Quick quiz. Suppose you read a headline in the online version of the Wall Street Journal (or NY Times etc) stating that, from now on, US Treasury bonds would be redeemed in crypto. Would your response be
(i) That’s absurd. Either it’s April Fools Day or someone has hacked the website
(ii) That’s unlikely. Surely [1] Wall Street will be able to kill this crazy idea
(iii) That will be tricky. Which cryptocurrencies will be included and what will be the exchange rates?
If your answer was (i) you can stop reading here (and don’t bother commenting to justify your position). This answer assumes that, despite Trump’s bluster, nothing has fundamentally changed. You’re still in the denial stage, with six more to come..
If you’re answer is (ii) or (iii) you are paying at least some attention. I’ll point to some evidence suggesting (iii) is a plausible answer, and look at what that implies for the global financial system.
Looking specifically at debt, the idea of defaulting on US government debt, or threatening to, has long appealed to Republicans. Here’s a piece I wrote back in 2013 [2] Unsurprisingly, Trump has embraced the idea, suggesting not only that a default might not be too bad, but also that some (unspecified) debts might be fraudulent.
But there are lots of other possibilities. One, raised by Paul Krugman is that the US Federal Reserve might be coerced into understating the inflation rate, thereby reducing the return on Treasury Inflation-Protected Securities.
Another, already taking place, is that the government may be able to coerce private banks into reversing legal payments. Henry Farrell (of CT) and Felix Salmon discuss this here.
The longer-term implication is that the existing global financial system, built around the US dollar can no longer be regarded as a reliable basis for organising trade, investment and banking. Some alternative will have to be constructed at an international rather than global levle. Moreover, this will have to be done on the fly, as the existing system crumbles around us.
This will doubtless be seen as good news for the BRICS countries, which have long chafed under the dominance of the dollar. But the obvious alternative, the Chinese Renminbi (aka yuan) is no better. As well as not being fully convertible, it is subject ot the political control of the CCP dictatorship.
An important point to start with is that the rapid growth in international financial integration that characterised the era of neoliberal globalisation came to an end with the Global Financial Crisis. As in this case, at least part of the adjustment to the end of the US will occur autonomously, as investors either steer clear of US financial markets or decide to play the increasingly corrupt games that will be required to survive there.
In this context, it’s crucial to understand the “weaponisation” of the global financial system, most notably by the US, as discussed by Henry Farrell and Abe Newman. The most striking instance of this so far has beem the seizure of Russian financial assets after the 2022 (further) invasion of Ukraine. Most of these assets were held by EU financial institutions, which Putin imagined to be safe from the US.
Until now, the main complaint of critics about weaponisation of the financial system was that it was being overused in the pursuit of secondary objectives. But with Trump in power, it will be used to do direct harm. Reliance on the US dollar is giving hostages to his regime.
Deconstructing and replacing a global system based on the assumption that the US is a reliable guarantor of stability will be a huge task, but the alternative of a system run by Trump and Musk is even worse.
We need to recognise that the idea of a single global financial system, which has been dominant since the 1980s, is done for. It’s not a loss to be mourned, but that won’t make the task of replacing it any easier.
I’m thinking about an alternative system, centred on the Eurozone, but incorporating other countries that don’t want to be dominated by either the US or China. That’s a mammoth problem
I’ll put up two ideas to start with.
The first is the need for unremitting hostility towards crypto. Should proposals for recognition of crypto as a reserve asset for the US turn into reality. the result will be to make the $US itself useless as a reserve currency. Governments and financial institutions outside the US should be ready to dump dollars if this looks like becoming a reality. In the meantime, financial institutions should be prohibited from dealing with it in any way, and individuals should be required to report crypto holdings and transactions.
My other suggestion is to take seriously a mildly snarky reference, in comments to my Crooked Timber post, to a “Brisbane Woods” conference. (I live near Brisbane, Australia, and the allusion is to the 1944 Bretton Woods conference which established, among other things, the World Bank and the International Monetary Fund.) These were set up in Washington both because the US was by far the largest contributor and because they could be colocated with the US Treasury. The famous “Washington consensus” of the 1990s referred to the neoliberal policy views shared by these three institutions.
But US contributions have been dropping steadily in both real and nominal terms and will doubtless be cut further by Trump. And proximity to the Musk-controlled US Treasury is now a danger not an asset.
The World Bank needs to move out of the US and drop the convention by which the president is always a US citizen (along with the parallel convention where the IMF managing director is European). Rather than moving to a single new location, both the Bank and the IMF need a more decentralised setup, ideally with significant centres in every continent[3]. This would involve both competition and co-operation with the BRICS group, which shares the aim of breaking with $US hegemony, but is not so keen on legal and democratic governance.
Those items are challenging enough, and just scratch the surface of what needs to be done. But repeating myself from previous posts, the idea of the US as the indispensable centre of a stable and democratic global order is gone for good. The sooner we realise that, the better.
fn1. Quiggin’s Rule of Surely: It’s a Sure Sign that you are not Sure
fn2. I didn’t pick the headline which was overblown even at the time. Now, if we wake up in four years time with Trump gone and nothing worse than a US default to worry about, it will have been the pleasantest of dreams
fn3. Except Antarctica and maybe Oceania, though of course Brisbane would be a great choice.
{ 12 comments }
wkw 02.23.25 at 6:53 pm
Thanks for keeping the conversation going. Some initial thoughts on the terrain, intentionally under-developed for reasons of space and uncertainty:
The US remains the central node in global finance despite the formal end of Bretton Woods because the US remains the demander of the world’s surplus production. This keeps the global financial system liquid in USD countercyclically, and endogenous reinforcement processes take over from there. So a less US-centric financial system requires a less US-centric demand structure as a basic prerequisite. This will require an overhaul of systems of production and distribution globally, and revision of the (non-US) world’s tax regimes to stimulate domestic consumption over exports (e.g. less VAT, less currency convertibility, fewer subsidies for export employment). The next system will need different ultimate buyers, and not through extractive dependency relationships (as in BRI). Finding workarounds to Trump’s trade wars (e.g., routing MNC production through Vietnam to bypass tariffs on China) is contradictory to that goal and so must cease. The world is rich enough now to seriously do this.
Related to #1, a majority of the world’s economies manage their exchange rates relative to USD either unofficially or officially (see Gita Gopinath, Helene Rey, BIS reports are generally useful). A less US-centric financial system will require a viable exchange rate stability mechanism at the outset, and both SDRs and currency securitization (e.g., gold standard) are unworkable. Proof-of-concept for a supranational central bank exists, but it is not set up for demand management (so #1 still bites, see Farrell/Quiggin on Hard Keynesiasnism). Ostrom’s polycentricity may become a useful concept for monetary/currencies management.
Farrell/Newman is useful insofar as they remind us that payments infrastructure is unavoidably political, technocracy is impossible. A study of Bretton Woods would tell us the same. (If folks are looking for a history of Bretton Woods that deviates from the typical frames, see Eric Helleiner’s Forgotten Foundations of Bretton Woods. Good stuff in there on the role of Triffin and Prebisch, among others.) So Brisbane Woods cannot be premised on technocracy, and global Maastricht is not a viable solution for #s 1 and 2. If the foundational political goal of Bretton Woods was an internationalized New Deal (as interpreted imperfectly through various national frames and constitutions, and obv revised as the Cold War progressed), then the foundational political goal of Brisbane Woods should be very similar: anti-oligarchy has high levels of consensus already, and democratic experiences are much more universally-shared in 2025 than in 1945.
Expanding on #3 in a different direction: everything abt Bretton Woods related to the US’s historical position in 1944. Those specific historical circumstances — the US as predominant industrial power, with the shadow of decolonization looming — do not obtain today; the US is still quite positionally prominent, but ROW has some legs now too.
This will not make reaching a Brisbane Woods agreement easier, it will make it harder, but we are not starting from scratch this time. In 1944 the world was disconnected economically and institutionally, now it very much isn’t. We often overlook that there is now a thick web of ad hoc trade/investment/security agreements which the US is not central to, because of the US’s pre-Trump preference for working through Bretton Woods institutions. E.g., the EU has many, many more PTAs than the US has, the ICJ exists, etc. These non-US institutions are infrastructurally-useful, in the Farrell/Newman sense (and I suspect they’d encourage the reading of Michael Mann on infrastructural power), but they need to be retrofitted to carry the weight of this new project (which is not what they were built to do). The Helleiner book above is relevant not as mere history, but also because it locates a non-Marxian intellectual project for global institutionalism that actually is oriented towards inclusive and broad-based development.
Non-US countries must be prepared to surrender a significant amount of national sovereignty. If that is not on the table then all of this will go nowhere. IMO declining sovereignty is less a choice than a fact to be grappled with — Brexit has made Britain more susceptible to global plutocratic forces, not less — but democratic polities are not very forward-looking these days (he types, anxiously, as the polls in Germany close).
One very important step for sidelining the US (without accommodating the Xi-Putin-Khamenei axis) will be passing EU-Mercosur and then inviting Canada, Mexico, and other Pacific Rim economies to join. Quickly.
This is longer than intended already so I’ll stop for now. Thanks again for keeping the conversation going.
Lee A. Arnold 02.23.25 at 8:28 pm
John what are your reasons for supposing that the Chinese cannot work on convertibility and capital control issues enough to make the renminbi (or a stablecoin of it) more attractive to half the nations on the planet? There are plenty of governments wary of the US for various reasons. The Economist [Feb. 9] reported that already “70 countries have now officially endorsed both China’s sovereignty over Taiwan and, just as crucially, that China is entitled to pursue ‘all’ efforts to achieve unification, without specifying that those efforts should be peaceful.” The reappearance of Trump ought to give China more opportunities to make stronger inroads.
John Q 02.23.25 at 11:40 pm
Lee, you seem to have answered your own question. What’s left of the democratic world needs to be free of dependence on brutal and aggressive dictatorships, a class which, as your quote indicates, includes the dictatorship that rules China. In this context, while I referred in the OP to the CCP, it would be more correct to describe it as a personal dictatorship under Xi.
It will be necessary to find a balance between Trump’s US and Xi’s China. That entails an end to the current alignment with the US against China, but not a reversal, and certainly not support for an invasion of Taiwan.
John Q 02.23.25 at 11:44 pm
wkw, thanks for carrying on the discussion, amd for useful links. In particular, while I have long been familiar with Ostrom’s work on common property systems (I did my masters thesis on that topic, and went to some of her conferences around 1990) I hadn’t heard of her work on polycentricity.
Are you aware of any current discussion along these lines? I’ve seen plenty on military issues, but as I already observed, that’s the (relatively) easy bit.
LFC 02.24.25 at 2:15 am
wkw @1
The Helleiner book … locates a non-Marxian intellectual project for global institutionalism that actually is oriented towards inclusive and broad-based development.
Relatedly, I think perhaps some of the conversations in the mid/late 1970s (when the NIEO was a hot topic) are relevant here, e.g. Mahbub ul Haq, The Poverty Curtain (1976), which is obviously dated in some ways but parts may be still of interest, e.g., discussion of a supranational central bank not under control of the developed countries. Some historians (and a few political scientists) have gotten interested in the NIEO in recent years and produced a kind of retrospective or reassessing literature, most of which I haven’t read but my sense is that it tends to downplay the tensions and generally be too uncritical. That said, that period should probably not be left to historians, and people working on the politics of the contemporary global economy should perhaps take a look at it.
wkw 02.24.25 at 5:05 pm
JQ, first, sorry that some formatting was lost in my first comment.
There is room for innovation here. There’s not a well-established theoretical apparatus ready to take off the shelf for applying polycentricity to the global monetary system, altho similar notes are sounded (from a different perspective) in proposals like these: https://positivemoney.org/publications/beyond-dollar-dominance/.
So take all of what I write as “brain-storming”. For polycentricity as a concept maybe just start with Ostrom’s Nobel lecture: https://web.pdx.edu/~nwallace/EHP/OstromPolyGov.pdf
It could be productively read alongside Farrell/Newman (because it’s about providing utilities without oppressing people) and D^2 (because it’s about systems management at varying scales). Here’s a definition she cites from her husband’s work with Tiebout (stars added):
““Polycentric” connotes many centers of decision making that are formally independent of each other. Whether they actually function independently, or instead constitute an interdependent system of relations, is an empirical question in particular cases … the various political jurisdictions … may function in a coherent manner with consistent and predictable patterns of interacting behavior. To the extent that this is so, they may be said to function as a “system.””
That describes “Bretton Woods 2”, so we’re not starting from scratch conceptually. The Q is whether a “hegemonic” power is theoretically required to order such a system. The answer is “no”. Keohane and Ostrom worked together on adapting polycentric common-pool governance models to International Relations in the 1990s, back when Keohane was focused on modeling global institutions “After Hegemony”: https://uk.sagepub.com/en-gb/eur/local-commons-and-global-interdependence/book204733#description
This intellectual project didn’t go far in the 1990s, not least because of the functionalist framing of institutionalists like Keohane (focus on Coasian bargaining to minimize transaction costs and realize joint gains… but politics requires more than coordination), and the micro-behavioral turn US economics in the 2000s. We now have real-world applied experience (good and bad) from the creation of the ECB (and AIIB, etc), plus semi-formal monetary policy coordination mechanisms (e.g., swap lines) from the GFC and Covid. That’s useful existing infrastructure, and it hasn’t all been “weaponized”. Same is true of the thick network of PTAs/BITs, which is allows countries like Canada and Mexico to immediately respond to tariff impositions with tit-for-tat rather than acquiescence.
PS, Mark Carney for PM! He is ideally situated for this historical moment, maybe more than anyone else on the planet. He has the requisite policy experience from both the core (BoE during Brexit) and semi-periphery (BoC) of the global financial system, and because a Canada/UK defection from the Fed-centric IMS — even if it’s partial/hedged — would be a major re-ordering move. He seems very motivated to find willing partners, and he has legitimacy in the City and on Wall Street, but also (I suspect) in Geneva and Hong Kong and Singapore and Montevideo and Tokyo and Frankfurt, possibly even such far-flung locales as Brisbane. MMT progressives like him (like the Positive Money folks I linked above), so do digital-currency types. If anyone can step into a Keynes-esque policymaking role in this moment, my money is on Carney being the guy.
On the bottom of pg 5ff is diagnosis, then on pg 13ff we get proposals, some of which I don’t love but that’s irrelevant… this is good enough to use as a starting point. https://www.bis.org/review/r190827b.htm
So that’s my answer to a question I posed previously about who convenes Brisbane Woods and sets the agenda: Carney/Freeland + Legarde types from the Continent with IGO experience (Smaghi at least gets Triffin: https://www.eurasiareview.com/04102011-the-triffin-dilemma-revisited-oped/) + equivalent representatives from ROW. In my view, Mercosur is very important to this effort and should not be sidelined. Giving prominent roles to Ragu Rajan-types can maybe drive a wedge in the BRICS club, Guido Mantega would surely have interest too.
The key premise of Brisbane Woods is that USD is no longer a safe asset just as a fact, because the foreign economic policies of the US admin — specifically, bringing the trade balance into surplus through ad hoc extortion, not to mention ongoing debt shenanigans — will destroy the dollar-centric monetary system anyway. The status quo ante is gone, it’s not that the US can be dispensed with so much as it is dispensing itself. Everyone must adjust to that fact of life whether it is preferable or not. Carney gets it, and knows what needs to happen next, and IMO the others I named share enough common ground to move forward.
PPS, the military question is incredibly complicated, I’m not side-stepping it so much as saving it for later because establishing a new monetary system is a prerequisite for reform the military structure. But let’s not operate under illusions, the world we are entering will be much more violent than the world we are exiting. It already is. That is why the monetary actions are needed: countries need to control their money in order to maximize security. In a USD-centric system they do not and cannot control their money, no matter what Rodrik claims.
Another experience we now have is Russia post-2014. They effectively de-dollarized pre-2022 and have just about managed since, paying real costs but also showing that it is possible to muddle through with just one or two semi-committed partners, much less many of them who are fully committed. We can learn from assholes as well as friends.
wkw 02.24.25 at 5:15 pm
LFC, yes there has been a lot of activity surrounding 50th anniversaries lately (note: NIEO really intensified right at the historical moment when the OG Bretton Woods exchange rate system fell apart, so these are not unrelated issues).
Since my other comments are long, I’ll briefly say that the fundamental political belief undergirding the NIEO effort — that commodity power could be effectively mobilized against financial power within existing global institutions — remains incorrect, which is why it’s important to straighten out the financial system rather than deferring to the existing one.
But commodity price stabilization (say) could be part of the new IMS policy regime in the same way that currency price stabilization was part of the old one, which is why I recommended the Helleiner book: to encourage thinking along these lines. That mentality also motivates my suggestion that folks like Guido Mantega be invited to Brisbane Woods. The world is so much richer now than it was in 1944, when the US controlled 80% of the world’s gold supply and 50% of the world’s manufacturing. Many things are possible now that weren’t then.
LFC 02.24.25 at 11:15 pm
wkw,
The mobilization of commodity power was a main strategy of the NIEO, but I wouldn’t reduce the NIEO to it. (Haq’s and others’ proposals, e.g. for an int’l central bank and int’l taxation system, went beyond the official NIEO program.) But I don’t think we’re in much disagreement on this particular point.
commodity price stabilization (say) could be part of the new IMS policy regime in the same way that currency price stabilization was part of the old one
Interesting way to put it, and that would clearly be welcomed by those countries still dependent to some significant extent on primary commodity exports. Of course, a lot has changed in the intervening decades, and (familiar things like) the “offshoring”/decentralization of production, accompanying increased industrialization in the “periphery” and “semi-periphery,” rise of global supply chains, etc., all means that the trade issues that might be part of, or linked to, a new monetary regime are now somewhat different. To take a concrete example, about 80 percent (I think) of Bangladesh’s export earnings in recent years have come from the garment industry, whereas in the 1970’s Bangladesh’s main exports were jute and tea (I would have guessed jute, Google via its “AI overview” added tea). So in addition to having done relatively well economically (though not in terms of democratic politics) in recent years, what it wants from a trade/monetary regime will presumably now be somewhat different.
Anyway, I appreciate the thread and your comments, even if (from a place of definitely less expertise than yours) I might not agree with every statement — but I think it’s more useful for now to focus on what we agree on.
Howard NYC 02.25.25 at 2:12 am
since alcohol no longer works to offset my nightmares, I’ve begun spooning down a pint of lux-grade premium ice cream nightly
while nobody loved the USD, everyone relied upon it for consistency in contracts, scheduling, purchasing, shipping, et al… and the tedious boring bits of international commerce… becuase nobody loved usage of actual precious metals in completing their trading
now its gonna be everyone’s nightmare… handing across the table actual sacks of gold bars and silver ingots
wkw 02.26.25 at 3:56 am
Did not mean to imply that NIEO was limited to the small subset of issues I mentioned, sorry for not being more clear.
Yes things have changed, but commodity prices stabilization is still a priority, even moreso as climate change accelerates. There are food wars already, global conflict is rising. A shift away from the dollar will be further destabilizing, particularly if China challenges it (b/c of their USD holdings, and for other reasons); USD volatility tends to send commodities prices haywire, and we intend to make the USD more volatile. So it’s not the only priority but IMO it is a priority.
Re garments trade, the WTO still exists, and the US might well withdraw and leave the institution to others; Either way, the network of PTAs has been expanding significantly for 3 decades, it governs long and complex value chains as it is, and these are not US-centric. The EU and most major economies have a standard package that can be extended fairly quickly if needed, but trade is already regulated well enough to start with. What is most needed, as mentioned before, are new sources of demand for surplus production. If you don’t want to receive USD you shouldn’t sell stuff to the USA. Which means you’re going to be exporting less in general, have a plan for that.
The issue with commodities is that they are speculative financial assets, but people have to eat them to survive, so volatility (in either direction) really screws somebody hard and fast. That breeds revolution, imperialism, etc., see the mention of food wars above. The old Malthusian problem.
MFB 02.26.25 at 9:02 am
As I see it, there is a serious problem here. What Quiggin recommends is the establishment of a central bank for Europe, granted additional powers to the one which the existing European central bank possesses which would, essentially, replace the World Bank and the International Monetary Fund’s role for those countries which want to fall under it. This would operate in competition with the not wholly dissimilar entities set up by China/BRICS and those countries which want to fall under those entities, and also in competition with the existing US financial architecture and those countries which are currently under it and find themselves unable to get out from under.
That means three separate financial systems, with three different currencies, presumably the dollar, the euro and whatever BRICS comes up with as an international currency. Surely this is a recipe for chaos which will be greatly exaggerated by the trade wars which the US and Europe are waging against the rest of the world. What’s worse, it seems likely that the US is in decline and Europe does not look in very good shape, and therefore the China/BRICS element of the three would become gradually more dominant. The US and Europe would view this as a problem and would probably coalesce, so Quiggin’s solution would turn out not to be a solution at all.
Unless an European financial system could restore Europe’s economic growth to something approaching China’s, I don’t see that it will solve any problems. It could actually create more.
KT2 03.09.25 at 3:28 am
MFB, if a storm, a safe harbour for a time doesn’t seem unreasonable. Merging the harbours may not be easy, afterwards. Is it competition or choice or…???
“Investors see the beginning of a tectonic move away from US markets
by Energy News updated March 5, 2025
“The global money flows are being upended by a historic trade war, the proposed European fiscal bazooka of $1.2 trillion and China’s rise as the leader in the tech race. This could be a turning point, with investor capital moving away from the United States
…
“Tim Graf, State Street Global Markets’ head of macro strategy in EMEA, said: “The U.S. has changed, and the world is now saying that we must adapt, as the U.S. no longer is a reliable trade partner. We have to look after our own defence needs.”
“A rare divergence on global stock markets has been fueled by the change in sentiment.
“The S&P 500 index has fallen 1.8% in the past year. However, European shares have risen almost 9% to a new record high. Tech stocks in Hong Kong are up nearly 30%.
“The euro has soared above $1.07 for the first time in four months, and many banks have backed away from their calls to drop it to parity with the dollar.
“According to weekly data released by the Commodity Futures Trading Commission, investors have cut their bullish dollar bets in half since the inauguration of U.S. president Donald Trump in January.
…
https://energynews.oedigital.com/energy-markets/2025/03/05/investors-see-the-beginning-of-a-tectonic-move-away-from-us-markets
Comments on this entry are closed.