Yves here. Michael Hudson presents an insightful overview of Trump’s ongoing attempts to reinforce US dominance in both military and economic arenas, as detailed in an excerpt from his forthcoming article. It’s worth addressing a point of contention: Hudson suggests that the US may eventually fail to meet its obligations on Treasury bonds. A sovereign currency issuer is never destined to default. It can, at any time, fulfill its obligations in its own currency. While overspending could lead to excessive inflation, diminishing the currency’s value relative to others, making it less attractive for foreign holders, the US can consistently honor its dollar debts.
The US may opt to alter agreements with creditors, such as extending Treasury maturities, but it is always capable of meeting its dollar commitments.
The primary reason central banks accumulate dollars is that they intentionally maintain low currency values to foster trade surpluses and build foreign exchange reserves. This strategy was notably adopted across Asia following the 1997 financial crisis, where countries like South Korea and Thailand, having experienced IMF bailouts, aimed to avoid falling under similar circumstances again. A robust foreign exchange reserve enables a nation to defend its currency independently during a financial crisis.
Even during the Obama administration, the Treasury faced scrutiny for not labeling China a currency manipulator due to its currency’s peg being artificially low compared to the dollar. This characterization persisted into the 2010s until China shifted to a managed float policy, allowing for a gradual appreciation of the renminbi, thus nullifying the previous claim.
It is also important to clarify that SWIFT functions solely as a messaging service. SWIFT does not provide clearing services; transactions involving dollar settlements are carried out through Fedwire.
By Michael Hudson, a research professor of Economics at the University of Missouri, Kansas City, and a research associate at the Levy Economics Institute of Bard College. His latest book is The Destiny of Civilization
The National Security Strategy’s Drive to Shed the Costs of Imposing Its U.S. Unipolar Empire
One realistic aspect of the National Security Strategy (NSS) is the understanding that the United States cannot overtly project control through military force. Instead, this responsibility is increasingly delegated to client oligarchies and their governments, similar to how the European Union’s political and foreign policies have historically been aligned with NATO guidelines controlled by the US.
In a shift away from the anti-Russian rhetoric of Biden’s administration, the NSS suggests delineating the world into spheres of influence for significant regional powers: the United States (holding sway over Latin America and the Caribbean), Russia (controlling Central Asia and former Soviet republics, including portions of eastern Ukraine), and China (exercising influence over mainland Asian neighbors). This strategic framework involves creating a Japan-led Pacific coalition akin to NATO, with India playing a potentially unpredictable role. The European Union and NATO are portrayed as diminishing influences.
However, this arrangement does not genuinely divide spheres of influence, akin to the Yalta Conference of 1945. The primary focus is establishing unequivocal U.S. control over Latin America and the Caribbean, discouraging European and Asian investments in these resources.[1] This distorted interpretation of the Monroe Doctrine promotes a form of reciprocal non-interference; traditionally, Europe stayed out of Latin American politics, while the U.S. would refrain from meddling in European affairs. However, U.S. officials showed little concern when newly independent Latin American nations accrued significant debt to foreign creditors, reminiscent of France’s treatment of Haiti following its quest for autonomy.
Historically, the U.S. has violated the Monroe Doctrine through its influence on Eurasian matters, meddling in European elections, such as in Italy and Greece post-World War II, and establishing military bases around Eurasia. This approach has been costly, contributing significantly to the U.S. balance-of-payments deficit since the Korean War and fuelling the domestic budget deficit. The NSS recognizes that these extensive costs must be distributed across regions, burdening compliant U.S. allies, much like NATO countries under British, French, and German influence.
In Asia, U.S. diplomacy relies on the Quadrilateral Security Dialogue (Quad)—comprising Japan, Australia, India, and the United States—together with allied governments in South Korea and the Philippines, aiming to obstruct oil and gas acquisitions from Russia, Iran, and Venezuela while establishing military installations encircling China. Similar to NATO’s pressure tactics, Asian nations are encouraged to back a separatist political movement in Taiwan.
The NSS’s concept of Chinese and Russian spheres of influence raises significant questions, especially regarding islands Japan acquired from Russia after the 1905 war and the cluster of islands in the South China Sea leading toward Taiwan. The U.S. proposition of deploying missiles on these islands parallels its activities in Okinawa, complicating any promised U.S. pullback from its extensive military presence. This effectively shifts the financial burdens of potential military conflict with China onto Japan and other nations aligned with the U.S. bloc. Will Japan’s Liberal Democratic Party align with the commitment to defend “to the last Japanese,” in a manner reminiscent of Ukraine’s current situation?
Japan has long been considered a potential candidate for establishing its own Monroe Doctrine over China and surrounding regions on behalf of the U.S. A few years back, the U.S. attempted to incorporate Japan into the UN Security Council, a proposal opposed by Russia, viewing it simply as a means to further the U.S.’s agenda.[2] As the U.S. has historically utilized NATO and the EU as proxies against Russia, Japan is expected to lead efforts against China while the Trump administration rekindles tensions between India and China.
The NSS aims to position Japan within a coalition of five nations to lead a coordinated regional alliance under U.S. guidance, with China and Russia as its two main adversaries. The strategy appears to seek ways to detach Russia from China by proposing to lift trade and financial sanctions against Russia, along with potential U.S. investment in Russian mineral assets. This endeavor risks overlooking the detrimental historical context concerning the U.S.’s dealings with figures like Michael Khodorkovsky and his associates.
Throughout the Western Hemisphere, U.S. policy seeks to curtail Chinese, Russian, and Iranian investments in Venezuela, Cuba, Brazil, and other Latin American and Caribbean nations. This strategy involves promoting and maintaining client oligarchies, kleptocrats, and military dictatorships to ensure continued dominance.
Trump’s ambitions extend beyond simply garnering support for current U.S. industries. He aims to exacerbate the confrontational stance of the Biden administration by imposing high tariffs and sanctions against Russia and China, incentivizing other nations to relocate their industries and financial assets to the United States. This tactic began with the disruption of the Nord Stream pipeline, driving energy prices up in Europe and diminishing the profitability of various German industries. Despite these challenges, relocating to China, known for its low-cost economy, remains more appealing for German companies that have already established extensive operations in cities like Wuhan and Shanghai. Surprisingly, China might emerge as a significant beneficiary from the fallout of the Nord Stream incident.
Dedollarization, and Trump’s Drive to Counteract It
In summary, foreign investors are expected to maintain their savings in the U.S. or dollar-denominated assets, potentially reallocating their stockholdings to U.S. markets. The underlying assumption is that trade policies and investment flows can enhance the competitiveness of U.S. industrial production.
The reliance on foreign investments in U.S. Treasury securities is critical for preventing a sharp depreciation of the dollar’s exchange rate, a situation exacerbated by the monetary drain associated with America’s military spending, which has contributed to balance-of-payments deficits since 1950—a trend now accompanied by expenditures to import goods that the U.S. no longer manufactures domestically.
However, the international financial landscape is evolving toward multipolarity as nations respond to U.S. trade weaponization and financial sanctions by seeking to reduce their reliance on the dollar. The U.S.’s collaboration with European allies to confiscate Russian and Venezuelan reserves has significantly undermined confidence in the dollar as a reliable reserve currency, leading to calls from countries like Germany for the return of gold reserves previously held in the U.S.
The movement toward dedollarization is fundamentally a defensive strategy against the increasing weaponization of international finance by the U.S. Historically, most central bank dollar reserves were held in U.S. Treasury securities. However, rising concerns regarding the sustainability of U.S. foreign debt and a ballooning domestic debt will force nations to reconsider holding these assets.
Global trends toward dedollarization are taking shape on two fronts: countries are engaging in trade settlements utilizing local currencies and holding them in reserves based on swap agreements, thus mitigating currency exchange risks. Simultaneously, countries are increasingly investing their monetary reserves in gold, acknowledging it as a long-standing standard for settling balances, rather than accumulating U.S. government securities.
An important driver behind the shift away from dollar-centered financial systems is the fear of abrupt exclusion from the Western financial system, as exemplified by Russia’s removal from SWIFT following its military operations in Ukraine. This action aimed to cripple Russia’s capacity to facilitate trade payments; however, it inadvertently demonstrated resilience, prompting other nations to seek alternatives, including China’s own payment processing system, which offers lower transaction fees than traditional dollar-dependent systems.
At a fundamental level, the greatest challenge to the dollar’s dominance arises from the understanding that the dollars circulating in international markets largely stem from U.S. military expenditures. By holding substantial U.S. Treasury securities, countries inadvertently provide the U.S. with a significant financial advantage. Following the U.S. abandonment of the gold standard in 1971, central banks were pushed toward Treasury bonds as their primary reserve vehicles.
The predatory nature of this arrangement has allowed the U.S. to finance military operations surrounding other nations while diminishing reliance on the sale of gold or other assets typical for most countries facing balance-of-payments deficits. The U.S. has achieved this through the issuance of its IOUs, maintaining an exorbitant privilege in the international financial system.
Recently, Trump has proposed the creation of a Mar-a-Lago Accord, suggesting that foreign holdings of dollar reserves should be converted into 100-year bonds, thus alleviating pressure on the U.S. to redeem these dollars anytime soon.[3] This approach aligns with the sentiment expressed by former Treasury Secretary John Connally, who remarked, “It’s our dollar, but your problem.” The current U.S. strategy directs foreign central banks to remain engaged in a cycle of trading U.S. debt, with any serious requests for redemption seen as antagonistic.
The growing concerns surrounding the risks associated with holding U.S. dollar-denominated debts have led nations to revisit gold as a safer option for settling international transactions. This shift has contributed to rising gold prices. While China’s dollar holdings have not drastically decreased, its recent foreign reserve increases have primarily been in gold and investments linked to its Belt and Road Initiative, as well as in the currencies of major trading partners.
Trump’s Efforts to Dissuade Foreign Countries from Moving Away from the Dollar via Cryptocurrency
In its attempts to counter the trend of dedollarization, the most recent U.S. strategy involves encouraging foreign nations to invest in stablecoins—cryptocurrencies linked to U.S. Treasury securities rather than to Chinese bonds. This initiative aims to bolster the dollar’s exchange rate. Martin Wolf of the Financial Times notes that stablecoins have surpassed Japan as the largest holder of U.S. debt; projections suggest that this sector could rise from $280 billion to $2 trillion by 2028.[4]
Nevertheless, rising interest rates threaten to diminish the value of U.S. bonds backing these stablecoins, potentially leading to negative equity. Economic pressures could prompt investors to withdraw funds from the U.S. economy and its dollar. Additionally, the Trump Administration has amplified this risk by resisting regulation of cryptocurrencies, which could safeguard the financial sector from vulnerabilities associated with market downturns. This deregulation, described as “clearing the bureaucracy,” increases the likelihood of defaults, particularly among banks that back loans with stablecoins, which remain unregulated and prone to significant fluctuations, as evidenced by recent declines in cryptocurrencies like Bitcoin.
A notable feature of cryptocurrencies is their potential facilitation of tax evasion and anonymous transactions that circumvent public oversight, echoing the U.S. historical pursuit of offshore banking centers. During my tenure at Chase Manhattan Bank, I was tasked with estimating dollar inflows from U.S. initiatives to attract illicit financial activity to locations that enabled tax evasion.
Eventually, the modern equivalent of such havens can be found among cryptocurrencies such as stablecoins, whose proceeds are invested into U.S. Treasury securities to entice foreign savings to support the dollar. The central hope is to prevent sell-offs of these cryptocurrencies, ensuring that dollar-denominated asset prices remain stable, thereby avoiding a depreciation of the dollar and rising interest rates.
[1] The situation in Venezuela exemplifies this trend. Trump’s focus on monopolizing control over the oil industry has led to blocking investments and military assistance from China and Russia. Trump also insists on China relinquishing its port development in Panama.
[2] Historical practices included using criminal organizations in Japan to undermine socialist movements and maintain U.S. influence.
[3] The Mar-a-Lago Accord proposal suggests converting foreign holdings of dollar reserves into 100-year bonds, reflecting a strategy to maintain dominance through extended commitments and imply an everlasting threat from adversarial nations.
[4] Concerns regarding stablecoins raise significant issues about their potential risks and implications for the broader financial system.
