America has a secret weapon that will help it retain its position as the world’s dominant power. That weapon is the United States dollar, which has been the world’s primary reserve currency since the end of World War II.
The dollar’s position as the world’s top reserve currency helps keep rival powers like China and Russia in check and preserve world peace. Much of America’s position as the world’s richest and most powerful nation is based upon the dollar’s status as a reserve currency, not on its vast military power.
Reserve currencies are important because they are the primary means used to pay off debts and other financial obligations. More importantly, the price of commodities such as oil, gold and iron is usually calculated in the reserve currency. Simply put, you need dollars if you want to pay debts, buy bonds, sell bonds or buy and sell oil in the international markets.
If China wants to buy oil from Saudi Arabia or iron from Australia, it needs dollars. If Russia and Saudi Arabia want to sell oil, they need dollars. Any other arrangements they enter into will be limited ones because whatever currency is used in the transaction cannot be spent elsewhere in the world. Even if China does pay Russia yuan for oil, the Russians would still have to convert the yuan into dollars if they wanted to borrow money in the international market or buy a warship from France or vacation on the Riviera.
How America Owns China
That means China has a strong vested interest in keeping America and the dollar strong and healthy. On some level, the dollar is the basis of their economies. This reality is even stronger for China, which exported $443.94 billion worth of goods more to the United States in the first 11 months of 2015 than for Russia.
Both China’s industrial boom and its growing military are being paid for with U.S. dollars. Were dollars to disappear tomorrow, China’s entire economic and political system would completely collapse. This makes any sort of war or conflict between the People’s Republic and the United States unlikely because China needs the United States.
The dollar’s position as the reserve currency makes China far more dependent upon the United States than most observers realize. It is also rather unprecedented because there is no historical example of two countries with such radically different cultures and political systems being so dependent upon each other economically.
This arrangement preserves the peace because leaders in the United States and China have a strong vested interest in preserving a strong dollar and a high level of trade. It gives leaders a strong incentive to set aside political and ideological differences and to ignore “national interests.”
One interesting aspect of this arrangement is that some sort of U.S./Chinese alliance against Russia, which is militarily strong but economically weak, is actually more likely than a Chinese/Russian alliance against the USA. Economically, China has little to gain from a special relationship with Russia except low prices on commodities and much to lose.
America provides China with something far more important than oil or natural gas: a market for its goods. One problem China has is that the United States is the only market for much of its production. There simply are not enough people in Russia to buy all of China’s surplus production, and other emerging markets like Africa and India lack the cash to buy China’s goods.
China’s current economy is designed for a strong U.S. dollar as the reserve currency and a large open American market. If either of those circumstances were to disappear, the People’s Republic would face economic collapse and quite probably revolution.
How the Strong Dollar Keeps Russia Weak
The dollar limits Russia’s power and influence but does not necessarily hold it in check. Russia has a natural resource-based economy, which means it relies upon exports of oil, gold and other commodities.
These are paid for in dollars, which hurts Russia if the dollar is high. An even worse situation occurs for Russia if commodities prices are low, which they are right now. The value of the Ruble is based upon the price of oil, which explains Russia’s high rate of inflation.
As long as the dollar remains the reserve currency, the Russians have no real means of controlling their inflation. The Chinese like this arrangement because it enables them to buy commodities such as oil and advanced weapons from Russia at very low prices. Russia is slowly becoming a dependent of China, an arrangement that Vladimir Putin has accepted.
China’s Dollar Imperialism
The dollar’s role as the reserve currency enables China to buy a wide variety of commodities around the world at a very low price. One strange side effect of the dollar’s role as reserve currency is to give the Chinese a great deal of leverage over countries that are dependent upon exports of natural resources.
This arrangement allows for a sort of low-cost colonialism in which the Chinese get to pay whatever price they want for commodities like oil or iron from developing countries. Those countries get impoverished, and their people receive little or no benefit from their own resources. They also suffer the environmental degradation that comes from activities like mining and oil production.
Countries have to participate if they want to be a part of the world economy. If nations like the idea of having access to modern technology and global markets, they have to go along. The alternative is to be North Korea and live permanently in the 1950s.
The United States profits from this arrangement because it gets the finished products the Chinese make from the resources. The Americans benefit because they do not have to put up with the side effects of extensive industrial production such as pollution and labor unrest.
This partially explains why commodities prices are so low right now. The United States and China have created an economic environment that deliberately depresses commodities prices. Some other nations, such as Saudi Arabia, are contributing to it by selling oil off at a low price.
How Long Can the Dollar’s Reign as Reserve Currency Last?
The important question we need to ask ourselves right now is, how long can the dollar’s reign as reserve currency last? The best answer is for the foreseeable future because there simply is no credible alternative; the yuan is untested and unproven, and the Euro is crippled by Europe’s economic stagnation.
Perhaps we should welcome this development because the last time a global reserve currency (the British pound) collapsed, the result was the Great Depression and World War II. For better or worse, the dollar’s role as reserve currency is keeping the peace.
Therefore America’s leaders should concentrate on keeping the dollar the reserve currency, not on building up unnecessary military might, if they want the United States to be the world’s most powerful nation. The dollar and not the Pentagon’s war machine is America’s real secret weapon.
