury bills. The American government ran up huge budget deficits that included not just borrowings from every country with whom they had trade deficits, but from their own citizens as well.

But the swing of a pendulum is both inexorable and inevitable. It always swings to the other extreme.

The American clout in the form of their ‘Big Daddy’ status on the world stage that came with a cost like paying for European security and operating military bases across the world, their lavish consumption and indulgences, and their wars and feuds across the world, were therefore financed ironically with Chinese money and the money that rightfully belonged to every country that enjoyed trade surpluses with them. That money had to be returned someday.

Absolute power corrupts absolutely and that began happening when the US began weaponising the dollar through indiscriminate sanctions against countries and individuals they didn't like, and freezing their dollar denominated assets. Slowly the world began to contemplate shifting away from the dollar, but the time was not ripe for that yet. It needed America to decline further and for an alternate responsible power to emerge a little more clearly.

The writing was on the wall

Some of the present global bloodbath was therefore inevitable. The form and shape in which this correction would happen was however unexpected. But history has amply demonstrated that no change in global world order has ever happened without a major bloodbath.

America has been drunk on power for eight decades. An addiction that is worse than cocaine, carbs or a monthly salary. It is stuck in a trap from which an escape is not easy.

To take a metaphor from Hindu mythology, it is always easier to get into a ‘Chakravyuh’ than get out of it. It wants to regain its economic competitiveness without giving up its biggest export, which is its currency. It will soon realise the two don’t go together. If it wants to regain competitiveness, then tariff wars are not the way. The tariffs strategy is unlikely to revive America's glorious manufacturing past. American apparel manufacturers are unlikely to replace their apparel suppliers in Asia. It would just lead to long-term pain for everyone and most of all for its own citizens. The only way for America to get out of this debt trap, also a death spiral, is to humbly let go of the dollar as the reserve currency, allow it to depreciate significantly and promote alternate mechanisms to take shape.

My parents' generation saw WWII and India's struggle for Independence. I wondered if I would ever witness historic events and changes in my lifetime. Covid-19 was probably the first. And the second is just taking shape.