Thread by @andymok

Not sure why dollar hegemony is so important? Check out this thread to find out why

The foundation of American hegemony might appear to rest on its military. But, in fact, the true source of American power is based on its currency: The U.S. dollar.

For dollar hegemony allows US to borrow unlimited amounts of money from the rest of the world. Ending this dominance would cut off credit to US and place the cost of American defense spending, and other major government programs squarely on the shoulders of the American voter

This would likely lead to a drastic reprioritization of government spending priorities.

There are four interlocking pieces to this monetary hegemony: (1) The ability to force other countries and companies around the world to denominate their trade in dollars,

(2) controlling access to the global payments system, (3) the primacy of the dollar as a global reserve currency and, perhaps most important, (4) the nature of the dollar as a fiat currency.

These are all currently under threat.

And in a world where changes occurs at faster and faster rates, the demise of the dollar may play out not in decades, as many assume, but perhaps over just a few short years. Recent developments suggest that this process is well under way.

The dollar as a unit of account

By forcing other to price goods and services in dollars, the U.S. creates demand for its currency. This requires buyers to find ways to earn dollars to pay for their purchases.

However, because the dollar is a fiat currency (more on this below), the U.S. can create dollars literally out of thin air without providing anything of value in exchange for a new batch (or boatload) of dollars.

As American economist Barry Eichengreen noted "It costs only a few cents for the Bureau of Engraving and Printing to produce a 100 dollars' bill, but other countries had to pony up 100 dollars' of actual goods in order to obtain one."

This part of dollar hegemony was cemented into place in the 1970s when Saudi Arabia agreed to price oil in dollars in exchange for American military protection (and use those dollars to purchase U.S. government securities).

However, recent developments including the launch of Shanghai oil futures, which are denominated in Renminbi (RMB), offer an alternative. China is already the world's top importer of oil.

With the recent upgrading of China-Russia relations which includes trade in oil priced in RMB, the emergence of another currency as a global unit of account has been firmly established.

Control of the global payment system

The Society for Worldwide Interbank Financial Communications (SWIFT) financial messaging service is the primary means to transfer money globally.

Based in Belgium, the member-owned cooperative connects more than 11,000 banks, financial institutions and corporations in more than 200 countries and territories around the world. It serves as the central nervous system of global finance.

So, if a country's banks are cut off from SWIFT it cannot pay for imports or receive payments for exports. But while SWIFT might look like an independent multi-national organization, appearances can be deceiving.

In fact, the U.S. through threats of sanctions against SWIFT's board of directors can force it to disconnect those who displease Washington and it is in fact a crucial tool for maintaining American dollar hegemony.

However, on June 28, France, Germany and the UK announced that an alternative payment system called Instex became operational. This payment balancing system permits companies in Europe to buy Iranian goods, and vice-versa, without accessing SWIFT.

Given the growing number of countries which the U.S. has threatened with economic aggression including China, Iran, Russia, Venezuela and others, the desire for an alternative payment system is undeniable.

The U.S. Treasury Department's undersecretary for Terrorism and Financial Intelligence, Sigal Mandelker, warned Instex President Per Fischer, in a May letter, "I urge you to carefully consider the potential sanctions exposure of Instex.

Engaging in activities that run afoul of U.S. sanctions can result in severe consequences, including a loss of access to the U.S. financial system."

However the timing of the June 28 announcement may signal that a big enough coalition of countries exists to counter or deter US threats against Instex. Moreover, its backers may believe that retaliation by the U.S. will spur even faster adoption of an alternative to SWIFT.