Dollar Hegemony,“Monetary Geopolitics” and the IMF: The Symbiosis between Global Finance and Power Politics
Global Research, December 21, 2013
The following article is part II of a longer text pertaining
to Hegemonic Currencies and Monetary Geopolitics.
Part I of this text is Honey Traps”: The Strauss-Kahn Affair, A Stealthy Coup d’état at the IMF?
«Money brings honor, friends, conquests and realms» –John Milton
This
study is incomprehensible unless one acknowledges that “the management of money
is always and everywhere political [and that…] even in the esoteric realm of
money, international relations still reflect, to some extent, the interests of
powerful states” (Kirshner, 2003).
Along
these lines, since Classical Antiquity, there has always been a strong connection
between wealth and military power and therefore, in the most simple and direct
way, between economics and national security. Not surprisingly, modern times
are not so different. (Friedberg, 1991).
Therefore,
the trends that rule the behavior of currencies are strikingly similar to those
that govern the conduct of national states. They both seek dominance in highly
hierarchical and dynamic systems where competition, conflict and confrontation
are commonplace. They both gain and lose power and prestige at the expense of
one another in zero-sum games (Cohen, 2003). Therefore, “the realpolitik
balancing instinct would apply to currency politics as well as geopolitics”
(Drezner, 2010).
The
evident overlapping parallel implies that, paraphrasing Robert Mundell (1993),
powerful States have powerful currencies. In fact, history provides many
examples that demonstrate that “currency can enhance the power of the state
that issues it” (Cohen, 2009). Thus, it would be mistaken to disregard that
“Money Rules – now more than ever – but those rules serve political masters
[so] students of money in general and political scientists most particularly
must return to that basic starting point – money is politics”. (Kirshner,
2003).Indeed, “World history demonstrates that there is a close relationship
between monetary systems and war and peace”(Lips, 2004).
Furthermore,
since the dawn of human civilization, the issuance of currency has invariably
carried heavy political connotations related to territorial considerations:
“governments have been assumed to enjoy a natural right of monopoly control
over the issue and management of money within their borders [and following a
model akin to a]Westphalian model of monetary geography […whereby] each state
was expected to maintain its own exclusive territorial currency” (Cohen, 2008).
Consequently,
not unlike nations, currencies rise and fall too. “An examination of the long
history of reserve currencies shows the tendency for one currency to dominate,
with any change in status often reflecting a shift or rebalancing of economic
and political power” (Lee, 2010). Accordingly, “currency internationalization
does indeed impact directly on the power position of issuing states” (Cohen,
2009).
Hence,
there seems to be a persistent symbiotic link between geopolitics and finance
that represents an element which is considered by statesmen in order to
properly assess national power. Indeed, it is known that nowadays Central
Bankers and political leaders actively collect intelligence information on the
behavior of currencies and periodically test their relative strength, in order
to “adjust their strategies accordingly” (Stroupe, 2005).
However,
hegemonies, both geopolitical and monetary, are not perpetual: “historical
experience demonstrates the speed and pervasiveness of changes in national
economic power; since hegemony is transitory, so must be any international
monetary system that takes hegemony as its basis” (Eichengreen, 2003), which
indicates that “the international monetary system has always rested and
depended upon political foundations” (Kirshner, 2003).
The
following graph, based on data from a study on the evolution of monetary
hegemony (Dwyer & Lothian, 2002), shows the historic succession of dominant
international currencies from the 5th century B.C. onwards. Not surprisingly,
as can be clearly seen, currencies occupy a dominant position when the nation
that mints them becomes a great power.
However,
“since states are no longer able to exercise supreme control over the
circulation and use of money within their own frontiers, they must instead do
what they can to preserve or promote market share. As a result, the population
of the monetary universe is becoming ever more stratified, assuming the
appearance of a vast Currency Pyramid — narrow at the top, where the strongest
monies dominate; and increasingly broad below, reflecting varying degrees of
competitive inferiority” (Cohen, 2003).
At
this point, it is important to emphasize that ‘reserve currency’ status is the
highest position a currency can attain because it is “something which evolves
over time through combination of international economic and political power and
convenience to the greatest number of users rather than abruptly as the result
of conscious decisions by a single country”(Eslake, 2009). Moreover, there are
other evident advantages provided that “the issuers of currencies that are
widely used by others as reserve assets […] can finance deficits simply by
printing more of their own money” (Cohen, 2008). Therefore, there is a “link
between the distribution of economic power and the allocation of reserve
currencies” (Drezner, 2010). Hence, “the great bulk of reserves is held in the
form of highly liquid assets denominated in one of the small handful of moneys
at the peak of the Currency Pyramid” (Cohen, 2009).
A reserve currency is thus defined by three essential attributes:
A reserve currency is thus defined by three essential attributes:
a)
It provides a store of value, i.e. “confidence that the currency will retain
its value, so making it a safe place in which to invest official reserves or denominate
contracts” (Dobbs, 2009). Confidence is critical because “economies operate on
trust as a foundation” (Stroupe, 2006). Thus, “reserve assets serve as a store
of value that can be used directly for intervention purposes or else can be
more or less quickly converted into a usable intervention medium” (Cohen,
2009).
b)
It is employed as a “medium of exchange that offers the ability to transact
globally in the currency in an easy and low-cost way” (Dobbs, 2009). As such,
“a reserve currency facilitates trade and finance by decreasing the number of
bilateral exchange markets that need to be created, thus reducing transaction
costs” (Carbaugh&Hendrik, 2009). Therefore, it provides a reference to set
the bilateral exchange rate quotations (Oxford Analytica, 2008).
c)
As a unit of account, it is “a widely held and recognized currency that can be
used to denominate international contracts […and] to invoice contracts” (Dobbs,
2009) and it is the currency in which many commodities –including fossil fuels,
strategic raw materials, precious metals– and financial instruments available
in capital markets are priced and traded (Oxford Analytica, 2008).
The
latter is particularly important because there is a strong link between finance
and hydrocarbons market, due to the fact that
“black
gold has other pseudo-monetary characteristics as an indispensable commodity
that practically begs to be controlled. In an increasingly industrialized
world, this fungible primary energy source is everywhere in demand [and, as
result…] the spectrum of thought on national security and foreign policy [is
taken] into the realm of high finance, capital flows and the trump asset of
energy resources (Roby, 2010).
Hence,
this research paper must be understood in the context of the United States
dollar’s decades-long role as the ‘first among equals’ in the international
monetary system. The following graph, based on data from a paper written by a
prominent scholar of International Political Economy (Cohen, 2009) illustrates
the current hierarchical pyramid of currencies, classified as “top currency”,
“patrician currencies” and “elite currencies”.
In
geopolitical terms, during the Cold War period, the Dollar hegemony “held the
American alliance system and the world economy together… [because] America’s
major allies and economic partners were willing to hold dollars for political
as well as for economic reasons” (Engdahl, 2006). Therefore, the privileged
position of the dollar has been “a key contributor to US global hegemony”
(Oxford Analytica, 2008) for it provides advantages derived from the Federal
Reserve’s absolute monopoly of the printing of a currency needed by countless
national economies to survive (Engdahl, 2003).
Thus,
thanks to of its wealth, “America has been able to irresistibly influence all
the other players on the geopolitical chessboard because it has led the global
economy, and historically it could therefore greatly reward or severely punish
in ways and to an extent no one else could” (Stroupe, 2006), attaining both
political and diplomatic power, as well as formidable power projection
capabilities.
For
this reason, “America’s dominant position as the sole superpower ultimately
rests upon two pillars: its overwhelming military superiority and its control
of the global economic system by the unique role of the dollar as the World
Reserve Currency” (Clark, 2005). According to this reasoning,
“it
might be considered an elemental interest of the United States to maintain the
system which also includes intense diplomatic and limited military operations
in order to preserve its abundant financing for as long as possible. After all,
there seems to be a strong interdependence among nations. The US is dependent
on cheap financing from abroad and is even willing to apply some military power
to protect these interests” (Schulz, 2009).
Moreover,
it cannot be denied that “the dollar’s leading role in foreign exchange
transactions also is reinforced by this currency’s widespread use in the
invoicing of international trade” (Goldberg, 2011). That is especially true
about oil markets, given that “since oil trade was and still is noted, as well
as traded in US Dollars, every nation has to purchase huge amounts of this
currency for its national reserves in order to maintain its ability to purchase
the required energy” (Schulz, 2009). Consequently, monetary dependence of
others on the issuing country confers the latter significant geopolitical
power(Cohen, 2003).
The
unavoidable reasoning that arises is that “a full challenge to the domination
of the US dollar as the world central-bank reserve currency entails a de facto
declaration of war [on American power]” and, as a result, the United States is
willing to fight wars to defend its national currency (Engdahl, 2006) because
“an end to the dollar’s reserve currency status would impose material
constraints on the United States to finance its deficits, and lead to a major
loss of prestige and power projection capabilities” (Drezner, 2010). A
possibility is that “widespread oil pricing in alternative currencies or
perhaps the bartering of oil would then threaten U.S. hegemony by crimping the
relative global demand for dollars” (Roby, 2010).
Nevertheless,
perpetual hierarchic supremacy of the dollar cannot be taken for granted:
“Sooner
or later, confidence in the dollar is bound to be undermined by America’s
chronic payments deficits, which add persistently to the country’s looming
foreign debt […] The exorbitant privilege obviously cannot endure forever;
America’s spending cannot indefinitely exceed its income. In the absence of
significant policy reforms to reverse the deficits, the world’s trust in the
dollar is bound […] to be eroded. Dollar accumulations will eventually dry up
and could even turn into massive sales” (Cohen, 2008).
The
feasibility of said scenario has been enhanced by recent events. Indeed, “the
[2008 and 2009] financial crisis and its aftermath have triggered uncertainty
about the future of the dollar as the world’s reserve currency” (Drezner, 2010)
because it “revealed the inherent weaknesses of the current international
monetary system that contributed to global financial instability and a weak
global economy and [said crisis has also] hampered the long-term prospects of
both the US dollar and the euro as reserve currencies. The crisis has compromised
both currencies as safe-haven stores of value” (Lee, 2010).
The
following chart, based on official IMF data (International Monetary Fund, 2013)
reflects the composition of foreign exchange reserves held on a global basis by
early 2013. As can be seen, nowadays the US dollar still occupies a predominant
position which is unmatched by other inhabitants of the world’s current
monetary universe.
At
first, “it appears that the current system of dollar dominance will persist
provided that geopolitical tensions do not become too important for
policymakers – or not important enough” (Drezner, 2010), yet appearances can
deceiving and potential challengers might become increasingly assertive:
“several
states around the world today are thought to harbor ambitions to amplify their
monetary power – including, most prominently, the four BRIC countries (Brazil,
Russia, India, and above all China). One way to do this is to promote
internationalization of their currency” (Cohen, 2009) by “trying to establish
their own financial regimes as the international payment vehicle” (Schulz,
2009).
It
is telling that, back in 2008, Vice Admiral J. Michael McConnell, then Director
of National Intelligence voiced before the United States Congress Intelligence
Committee his “concerns about the financial capabilities of Russia, China, and
OPEC countries and the potential use of their market access to exert financial
leverage to achieve political ends” (McConnell, 2008). The senior American
official’s threat assessment is not mistaken: “influence might be increased
directly through the use of newly acquired reserve stockpiles to threaten
manipulation of the value or stability of a key currency such as the dollar”
(Cohen, 2008).
The
Vice Admiral’s statement, which –needless to say– goes “beyond the conventional
world of spycraft” (Shelton, 2008), implies that the US intelligence
Nomenklatura has already acknowledged the threat posed by the geopolitical
manipulation of financial forces by foreign powers hostile to American
interests. It might be interpreted as the confirmation that “the United States
may be expected to resist any compromise of the greenback’s historical
dominance…” (Cohen, 2008).
Indeed,
McConnell’s concern is not unsubstantiated at all, taking into account that
“[the] US increasingly came to rely on the governments of countries that were
neither democracies nor US allies for financing […and since such States] with
large quantities of reserves have more strategic freedom of action; they are
less likely to be deterred from taking geostrategic risks by the possibility
that their actions could precipitate a financial crisis (Setser, 2009).
Actually,
the unleashing of financial warfare seeks the infliction of economic damage as
it “involves malicious acts in markets for stocks, bonds, currencies,
commodities and derivatives” (Rickards, 2012). The same author points out that,
unlike conventional warfare, it can be waged stealthily enough so as to obscure
the identities of the attackers as well as their channels. Thus, it requires a
remarkably high degree of sophistication.
The
aforementioned has engendered, paralleling Cold War terminology, a system akin
to a “balance of financial terror” (Summers, 2004) whereby America’s overall
stability could potentially be threatened due to the fact that “America’s
partners in NATO are no longer the dominant holders of US dollars in reserve as
they were during the cold war. The connection between dollar holders and
security partners has been severed [and, as a result,] the dollar depends on the
kindness of strangers” (Drezner, 2010). At this point, it is vital to
underscore that “[regarding monetary concerns] politics will mater greatly
[because] States do not typically (accumulate claims on) countries that are, or
may be, their geopolitical competitors –if they can help it, that is, or if
there is any credible alternative” (Jaeger, 2010).
In
the light of the above, based on data from the CIA World Factbook (Central
Intelligence Agency, 2012) and the World Gold Council (2011), the following chart
reveals the largest proprietors of financial assets, including foreign currency
reserves, gold and holdings of SDR. The list includes industrial economies,
emerging powers, world-class financial centers and oil exporters. Not many of
them are staunch US allies, some might eventually reconsider their Foreign
Policy vis-à-vis America and only one of them, namely Germany, is a NATO
member, for the time being.
It
must be borne in mind that “for historical reasons gold is still included in
the reserve stockpiles of many countries, despite the fact that it is no longer
directly employable as a means of exchange. So too are SDRs [and that both of
them] must be exchanged for a more utilizable instrument when the need for
financing arises” (Cohen, 2009). Indeed, given the fact that the aurous metal
“has been used as money to a greater or lesser extent for much of the history
of civilization” (Michaud, et al., 2006), it “fulfills the unique function of a
global store of value” (Faugère& Van Erlach, 2005). Incidentally, even
though the US is not among the top ten holders of financial assets, most the US
currency reserves are not denominated in dollars (!) but in gold: Its 8,133.5
tons represent 76.6% of its national currency reserves (World Gold Council,
2011).
Even
though this paper does not focus on the yellow metal, its significance in terms
of monetary politics is deservedly acknowledged because “from the beginning of
recorded history some 6,000 years ago, gold made a profound and lasting
impression. Gold was, and still is, the ultimate symbol of wealth, power,
beauty and prestige. It has been deeply rooted in the consciousness of man ever
since” (Lips, 2001) and, as a result, “gold is a political metal” (Lips, 2004).
As such, it is “highly susceptible to geopolitical factors [because…] during
periods of fiscal or monetary mismanagement, crises of various kinds or
fundamental changes in the dominant currency, gold may be a very useful asset
for hedging risk” (Michaud, et al., 2006).
In
other respects, dollar hegemony went unchallenged during six decades because no
competitive rival emerged, yet “ample evidence exists to suggest that the
distribution of power in international monetary affairs is changing” (Cohen,
2008). Especially, the rise of the People’s Republic of China as an economic
superpower has enhanced the possibility that the ‘Middle Kingdom’ could become,
in the long run, a financial superpower (Makin, 2011). Naturally, “many PRC
scholars and policy makers […] aspire for a world economic and financial order
less dominated by the US and in which the PRC can play a more influential role”
(Lee, 2010).
Accordingly,
by proposing alternatives to the US dollar as reserve currency –like Special
Drawing Rights–, “China desires to decrease the financial and political power
of the United States” (Carbaugh & Hendrik, 2009) and, it has to be taken
into account that “If any nation is in a position to use its newly acquired
influence in this manner, it is China. At any time, Beijing could undermine
America’s money by dumping greenbacks on the world’s currency exchanges or even
simply by declining to add dollars to China’s reserves in the future” (Cohen,
2008).
Both
options are not mutually exclusive and they can be advanced simultaneously.
Indeed, the People’s Bank of China could covertly and progressively diversify
its massive currency reserves by ceasing to buy American dollars and,
simultaneously, stockpiling growing reserves denominated in other currencies
and even in precious metals. This deceptive strategy is meant to preserve
wealth without precipitating a sudden dollar collapse, along with some
political consequences such move would recklessly unleash. Therefore, it is not
surprising that the composition of its foreign currency reserves is one of the
highest state secrets of the People Republic of China (Stroupe, 2006).
Even
if “China’s tactics suggest that it is not prepared to challenge the dollar’s
hegemonic status at any point in the near future” (Drezner, 2010), it actually
looks like, in the long term, Beijing is interested in forging a new monetary
system in which the US dollar is no longer the only reserve currency available
and overreliance on the American currency is not a necessary evil anymore.
Chinese statesmen can accomplish such an ambitious objective through the
application of two strategies: a) contributing to the strengthening of Special
Drawing Rights (DSR)[1], in order to establish a multilateral reserve currency
under which financial power will be, more or less, evenly distributed and b)
unilaterally promoting the internationalization of the Renminbi as a growingly
solid currency (Chin & Wang, 2010).
Interestingly,
the international monetary diversification away from the dollar is
enthusiastically welcomed by Russia (Drezner, 2010), an utmost resourceful
challenger of American geopolitical interests which, as such, would be more
than glad to witness the accelerated decline of the US as the international’s
system top power.
If
the economic rise of China is uninterrupted during the next few decades, there
will be profound financial and, above all, geopolitical consequences: “If the
yuan emerges as a reserve currency potentially rivaling the dollar, China will
become more powerful and the US less powerful in international and financial
affairs… [In that sense,] the emergence of the yuan as a major reserve currency
will reflect the underlying shift in economic and financial power, even if it
does, independently, provide tangible benefits to China [but] this is likely to
have ramifications for Washington’s political position in the world” (Jaeger,
2010).
Reportedly,
while discussing if accumulating mammoth currency reserves denominated in
American currency benefits China’s national interests, Beijing’s ruling elite
has questioned the long-term strength of the US dollar a solid store of value
and, in order to encourage the introduction of a new international monetary
system under a new global reserve currency and, thus, senior Chinese government
officials have implemented. “measures to promote the internationalization of
the renminbi [also known as ‘people’s currency’ or yuan]” (Drezner, 2010).
Nowadays, it appears likely that
Nowadays, it appears likely that
“the
yuan is set to become a major reserve currency, but it is not a foregone
conclusion that it will emerge as the dominant reserve currency 20, 30 or even
40 years from now. For, despite heated theoretical debate, it is possible for
two or even three major reserve currencies to co-exist” (Jaeger, 2010).
Even
if it is still unclear who will inherit the dollar’s position as hegemonic
currency due to a lack of credible alternative successors, the assumption that
an eventual monetary transition, far from being unfeasible, is a real
possibility, considering that “several currencies can share reserve currency
status, as they not infrequently have. Changes in financial technologies and
market structures […] make it even more likely that this will be true in the
future than the past” (Eichengreen, 2005). Likewise, “a multi-currency reserve
system provides alternatives for countries to diversify their foreign exchange
currency holdings. If dollar liabilities increase and confidence declines, for
example, central banks can switch to the other reserve currencies” (Lee, 2010).
Accordingly,
it is way too early to accurately forecast what the international monetary
system will look like during the next few decades. It is also unknown if the
much-anticipated shift will be accomplished through peaceful or violent means.
In the absence of consolidated challengers, it appears likely that some sort of
‘multipolar balance of monetary power’ will emerge, i.e. “[a] fragmented
currency system, with no dominant leader… [akin to the] interregnum of the
period between the two World Wars, when Britain’s pound sterling was in decline
and the dollar on the rise, but neither was dominant” (Cohen, 2008).
Whatever
the ultimate result, it must always be kept in mind that a power vacuum is not
meant to last neither in geopolitics nor in finance. Along these lines, some
analysts foresee that “the dollar’s global dominance is more likely to be lost
incrementally to a number of other currencies as those currencies continue to
rise in international importance, that is, as they come to be used more
frequently in international transactions” (Stroupe, 2006).
If
the US dollar does lose its royal crown, it will not be immediately grabbed by
another national currency. There are alternative possibilities that deserve
special attention, such as Special Drawing Rights (SDR), which were “created by
the International Monetary Fund (IMF) in 1969 to support the Bretton Woods
system of fixed exchange rates. The IMF’s objective was to introduce into the
payments mechanism a new type of international money, in addition to the dollar
and gold, that could be transferred among participating nations in settlement
of payments deficits Although the SDR was designed as a reserve currency, it
never took off. SDRs today add up to less than 1 percent of total reserves. The
SDR has only limited use as a reserve asset, and its main purpose is to serve
as the unit of account of the IMF and some other international organizations.
Rather than being an international currency, the SDR is a potential claim on
the freely usable currencies of IMF members” (Carbaugh&Hendrik, 2009).
Nonetheless,
it must be pointed out that “The SDR is not a hard currency but rather a
derivative as its value is determined based on the value of other assets […]
more importantly, the SDR is tied to all the world’s economies unlike existing
currencies which are components of either a single country’s economy or a pool
of countries like the euro” (Rosensweig, 2009). In other words, SDR is regarded
as the “Esperanto of currency options” (Drezner, 2010).
The
aforementioned plurality is due to the fact that “the value of the SDR is
defined as a basket of currencies which include the U.S. dollar, Japanese yen,
UK pound, and the euro. The SDR’s basket composition is reviewed every five
years to ensure that it reflects the relative importance of currencies in the
world’s trading and financial systems. the economic welfare of the world would
not depend on the behavior of a single currency, namely the dollar. Currency
risk would be diversified through a basket reserve unit. It would take years to
develop SDR money markets that are liquid enough to serve as a reserve asset.
Although the IMF approved the first issuance of SDR-denominated bonds on July
1, 2009, as it attempts to increase its resources, the bonds can be purchased
and sold only by central banks, not private investors” (Carbaugh & Hendrik,
2009).
On
the other hand, it is outstanding that, only until relatively recent times,
have military strategists acknowledged the full destructive potential of
financial warfare as a geopolitical weapon of the highest caliber, yet if
offers the advantage of avoiding much bloodshed, unlike the use of conventional
armament or Weapons of Mass Destruction –WMD–. Indeed, according to Chinese
military experts, wars can be waged through the manipulation of financial
instruments to demolish countries’ national economies. In that sense, the
consequences of financial attacks are usually devastating because they
precipitate “a near collapse of the social and political order.
“The
casualties resulting from the constant chaos are no less than those resulting
from a regional war, and the injury done to the living social organism even
exceeds the injury inflicted by a regional war [and an additional advantage is
that]… financial war […] allows for concealed actions…” (Quiao & Wang,
1999).
In
that sense, it has been argued that dollar hegemony was somehow involved with
the Anglo-American decision to invade Iraq back in 2003, not long after the
Middle Eastern country had switched to the euro in its oil exports. Once Saddam
Hussein’s regime was overthrown, the occupation forces “quickly reconverted
Iraq’s oil transaction currency to the dollar” (Clark, 2005). That would
explain the staunch Franco-German reluctance to participate in and back
Operation Iraqi Freedom.
Libya
offers another intriguing case worth looking into. Libyan satrap Muammar
Gaddafi was reportedly planning to sponsor the introduction of a gold currency
shared by African and Arab nations (Scott, 2011). Revealingly, French President
Sarkozy even declared that, “Libya has begun to change their views towards
financial security of mankind” (Gold Investment, 2011). Furthermore, during an
ensuing bloody insurrection, Western-backed rebels fighting to unseat Gaddafi
established their own central bank even before the Libyan dictator was finally
deposed and a new government could be created, which illustrates that “there
were some pretty sophisticated influences [involved and that it also shows] how
extraordinarily powerful central bankers have become in our era” (Brown, 2011).
Finally,
“the absence of geopolitical tensions could boost the chances of coordinated
shift in currency reserves” (Drezner, 2010), but it definitely cannot be
discarded that “the outcome could be heightened struggle for leadership over
the longer term and a rising tension in international currency affairs” (Chin
& Wang, 2010). Indeed, it seems that the first shots of this very
unconventional war may have even been fired already, indicating that,
apparently, “a battle of currencies [far from being peaceful] could get nasty”
(Cohen, 2008).
Indeed,
“there are many other historic examples of the US stepping in to halt a
movement away from the petrodollar system, often in covert ways” (Katusha,
2012) and the case of Dominique Strauss-Kahn may offer one of such examples.
The author of this paper shares said perception and believes that, as will be
explained below, DSK apparently may have been one of its (political)
casualties.
Intergovernmental Institutions as Battleground Arenas
«Money is a good soldier, sir…» –William Shakespeare
It
is mistaken to disassociate international institutions from the contextual
balance of power that prevails at any given time. Far from being autonomous
players, they “are created by the more powerful states, and [they] survive in
their original form as long as they serve the major interests of their
creators, or are thought to do so [and] institutions remain close to the
underlying distribution of national capabilities or [else] they court failure”
(Waltz, 2000).
From
the moment of their inception, intergovernmental institutions are inescapably
permeated by national interests due to the fact that “States sometimes operate
through institutions. The most powerful in the system create and shape
institutions so that they can maintain their share of world power, or even
increase it” (Mearsheimer, 1994). As a result, institutions are not politically
neutral. Instead, they “reflect state calculations of self-interest based
primarily on concerns about relative power” (Mearsheimer, 1995). So, it is not
surprising at all that powerful States struggle to control, either directly or
indirectly, those same institutions.
For
instance, the Organization of American States (OAS) is clearly dominated by the
USA as the Shanghai Cooperation Organization (SCO) is undeniably dominated by
both the People’s Republic of China and the Russian Federation. Likewise,
“since the founding of the Bretton Woods institutions in 1945, the World Bank
has been headed by an American whereas the FMI has been under the helm of a
(Western) European” (Chossudovsky, 2011). Such control indicates that, when
both institutions were created, the US and Western Europe wanted to forge a
comprehensive transatlantic alliance which could encompass economic and
financial affairs. There was also, of course, a military counterpart: The North
Atlantic Treaty Organization (NATO).
The
following lists, based on official data published by both the International
Monetary Fund (2012) and the World Bank (2012), illustrate that the former has
always been ran by a European whereas the latter has invariably presided over
by an American.
In
that sense, international financial institutions –like the IMF– are certainly
no exception because “the most basic choices about money – what money is used
where, the behaviour of international financial institutions, and efforts at
cooperation – can only be understood as the outcome of a political contest
between states with motivations other than the pursuit of global economic
efficiency” (Kirshner, 2003).
History
has shown that, from the very beginning, “the evolution of the IMF has
reflected the geopolitics of the international economy. [Beyond the fact that
its] headquarters […] have always been in Washington D.C. […it] has undoubtedly
played a role which has been useful for the general national interest of the
United States” (Bordo& James, 2000).
In
fact, it has been acknowledged that “one key channel of U.S. global influence
in the modern economic system has been its influence on the institutions, such
as the IMF and World Bank, that undergird the current international economic
and financial order” (Goldberg, 2011). Moreover,“the United States also
exercises a substantial amount of informal power at the IMF” (Weiss, 2012).
It
must not be forgotten that the
“the
IMF is owned by the governments of its member countries, represented through a
Board of Governors. The Governor for each member country is usually the
Minister of Finance or sometimes the Central Bank Governor. Voting is in
accordance with the size of a country’s share-holding in the Fund (or ‘quota’),
and many important decisions require special majorities (85% of the vote).
Periodically, quotas are recalculated to reflect changing economic size”.
(Bordo & James, 2000).
Consequently,
it is deeply mistaken to assume that IMF activities cannot be interpreted as
foreign to power politics and “many analysts contend that the IMF is a highly
politicized institution, reflecting the wide power differential between a few
advanced economies and the remaining membership” (Weiss, 2012). Moreover,
“diverting the IMF, for geopolitical purposes, from its principles to serve
particular interest is possible since decisions to lend are taken by the
Executive Board […which] is responsible for conducting the day-to-day business
of the IMF. It is composed of 24 Directors, who are appointed or elected by
member countries or by groups of countries, and the Managing Director, who
serves as its Chairman” (Reynaud & Vauday, 2007).
Indeed,
power is not evenly distributed among the IMF’s 188 member States. That
multilateral organization (International Monetary Fund, 2012) explains that
“Each member country of the IMF is assigned a quota, based broadly on its
relative position in the world economy. A member country’s quota determines its
maximum financial commitment to the IMF, its voting power, and has a bearing on
its access to IMF financing”. The logical result is that “members with very
large voting weight can possess a disproportionately greater voting power”
(Leech, 2002). In a nutshell, “the quota system is the basis of asymmetric
power relations among member states in the IMF” (Blomberg & Broz,
2006).
The
following charts, based respectively on data from the IMF (2012) and the CIA
(2012) reflects a comparison between the most influential IMF members, measured
in terms of the share of their voting power, and the largest economies, in
terms of their 2011 Gross Domestic Product (nominal). The correspondence is
somewhat accurate but, in the IMF system, the US, Japan, Germany, France, the
UK and Canada and are overrated, whereas China, India and Brazil are
underrated. Please note that, as of June 2012, the US represents 16.75 % of the
vote and, as a result, has the power to veto IMF decisions it does not accept
or agree with.
Conversely,
it has to be taken into account that
“[even
though] looking after national interests is the responsibility of national
governments… History gives us many examples of states choosing policies
supposedly in the national interest, but which in fact were chosen to serve the
interests of social, political or economic elites… History has many examples of
national policies serving special interests” (Strange, 1998). Moreover,
“finance is no longer dominated [only] by a few national governments at the
apex of the global order” (Cohen, 2008).
By
extension, the same applies to intergovernmental organizations, including the
IMF.
Along
these lines, the International Monetary Fund is hardly an independent entity or
indifferent to pervasive financial and banking interests, for it “is run by its
governors and executive directors, of whom the overwhelmingly dominant
authorities are the US treasury department, which includes heavy representation
from [investment bank] GoldmanSachs, and, secondarily, the European powers”
(Weisbrot, 2011). Indeed,
“while
the IMF is in theory an intergovernmental organization, it has historically
been controlled by Wall Street and the US Treasury [… and its] role is to
implement and enforce those economic policies on behalf of dominant economic
interests” (Chossudovsky, 2011).
It
is not far-fetched to assert that “the IMF also responds to pressure from
private banks, as evidenced by the fact that IMF programs include conditions
that support their interests” (Dreher, et al., 2007). In fact, even insiders
admit this. For example, former Senior Vice President of the World Bank Joseph
Stiglitz (2002) points out that the IMF is controlled by the wealthiest
countries and also by their financial interests, which provide the prism
employed by the Fund’s staff to observe events and developments. Stiglitz adds
that, therefore, it makes sense to presume that the IMF’s policies are designed
taking said interests into consideration.
The
power of banking clans currently reaches considerable heights and must not be
dismissed outright only because they are non state actors. According to an
article published by the New Scientist magazine, a compact group of
corporations, “mainly banks, [exert] a disproportionate power over the global
economy” (Coghland & MacKenzie, 2011). The study, produced by complex
systems theorists at the Swiss Federal Institute of Technology at Zurich,
revealed that, through entangled corporate ownership networks, financial
juggernauts stand out among the top “superconected companies”: Barclays pls, JP
Morgan Chase & Co, Deutsche Bank, Credit Suisse Group, Goldman Sachs Group
Inc, Morgan Stanley, Mitsubishi UFJ Financial Group Inc, Bank of America
Corporation, Lloyds TSB Group plc, ING Groep NV, among others.
A Geopolitical Interpretation of Dominique Strauss-Kahn’s
Downfall as Managing Director of the IMF
«And I sincerely believe, with you, that banking
establishments are more dangerous than standing armies…»–Thomas Jefferson
The International
Monetary Fund (IMF) is not commonly thought of as a likely candidate for regime
change. Whenever one hears such term, one thinks of strategically important
States whose geopolitical patronage is being fought over by great powers:
Belarus, Cuba, Iran, Libya, Myanmar, Syria, Ukraine, Venezuela and so on and so
forth.
In
fact, the IMF was established by the Western victors of World War Two, who
reached an unwritten agreement whereby the World Bank would be run by an
American whereas the IMF would be lead by a European, as explained above.
Therefore, according to conventional wisdom, it is hardly conceivable that the
most important intergovernmental financial organism worldwide could even
hypothetically become the target for a regime change operation.
There
might several member states interested in changing IMF policies or maybe even
its overall direction, but it has to be acknowledged that only very few
governments have the political willingness, the necessary contacts, the inside
influence, the global reach or the technical capabilities to bring about such
an outcome without serious consequences or at least without being visibly
detected.
In
that sense, back in 2007 even the Russian Federation failed to substantially
promote its handpicked nominee, then Governor of the of the Czech National Bank
Josef Tošovský. Instead, Dominique Gaston André Strauss-Kahn (DSK), a French
politician associated with the Socialist Party, became Managing Director of the
IMF as the candidate backed by the European Union, replacing Spaniard Rodrigo
Rato.
DSK
was even supported by right-wing French President Nicolas Sarkozy, who was
allegedly trying to send away one the most prominent heavyweights of the
Socialist Party (Reuters, 2007) and, it must be borne in mind, a potential
challenger for Sarkozy’s UMP Party -Union pour un MouvementPopulaire- in the
coming French presidential election that was to be held in 2012.
Moreover,
what could possibly motivate a soft coup d’état against DSK?
There
is an intriguing possibility. According to the UK-based newspaper The Guardian,
in February 2011, Strauss-Kahn proposed the introduction of a new world
currency that would challenge the supremacy of the US dollar and help ensure a
greater financial stability prevails. The then managing director of the IMF
specified that “using the Special Drawing Rightsto price global trade and
denominate financial assets would provide a buffer from exchange rate
volatility”, while “issuing SDR-denominated bonds could create a potentially
new class of reserve assets“ (Stewart, 2011).
Said
proposal, far from being far-fetched, is theoretically feasible because “even
though there is no currency currently poised to dethrone the dollar, that does
not mean that the euro, the yuan, or a basket of currencies such as the SDR
could not eventually join the dollar as a reserve currency” (Carbaugh &
Hendrik, 2009).
One
must bear in mind that, during DSK’s tenure as Managing Director, the IMF
published a study which examined the implications of enhancing the role of SRD
in the context of the debate concerning international monetary reform,
especially as a unit of account “which could be used to price internationally
traded assets (e.g., sovereign bonds) and goods (e.g., commodities), to peg
currencies, and to report balance of payments data” (International Monetary
Fund, 2011).
Such
solutions, according to the same IMF working paper, need to be taken into
consideration in order to correct problems like persistent global imbalances,
large and volatile capital flows, exchange rate fluctuations disconnected from
fundamentals and insufficient supply of safe global assets, among others.
Interestingly, the paper’s authors warn that political hurdles and constraints
would need to be overcome (!).
It
is important to consider that some specialists specify that an attack on the
dollar’s position as the world’s top reserve currency amounts to an attack
against the Achilles’ heel of American power. In fact,
“The
second pillar of American dominance in the world [the first one being superior
state-of-the-art military technology] is the role played by the US dollar as
the international World Reserve Currency…Maintaining this is a strategic
imperative if America seeks global dominance. It should be noted that dollar
hegemony is in many respects more important than US military superiority.
Indeed, removing the dollar pillar will naturally result in the diminishment of
the military pillar” (Clark, 2005).
Hence,
it is logical to believe that Washington is not willing to lose, at least not
without a fight, the considerable economic and political advantages derived
from the role of the US dollar as the only truly global reserve currency, which
is used as a medium of exchange, unit of account and store of value all over
the world, taking into consideration that “[from the American viewpoint,] war
and insidious interventions of this sort may be costly, but the costs of not protecting
the petrodollar system would be far higher” (Katusha, 2012).
The
consequences would include “the loss of the exorbitant privilege of easy
financing of large US deficits, both government and national. The political
influence that American policy makers have internationally, including in
international institutions, could also be diminished. If the euro were to
overtake the dollar in a few decades, it would be a once-in-a-century event…
[however, if] it happened to the pound in the last century, so who is to say it
could not happen to the dollar in this?”(Frenkel& Chin, 2008).
Additionally,
in a speech delivered by DSK back in late 2009, he stressed that even though he
acknowledged that the US dollar was expected to remain the chief reserve
currency for some (sic) time, “there have already been a number of valuable
proposals for how to address concerns related to reserve currencies, including
from prominent figures here in China. Some call for the creation of a new world
reserve currency, possibly based on the Special Drawing Right (or SDR)—the
composite currency issued by the IMF. Another possibility is for a
multi-reserve currency system to emerge, with the euro, the yen, and the
renminbi perhaps serving as co-equal anchors. These are useful ideas that will
influence the future discussion of this issue”.
On
that occasion, the then IMF Managing Director went ever farther when he
explored the potential implications of the “unprecedented shift in relative
wealth and economic power” –as the US intelligence community terms it (National
Intelligence Council, 2008)– away from the West to the Eastern hemisphere. He
explained that, given that the economic balance of power is being reconfigured,
“for
China and for Asia as a whole, a growing voice on the international stage means
tremendous opportunities to contribute to the reshaping of the post-crisis
global economy… China, no doubt, will play a leadership role in making the
changes needed to embark on a new growth path that secures long-term economic
success for all nations… [adding that] China’s role in the international policy
debate has been rising in tandem with its growing economy. As a key member of
the G-20, China is helping to elaborate the global policy priorities for the
future, and devise solutions to global problems. And at the IMF, China is
supporting our efforts to adapt and serve the needs of our member countries
even more effectively”.(Strauss-Kahn, 2009).
Remarkably,
in April 2011 –shortly before the abrupt end of DSK’s tenure as its Managing
Director–, the IMF forecasted that, by 2016, China’s GDP, measured in terms of
power purchasing parity, will have overtaken the United States as the largest
economy on Earth. It is not news devoid of deeper ramifications because “It is
the first time the IMF has put a time frame on the communist country’s
inevitable march, and the forecast has profound implications for the balance of
global power […moreover, said prediction casted] a deepening cloud over the
future of the dollar as the world’s dominant currency as well as Washington’s
attempts to close the budget gap and rein in the nation’s ballooning debt”.
(Gardner, 2011).
IMF
special studies and estimations go beyond the realm of intellectual or academic
interests alone because “the most useful function that the IMF contributed to
the debate about policy coordination was through the provision of data and
forecasts” (Bordo& James, 2000). The importance of which is highlighted due
to the fact that “[said intergovernmental organization’s] board usually meets
several times a week and carries out its work largely on the basis of papers
prepared by IMF staff” (Reynaud &Vauday, 2007). Incidentally, said
forecasts “are not purely based on economic considerations” (Dreher, et al.,
2007).
The
ultimate (geo)political significance of the aforementioned did not go unnoticed
by political analysts. The IMF’s projection was certainly unwelcomed in
Washington since “whether deserved or not, the IMF has a lot of credibility.
By
placing China as the number one economic power by the end of the next US
presidential term, the IMF thrust a dagger through the heart of American
hegemony. Washington’s power is based on America’s economic supremacy. The IMF
report said that this supremacy was at its end. This kind of announcement tells
the political world that, as the headline read, ‘the age of America is over’”
(Roberts, 2011). So, Strauss-Kahn possibly constituted a much formidable and
dangerous challenge due to his “perfect position to shape policy and to
persuade foreign heads of state that replacing the dollar is in their best
interests” (Whitney, 2011).
Even
if DSK’s provocative statements were not monitored by the mainstream media,
they could not have gone unnoticed by neither the US intelligence community nor
by financial players interested in maintaining the dollar hegemony. Needless to
say, it is clear that said reckless pronouncements were not received warmly.
Strauss-Kahn
is (was?) a member of the Western elite as a representative of Old Europe’s
Franco-German establishment –in contrast to the evident pro-Atlantist position
held by President Sarkozy–. Regardless, DSK was presumably framed by law
enforcement authorities closely linked to New York politician and Wall Street
businessman Michael Bloomberg (Chossudovsky, 2011). In the cases of both Eliot
Spitzer and Dominique Strauss-Kahn, some analysts suspect that “behind the
curtain might be found investment bankers and international financiers” (Bucci,
2011).
Furthermore,
it was reported that French politician Michelle Sabban stated that she
“[was]
convinced it is an international conspiracy [because] it’s the IMF they wanted
to decapitate, not so much the Socialist primary candidate […adding that] it’s
not like him. Everyone knows that his weakness is seduction, women. That’s how
they got him” (Allen, 2011).
In the light of the
above, It must not be overlooked that Russian President Vladimir Putin stated
he disbelieved the official version of the DSK sex scandal because the “real
political underlying reasons… [were] hard to evaluate” (Osborn, 2011). Taking
into account his professional background as a KGB spook, Mr. Putin is clearly
not unfamiliar with dirty tricks such as ‘honey traps’ and ‘character
assassination’ and, more importantly, his opinion openly endorses the view that
there were political factors involved (!).
There
are other additional circumstances worth taken into consideration. Then under
the helm of DSK, “on November 11-12, 2010, IMF member states agreed on a
package of reforms, the core of which is a doubling of overall IMF quota to
about $755 billion. In addition, there would be a significant shift of voting
power to dynamic emerging market economies. If the reforms are implemented, the
ten largest members of the IMF will consist of the United States, Japan, the
four largest European economies (France, Germany, Italy, and the United
Kingdom) and Brazil, China, India, and Russia” (Weiss, 2012).
Said
proposed redistribution, needless to say, was not enthusiastically received in
some circles whereas because it favors emerging powers. Meanwhile, “China is
urging the IMF to […] accelerate its own internal governance reforms [i.e.]
changes in voting shares to reflect changes in the international balance of
economic power” (Chin & Wang, 2010).
Conversely,
some pundits speculated that
“Strauss-Kahn
could just as easily been set up by rivals inside the IMF, as well as by rivals
within the French political establishment… [due to the fact that] Wall Street
and the US government also had strong reasons to eliminate him” (Roberts, 2011).
Other
commentators wondered if DSK’s actions –specially his promotion of SDR as
alternative to the US Dollar– could have unleashed the ire of “some very
powerful and well-connected people” (Whitney, 2011).
The apparent
participation of operatives close to French President Nicolas Sarkozy, a
staunch supporter of US foreign policy, suggests another factor worth
scrutinizing beyond the undeclared goal of triggering ‘regime change’ at the
IMF, namely, the possibility that DSK might have competed in the then incoming
France’s presidential, successfully challenging then incumbent President
Sarkozy: To be precise,
“a
Strauss-Kahn presidency and a ‘Socialist’ government would have been a serious
setback for Washington, contributing to a major shift in Franco-American
relations. It would have contributed to weakening Washington’s role on the
European political chessboard, leading to a shift in the balance of power
between America and ‘Old Europe’ (namely the Franco-German alliance)”
(Chossudovsky, 2011).
Both possibilities, it has to be borne in mind, are not
mutually exclusive. Far from it: They reinforce one another.
Conclusions
«…and wine maketh merry, but money answereth all
things» –Ecclesiastes 10:19
There
is way too much at stake regarding the evolution of monetary hegemony. As has
been discussed throughout this paper, the indisputable symbiosis of geopolitics
and finance is a concern of the highest political order for top decision makers
and, as a result, there are powerful States and groups involved. Moreover, the
IMF is a most critical multilateral organization whose proclivity is ultimately
decisive. Thus, resourceful players want to ensure that such intergovernmental
institution, far from being neutral, favors their interests at the expense of
potential challengers, real or imagined.
In
practical terms, the aforementioned implies that, as the issuer of the world’s
top reserve currency, the US simply cannot afford to be a passive observer
while the IMF promotes an alternative, however hypothetical, to the monetary
system of dollar hegemony. The United States is likely to perceive any such
attempt as a ‘deviation’ that needs to be corrected one way or another whereas
financially capable competitors politically willing to undermine the dollar’s
supremacy certainly consider the American currency’s reign as factor that
somehow will need to be deconstructed in order to irrevocably dismantle one of
the major elements of US power, contributing to catalyze its geopolitical
decadence.
Thus,
the monetary system is doomed to become an increasingly confrontational arena.
At this point, the battle’s final results are, at best, unclear and cannot be
precisely foreseen with an ample degree of accuracy. Yet only one thing is
certain: Conflict is and will be inevitable, both among great powers as well as
among currencies. Monetary war shall be waged through both conventional and
unconventional means. Consequently, intensifying attacks and backlashes are to
be expected either within the institutional framework of the IMF or, more
importantly, outside of it. In other words, the future of monetary hegemony
will not be defined peacefully and, of course, there will be havoc, losses and
casualties.
In
the light of the above, although it cannot be authoritatively confirmed that
there was a clandestine conspiracy organized by a powerful cabal of financial
and political forces at the highest levels to unseat Dominique Strauss-Kahn as
the IMF Managing Director, the circumstantial evidence analytically hereby
scrutinized leads to the reasonable conclusion that the ultimate goal of such
plot involving the judicialization of monetary geopolitics was to prevent the
IMF from becoming a solid platform for launching any initiative considered as a
credible alternative to the dollar hegemony, thus impeding any meaningful
reform of the international monetary system’s current distribution of power any
time soon. Geopolitically speaking, this hypothetical interpretation does make
sense.
On the other hand, the determination to eliminate a competitive adversary who was acquiring enough political capital and momentum to defy President Sarkozy’s bid for reelection in 2012 represented no more than a secondary concern.
Source: http://www.globalresearch.ca/dollar-hegemony-and-monetary-geopolitics-the-symbiosis-between-global-finance-and-power-politics-2/5362357On the other hand, the determination to eliminate a competitive adversary who was acquiring enough political capital and momentum to defy President Sarkozy’s bid for reelection in 2012 represented no more than a secondary concern.
