—— Dollar hegemony and the Global South

This is where things start to get a bit confusing for many people. And I have seen many leftists who make the mistake of thinking that the power of America’s fiat currency came from the fact that dollar is the global reserve currency and that’s why the US can print unlimited amount of dollars.

These are two separate concepts that one should learn to distinguish so we don’t make the fallacy mentioned above.

First, the fact that the dollar is the global reserve currency has nothing to do with how much the US government can spend on its domestic economy, like giving everyone free healthcare, free education, eliminate poverty and so on. Any government that has monetary sovereignty (currency not fixed to the dollar or gold or anything else) has the ability to do that, so long as it is not limited to the availability of labor and resources and technology (and we will get into why this is difficult for Global South countries a bit later).

Second, dollar hegemony came from the fact that US spending overseas are accumulated by the central banks all over the world whose countries have sold stuff to the US. Because the dollar is the global reserve currency, which is a safe, liquid and stable asset and extremely convenient to use across the world, there is always a demand for US dollar. So, every country desires to accumulate the US dollar, and so they are willing to export their goods and services (made by their own hard working labor) to the Americans.

However, the question is where do you store all your surplus dollars after spending whatever you need of the earned dollar to import (this is called running a trade surplus, where you export more than you import, so you end up with surplus dollar). Since you’re not allowed to purchase American critical industries without the explicit approval of the US Congress, you have to store those money somewhere else, otherwise it’s just dead money.

This is where the US treasuries (bonds) come in. They allow foreign central banks to store their surplus dollars in the form of US treasury bonds, which earn them a couple % of interests over the years. In this way, these foreign governments lent to the US government but in reality, it is simply a vehicle for the US government to absorb all the excess dollars it had spent overseas. This allows the US government to spend almost indefinitely and get free lunches all over the world, because all the extra dollars have already been absorbed by the US treasury.

So, no, China didn’t lend the US money for the US government to spend. It’s all junk papers for China, which is why they are also starting to move their reserves out from US treasuries and invest somewhere else, like Belt and Road Initiatives.

To re-iterate, fiat currency confers the US federal government to spend on anything that is sold in US dollar, including giving free healthcare for everyone. But it doesn’t really need to tax or borrow from other countries. This is distinct from the dollar hegemony, where the status of the US dollar as a global reserve currency allows it to spend indefinitely overseas because all the excess dollars are recycled back to US treasuries and absorbed there. Understanding the distinction between these two is the key to break through the neoliberal myth.

As an aside, you can also see why the establishment of eurozone in the late 1990s would go down in history as one of the stupidest policies ever implemented. With all the EU countries sharing a same currency that they can no longer print themselves, but dictated by the neoliberal bankers of Brussels, each of the EU member state now effectively function like a state government, like California and Nebraska and so on. They cannot issue their own currency, so they have to actually earn euros to fund their own spending, and with the unevenness of economic development across EU countries, from the rich Germany to the poor Greece, it is obvious that they all cannot possibly share the same monetary policy (interest rates) because hiking the rate would be beneficial to one party but not to the other. Worst of all, the European Central Bank has no mechanism to absorb these imbalances. This is why the eurozone is doomed to fail - it’s all about Germany and France exploiting the peripheral states like Italy and Greece.

Finally, let’s talk about the Global South. Why don’t the Global South countries simply print their own currencies without relying on the dollar?

In theory, this is a good idea, and should be the ultimate goal for every Global South country who wishes to achieve economic sovereignty. However, the post-WWII global economic development allowed the Western powers, the US in particular, to set up global institutions such as the IMF, World Bank, and the WTO to enable the US to exert its economic and monetary imperialism against the Global South countries.

The IMF, for example, would only lend money to the Global South countries if they agree to “structural adjustments” (i.e. privatizing your public utilities and assets), or we would not lend you the money you need to import fuel and food. Once you are indebted in dollars that you cannot possibly repay down the road, you have already been enslaved to the US empire.

The World Bank explicitly forbid Global South countries to grow their own food supply and instead forced them into investing into export crops, which they would in turn sell them to the Western imperialists countries while importing food in return.

GATT, which would later become the WTO, forced Global South countries to open up their domestic markets for multi-national corporations to come in and destroy their domestic industries and exploit their labor.

All these policies resulted in the Global South countries being heavily dependent on importing food and energy from abroad, and most of the transaction done in dollar, which means they have to sell goods/services in competition with one another, or borrow dollar from the IMF, to sustain themselves.

Fiat currency and monetary sovereignty require that these countries have low external debt, and food and energy sovereignty to fully leverage on the ability to spend domestically and develop their economies from within. This is why there is so much emphasis on de-dollarization these days, because it is the first step for the developing countries to escape being a debt slave to Western financial imperialism.

This is also why sanctions against Russia failed spectacularly, because Russia met precisely all three conditions: low external debt, and food and energy self-sufficient. The same cannot be said for most Global South countries.

—— The Soviet financial system under Stalin

I don’t have the time to get into the details about the Soviet financial system (this is an entire essay series in and of itself), but I’ll just leave you one quote from Stalin that will make everything clear:

"What ensures the stability of the Soviet currency?.. Of course, not only with gold reserves. The stability of the Soviet currency is ensured, first of all, by the enormous amount of commodity masses in the hands of the state, which are put into circulation at stable prices. Who among the economists can deny that such security, which exists only in the USSR, is a more real guarantee of the stability of the currency than any gold reserve? Will the economists of capitalist countries ever realize that they are completely confused with the theory of gold reserves as the "only" guarantee of currency stability?"

Joseph Stalin, at the Plenum of the Central Committee of the CPSU(b) in 1933

This alone should tell you that Stalin understood money better than most Western leaders at the time. Of course there are a lot more nuances about how the rubles work, and it didn’t exactly work like the fiat currencies I have described above, but the basic principles remained the same. The USSR was able to finance large scale infrastructure projects and lifted millions out of poverty, without relying on foreign capital investment or sacrificing the working conditions of its labor.

Khrushchev overturned this policy by defaulting on the state mandatory bond in 1957, claiming that the “national debt is too high” and the Soviet government “could no longer pay for them.” A true believer of liberal ideology when he probably didn’t even realize it himself.