Competition for the Crown: One of the recent sanctions that garnered a lot of attention was the decision to bar several Russian banks from SWIFT. Many commentators referred to this as the financial “nuclear option,” since it effectively cut those banks off from much of the global financial system. Because many of the transfers that use SWIFT are made in dollars, some feared this action could spark a negative backlash against the dollar. The analogy illustrates the challenge of substituting away from the dollar: There simply isn’t any comparable alternative. “The dollar represents the entire ecosystem of payments and banking,” says Wong. 

“It is difficult to find a close substitute that is equally deep, liquid, broad, and safe.” Most competitor currencies face limitations that the dollar does not. The euro is widely used for trade in Europe and is viewed as safe, but the fact that the euro- zone does not have a unified fiscal policy limits its ability to produce enough euro-denominated safe assets to satisfy  global demand. Plus, as the recent actions against Russia illustrate, switching to the euro would not necessarily offer any additional protection over the dollar, as Europe and the United States often work in partnership. China has taken steps to internationalize the renminbi in recent years by opening its financial markets up to more foreign investors, but Maggiori says it still has a long way to go to match the openness of the U.S. market.

The long view, while there may not be a single obvious replacement for the dollar, that doesn’t mean that countries haven’t been diversifying into other currencies. The dollar’s share of global foreign exchange reserves fell to a 25-year low at the end of 2020, to 59 percent from 71 percent in 1999. Rather, most of the shift away from dollars has been into dozens of smaller currencies. They cited a greater desire for portfolio diversification on the part of central banks as well as the falling cost of transacting in smaller currencies as factors that have contributed to this change. This has led some economists to speculate that we could be heading toward a “multipolar” world of many different competing currencies, which could have some advantages.

Many economists point to a new kind of Triffin dilemma as a greater risk to dollar supremacy than the use of sanctions. Just as the United States faced a crisis of confidence in its ability to back the dollars in circulation during the Bretton Woods era, economists have warned that it could face a similar challenge in the coming years to supply enough safe assets to meet global demand while simultaneously maintaining confidence in its ability to repay its debts. Having more options for safe assets to choose from in the form of different currencies could solve this problem, but not all economists agree that a multipolar system would necessarily be more stable. Competition among countries to grab the reserve currency crown could lead to coordination challenges and questions about which assets are truly safe. Moreover, the transition from the dollar regime to its successor could be unstable. “One historical precedent is the coexistence of dollar and sterling during the inter-war years,” the late Harvard University macroeconomist Emmanuel Farhi told Econ Focus in a 2019 interview. “It’s not a particularly happy precedent; it was a period of monetary instability.

History teaches that dominant currencies change infrequently and often over long transition periods. But crises can be the catalyst for those transitions, as was the case when the British pound’s centuries-long reign started to unravel after World War I. While almost no economist predicts that the dollar will be replaced soon, market confidence is fickle, and the types of crises that spark a changing of the reserve currency guard are inherently hard to predict.

Drivers of Reserve Currencies include  four key elements in determining reserve currency status,  The economic size/dominance of reserve issuers, credibility of reserve issuers, Inertia, and reserve currency shares at the global level. Trade Links as a factor could lead to more diversified supply chains and/or localized production to avoid overreliance on a single dominant supplier country in the future, with implications for the demand for reserves. For instance, more localized production could reduce international trade and subsequently the demand for international reserves. Alternatively, more diversified international supply chains might encourage demand for a more diversified portfolio of reserves. The post crisis period, lower trade shares with reserve issuers could lead to lower reserve shares. However, this potential development in trade links could be countered by any reserve issuer’s ability to elevate the status of its currency as an invoicing currency. The Credibility matters. The US dollar’s dominance has been related, in part, to a lack of credible alternatives. Rising demand for reserve assets, particularly in the context of a global shortage of safe assets, may create incentives for other potential suppliers to take proactive steps to develop new reserve currencies. Exchange Rate Anchor,  Geopolitics as a Trigger of Currency Switches,  Technology as a Disruptor, Development of Central Bank Digital Currencies,  Digitization of Payment Systems and Revenue System,  and Longer-Term Considerations can play a vital role in changing the reserve currency status.  

Recalibrating sanctions policy to preserve U.S. financial hegemony: The American economy, dollar, and banking system create unparalleled power for the U.S. in the global financial system. This power provides disproportionate influence over the world’s key economic and financial institutions, regulatory authority over major foreign companies and banks, and allows borrowing on favorable terms and in dollars, enabling long-term deficit spending.  U.S. policymakers are increasingly deploying financial sanctions to punish or coerce other states. Once targeted at weak rogue states, sanctions are now used against great powers and allies. These sanctions yield few political victories because they ask too much and are often implemented reflexively, to punish, rather than strategically, to achieve a desired outcome. But they carry serious political and economic costs—damaging relations with allies and locking American companies out of foreign markets.  

Although financial sanctions have come into vogue among policymakers as a seemingly low-cost, effective way to manage hostile states, other nations are increasingly alarmed at the weaponization of commercial institutions. Financial coercion has made both allies and adversaries aware of just how vulnerable they are to U.S. pressure. This realization has spurred other major economies to invest in alternatives to the current U.S.-led system. Aside from carrying long-term costs for U.S. dominance, the efficacy of liberally applied sanctions deserves further scrutiny. Sanctions often succeed in punishing adversaries but this tactical achievement rarely reforms target states’ behavior when important policies are at stake. Sanctions do shift commercial activity to channels outside the reach of the U.S., however, and change the cost benefit calculus for affected nations, making them more likely to invest in building their own alternative institutions to bypass the American-led system. The U.S. should not renounce sanctions as a policy tool but should use them far more judiciously. In many cases, policymakers have reacted to the failure of sanctions to change a target’s behavior with even more sanctions, locking in hostile relationships and locking American firms and those of U.S. allies out of the sanctioned economy. This means forgone opportunities for wealth creation in the U.S. and a market opening for competitors, often from great power rivals like China and Russia.Under the umbrella of  USA  the SWIFT has grown to 11,000 member institutions, representing nearly every country. Because the world needs USD, and because the dollar runs through American banks and ultimately the Federal Reserve, the U.S. also has incredible control over foreign banks who need USD, their clients who need to transact in USD, and institutions such as SWIFT. The dollar overwhelmingly dominates the foreign exchange markets, accounting for 87.6 percent of global market turnover in 2016 (BIS, 2016). This means those looking to convert one third-party currency to another (say Chinese yuan to Pakistani rupees) will often have to convert their own currency to USD before buying the destination currency. The ability to limit access to USD thus creates a potent bottleneck even for those not trading with the U.S. The recent sanctions by the US is indirectly creating her allies to join its enemy because of economic reasons.      

Tools in the Tool Box: Individual sanctions represent an attempt to avoid harming the adversary’s civilian population by personally punishing key elites. These sanctions were first introduced against Haitian military leaders in 1993 and have since grown to include visa bans, asset freezes, and blacklisting of the affected individual (and sometimes their family members) from conducting business with reputable financial institutions. Financial sanctions are designed to block the target from transacting with the financial institutions and in the financial markets of the U.S. and its commercial partners. In practice, this severing from the dollar system can undermine the target nation’s banking industry, currency, and ability to process international payments. With the so-called War on Terror, the U.S. honed its ability to apply pressure on adversaries via the international financial system and has deployed such sanctions repeatedly against both state and non-state actors. Secondary sanctions are used to sanction third-party economic actors that attempt to do business with sanctioned entities. While they are simply an enforcement mechanism for primary sanctions and often take the form of financial sanctions on banks or corporations that transact with a sanctioned entity, it is useful to treat them as distinct because they must inevitably target the firms of allied or neutral states, thus generating detrimental political consequences.

Do sanctions work. Sanctions are a frequently used tool because the domestic politics behind them are compelling. Imposing sanctions provides a political bump to policymakers who want to appear strong during international disputes without incurring domestic political risk (Taehee Whang, 2011). In these cases, whether the sanction works well or not as a policy tool is less important than its ability to be touted before domestic audiences. As long as sanctions remain on, policymakers can argue that the target entity is paying a price for its behavior, regardless of whether the sanction is actually advancing the desired foreign policy objective. Scholars have extensively examined the effectiveness of sanctions; the research shows economic sanctions tend to be ineffective at changing state behavior, primarily because other self-interested nations will step in to fill the void where the U.S. or its allies have severed relations.

It’s good to be the King. The U.S. is the world’s largest national economy, but its economic influence pales in comparison to its dominance of the global financial system. U.S. financial dominance is predicated on three pillars: U.S. dollar dominance makes it the world’s foremost reserve currency; U.S. banks’ role as a clearinghouse for many global financial transactions; and The reach of its regulatory apparatus. The USD is the global reserve currency, meaning central banks and other financial institutions stockpile USD to make investments and transactions or influence exchange rate. Although there are other reserve currencies, USD accounts for more than 60 percent of central bank currency reserves. Furthermore, roughly half of loans worldwide are denominated in USD, and 40 percent of international payments are processed using the dollar. Breakdown of $10.6 trillion in global share of reserves by currency (2018) are USD (62.2%). EURO (20.4%), British Pound (4.5%), Japanese Yen (4.9%), Canadian Dollar (1.9%), Chinese renminbi (1.7%), Australian Dollar (1.7%), Swiss franc (0.2%) and other currency (2.5%). The Central banks prefer holding U.S. dollars as part of their reserves because of its widespread use, stability, and the strength of the U.S. economy.

Weaponizing Economic Interdependence. As policymakers have realized the power financial dominance confers, they have weaponized economic interdependence—to use the term coined by political scientists Henry Farrell and Abraham Newman—against an increased set of targets.

Tightening the net with secondary sanctions: As the U.S. has become more comfortable with financial sanctions, it has also taken to using secondary sanctions to completely isolate targets even from neutral third parties. An example is the Helms-Burton Act of 1996, which allows suits in U.S. courts against foreign companies doing business with the Castro regime in Cuba. The passage of the act led the Europeans and Canada to pass “blocking statutes,” which forbid their companies from cooperation with U.S. sanctions efforts. In September, the U.S. sanctioned the Chinese military’s weapons development department following the purchase of Russian weapons in violation of U.S. sanctions on Russia. More recently, the chief financial officer of Chinese tech giant Huawei was arrested in Canada at the request of the U.S. for allegedly helping violate sanctions on Iran, sparking a diplomatic row and the retaliatory arrests of Canadians in China. The U.S. has followed up with criminal charges against Huawei itself for sanctions evasion and other crimes, a move that is a negotiating chip in a trade dispute, but also likely to further harm U.S.-China relations.

There are Challenges to US Financial Hegemony, as U.S. has dominated the global financial system for a long time. As long as other nations perceived U.S. power to be exercised judiciously and with a nod to their interests, they had no incentive to pursue radical change. But as the U.S. weaponized this system in recent years, the risk of relying on U.S. goodwill has become evident to other nations, leading them to take steps to counter American dominance. This manifests primarily in efforts to build alternative infrastructure and moves to chip away at the dominance of the dollar. Russia and China have been two of the first movers in this regard, due to their size and role as traditional rivals of the U.S. After the first round of sanctions forced Visa and Mastercard, two major payment processors in Russia, to cut ties with some of their customers, Russia introduced a national payment system known as Mir in 2014. It also developed a domestic messaging service known as SPFS that mirror’s SWIFT’s function and others in progress. China is trying. CIPS has come a long way since its 2015 founding. It has grown from 19 direct participants and 176 indirect participants at its inception to 31 direct participants and 829 indirect participants today, while also expanding service to cover more time zones and standardizing its protocols to bring them in line with SWIFT (Gjoza,). It has also significantly expanded both in the volume and value of transactions it handles. China’s payment clearing and settlement system has seen rapid growth since its launch in 2015. Similarly, the BRI, while facilitating increased use of RMB in some areas, has seen a decline of RMB use in others (SWIFT, July 28, 2017). Out of the 68 BRI nations, 33 are rated below investment grade, suggesting that they pose too much of a credit risk to secure development loans on the open market. Decreased foreign dependence on the USD would translate to reduced influence on these issues and decreased ability to effectively pressure states like North Korea when it truly matters. Economically, a fragmentation or balkanization of the international financial infrastructure could reduce the value of the dollar and drive up the cost of financing U.S. debt, even if the U.S. continues to lead the largest emergent system. A shift in central bank purchases away from USD toward other currencies would represent a significant reduction in demand and lead to a devaluation of the dollar.

That shift could be politically destabilizing in the U.S. Net interest payments in the 2019–2020 fiscal year amount to $479 billion, exceeding the annual cost of Medicaid “Fiscal Year 2020, Budget of the U.S. GovernmenTt). By 2027, even at the modest interest rate projections of 3.7 percent, the U.S. government will pay $788 billion in interest, surpassing the projected defense budget for that year and accounting for 13 percent of federal spending (up from roughly 9 percent in 2019; Fiscal Year 2020, Budget of the U.S. Government). Should a loss of confidence in Treasuries spike interest rates far above those projections, the U.S. could be paying $1 trillion annually in interest alone. While a full-scale withdrawal from Treasuries would be costly for major investors like China and Japan, declining foreign participation in Treasury auctions is already happening.

How Great Powers Pursue Monetary Hegemony: A Comparison Between the United States and China Currency Swap Policies.  The political economy literature shows that monetary hegemony guarantees significant privileges to a country’s economy—governments gain greater flexibility in their budgetary and current accounts without incurring significant macroeconomic imbalances. Such greater economic policy flexibility also shapes the global balance of power since governments have fewer fiscal constraints to enhance their military spending. One of the main instruments governments can use to enhance or preserve their currency’s position in the international monetary system is establishing currency swap lines with other central banks. Yet the policies of central banks differ, and so do their effects on currency power. It contends that a country’s political regime explains the different constraints it faces in its quest for monetary hegemony.

The theoretical framework to elucidate the difference between currency swap policies in democracies and autocracies have been discussed and proceed this in a comparative analysis of the Fed and PBOC currency swap policies. Revel that the United States restrains access to its currency swap lines with countries that are critical to the stability of the global economy and that levy small credit risk to the Fed. Ultimately, the US monetary authority fears domestic political backlash from their international operations. In the case of China, credit risk is not a concern due to the lack of popular scrutiny. Swap lines are extended to advanced and developing economies as financial stability and economic development instruments. However, China’s swap line policies cannot fully succeed since the authoritarian nature of the government impedes the implementation of reforms necessary for a country’s monetary rise: free capital flows and liquid capital markets. Essentially, the economic advantages that a reserve currency status provides to a country determine a significant part of its national security capabilities. Since a state can enhance its economic power by dominating the monetary system, the strength and international acceptance of a country’s currency affects its military capabilities. Ultimately, the reduction of fiscal constraints due to the dollar reserve currency condition facilitates the U.S. government’s ability to have the largest defense spending in the world. For instance, Thomas Oatley (2015) explains that financial power is the mechanism through which the U.S. government could overcome the so-called “crowding out constraint.” Essentially, the U.S.’s highly liquid capital markets and low credit risk conditions continuously attract foreigners to hold dollar-denominated assets.

China also wants to achieve a higher level of monetary dominance to experience some of the privileges that the dollar provides to the United States. Therefore, Chinese officials are pursuing policies to internationalize its currency. For that, China’s government is seeking to increase the use of its currency in trade and financial transactions and raise the renminbi’s allocation in the foreign exchange reserves compositions of central banks. In autocracies, the constraints that the political leadership faces are different. After all, financial openness, and economic liberalization, which are critical elements for achieving reserve currency status, can also represent a threat to the capability of autocrats to remain in power. Freeman and Quinn (2012) show that financially integrated autocracies are more likely to democratize than financially closed autocracies. This happens because the elites in autocracies gain a greater bargaining position over tax rates when diversifying their assets to overseas investments. As a result, they became less worried that the rise of the democratic regime would impose confiscatory taxes on them. However, that is not the only reason authoritarian states do not want to give up substantial control over their economies.

How the Fed and the PBOC Justify their Currency Swap Lines Agreements: It seems reasonable to conclude that currency swap lines are essentially a tool used by the Federal Reserve to fulfill the global liquidity demand, preserve the stability of the international monetary system, and preserve the role of the dollar as a global reserve currency in periods of crisis. Such a perception is corroborated by the analysis of Federal Reserve’s documents that publicize the rationale for establishing these swap lines. Those documents emphasize the importance of currency swap lines as an essential tool to minimize the effects of the global crisis on the U.S. economy and maintain the stability of the international monetary system. This temporary arrangement with the ECB is proposed to allow dollar funding problems now faced by European banks, particularly at terms longer than overnight, to be addressed more directly by their home central bank. Improved conditions in European dollar trading would guard against the spillover of volatility in such trading to New York trading and could help reduce term funding pressures in U.S. markets. Fundamentally, the worries regarding the credit risks of currency swaps are a genuine concern of a monetary institution in a democratic country like the United States. After all, the Federal Reserve has a high degree of independence to enhance the credibility of its actions. Nonetheless, their credibility also relies on the accountability of their actions.

The People’s Bank of China (PBOC) currency swap lines converge with the Fed because such an instrument is considered an important tool to promote global financial stability. On the other hand, the PBOC does not demonstrate significant concern about the credit risks of such operations. In the reports, interviews, and speeches analyzed, Chinese officials perceive swap lines as an instrument that can enhance China’s and its economic partners’ development by facilitating bilateral trade and investments. The swap lines are also an instrument to facilitate the development of the Belt and Road Initiative, as well as a tool to reform the international monetary system by emphasizing the importance of reducing the dollar monetary hegemony. Essentially, currency swap lines are one of the primary tools of Chinese economic officials to promote the internationalization of the renminbi.

Who receives currency swap lines from the Fed and the PBOC? When a 2020 map of the Fed’s and PBOC’s bilateral currency swap arrangements is displayed, the distinct approaches that each country is tanking for enhancing or preserving their currencies’ status in the international monetary system becomes evident. The countries that have established swap agreements with both the Fed and the PBOC. It is noteworthy that all these central banks represent developed regions of the world and, therefore, are critical elements for the stability of the global economy and financial systems. Ultimately, it is not surprising that both the PBOC and the Fed cooperate with the central banks of the Canada, Australia, New Zealand, South Korea, Japan, Euro Zone, and Switzerland. Together, the countries under these central banks’ jurisdictions corresponded to approximately 31% of the global economy in 2019. Moreover, all these central banks’ currencies have reserve status, except South Korea, Singapore, and New Zealand.

This paper presents multiple facets of gaining the status of a reserve, dominant, anchor currency for promoting international trade and investment, at different point time with the regime changes through war and some cases through economic, military and diplomatic routes by creating the economic, financial and political hegemony in the human history. Over the years, since the transition of currency hegemony from one to another power has not happened uniformly rather differently. Obviously, the criteria needed to gain the currency hegemony power has also changed from time of origin to modern time. In the globalized world, a particular country, does not possess all the required the comparative advantages because of differing social, geopolitics, military power, and government structure. At the same time, the stage of economic development, financial system, revenue system, international trade and investment, foreign direct investment and debt, stock market, and regulatory institutions to manage economic system and use of digital technology have been identified as the criteria to attain dominant power of currency. New comers are in the competition line including the older ones. Among the competing countries current hegemon USA covers the highest relevant criteria among the competing countries. But competition is not closed, and this ongoing process. The current dominant power USA is trying apply techniques to keep the current position. However, economists and politicians are divided and have different predictions about the coming future on the transition of currency hegemony.               

The political utility of sanctions makes it difficult to recalibrate the U.S. sanctions apparatus in the near term, but there are several steps the U.S. can take to reduce the incentives spurring alternative financial infrastructure. The U.S. should be cautious about the use of secondary sanctions on allies—particularly against those with large, influential economies—and use them in those cases only sparingly and when better alternatives are lacking. A more modest first step is to waive secondary sanctions on Europe for purchasing Iranian oil, thereby negating the need for INSTEX or similar measures, and allowing this experimental institution to dissolve before it becomes truly viable. The provisions in CAATSA that impose mandatory sanctions under certain circumstances should also be repealed. This would allow sanctions decisions to be made on a case-by-case basis and after a serious assessment of the cost-benefit to deploying them in a particular circumstance. New sanctions, whether imposed by Congress or the executive branch, should be screened for the following criteria to ensure they have the best chance of achieving desired political outcomes:  Sanctions should provide a clear statement of intent that outlines what behavior will get the sanctions either lifted or enhanced. There should be some stability and consistency to U.S. demands over time, both to create predictability for the target and to make it easier to benchmark how sanctions are performing against their intended goals.  The target should ideally be offered a window of time in which to change its policies before sanctions take effect. It is difficult for foreign leaders to walk back a policy while still saving face domestically after sanctions are imposed. Legislation should include sunset clauses with reasonable timeframes so sanctions do not remain on the books forever unless Congress still deems it worth keeping. Sanctions should be accompanied with a required Treasury assessment of the cost to the American economy, in order to better assess their relative value.

This last point is particularly important, as despite 8,000 U.S. sanctions currently in place, policymakers have no reliable data about how much that forgone business has cost the American economy. China for example is investing $400 billion in Iran while U.S. sanctions lock out all of China’s competitors, indicating the current sanctions regime is imposing potentially massive opportunity costs on American companies (Ariel Cohen, 2019). A recent Government Accountability Office report observed that the agencies tasked with implementing sanctions “analyze the impacts of specific sanctions on a particular aspect of the sanction’s target—for example, the sanctions’ impact on the target country’s economy or trade, according to agency officials. However, these assessments do not analyze sanctions’ overall effectiveness in achieving broader U.S. policy goals or objectives, such as whether the sanctions are advancing the national security and policy priorities of the United States (US Government Accountability Office, “Economic Sanctions).”  Officials argued that tracking the performance of sanctions relative to U.S. goals was difficult because policy goals often shift, isolating the impact of sanctions from other factors is tricky, and reliable data is at times lacking. However, the officials interviewed also noted that “there is no policy or requirement for agencies to assess the effectiveness of sanctions programs in achieving broad policy goals,” and hence they preferred to shift scarce resources toward the easier task of measuring impact on the target rather than political gains (US Government Accountability Office, “Economic Sanctions). By requiring agencies involved in the sanctions process to regularly assess whether sanctions are serving broader U.S. goals instead of simply harming the target’s economy, and properly resourcing that effort, Congress can make this tool more effective. The executive branch should also ensure that sanctions action from the Treasury Department is accompanied by a parallel diplomatic process with the target country at the State Department, in order to negotiate the political concessions the action is intended to achieve. Successful diplomacy on sensitive issues (nuclear weapons, territorial conquest) will often require the U.S. to make some concessions other than scaling back sanctions—there is no such thing as “something for nothing” when asking other states to compromise on what they perceive to be their core interests. By acknowledging the limitations of U.S. financial power—and using it strategically and in pursuit of clear, attainable goals—the U.S. can better preserve that power, and the prosperity its ubiquitous financial influence underpins well into the future.

With the contribution of science and technology and its application in the international business and commerce, financial system, information and communication technology, health and medicine the life expectancy and quality of has improved significantly compared to the past. Therefore, this world should not get proceed for war among mankind. For the world peace and prosperity, the currency world currency management system should follow multi polar abandoning unipolar by defining specific criteria based on world trade, investment, finance and banking services with a provision of reviewing after specific time line, for considering the updates on latest development.     

This paper is not aimed at serving a particular ideology. It is instead an attempt to illustrate the power of a reserve currency, and thus the real cost of America losing that status. Furthermore, it prescribes a pragmatic approach to solving America’s debt, its most serious economic and national security threat. A debt-reduction plan reliant on only tax increases will be disastrous, as will a plan that includes only spending cuts. Like so many things, the truth is somewhere in between, a compromise that has so far proved elusive in a Congress increasingly out of touch with everyday Americans. A strategy of tax reform, targeted spending cuts, and productive investments is needed to ensure that the debt is gradually paid off while the economy continues to grow. Manufacturing needs to be improved and consumption needs to be reduced. Importing German labor practices and implementing a value added tax will surely bring up a scare of “European socialism”, but America would still enjoy a de-regulated service sector and its highly conducive environment for ingenuity and entrepreneurialism. These are policies aimed at boosting exports and cutting consumption. The U.S. will never be a welfare state, and neither should it strive to be. But that doesn’t mean it shouldn’t learn from policies that work, tailoring them to the specific needs and desires of the country. 

Though economists underestimate it, the continued rise of China is inevitable. Following a disciplined economic approach for the last few decades, they have built up an enormous balance of payments surplus, a capable military, and will soon be the issuer of a major international reserve currency. The ongoing liberalization of Chinese financial markets will result in greater liquidity of the renminbi and thus a further erosion of the network externality effect that has protected the dollar for the last several decades. 

Like the transition from the pound to the dollar in the 1920s, a move away from the dollar reflects investor concern about U.S. debt levels and the dollar’s future value. Instead of fighting this change in the international monetary system through protectionism and belligerency towards China, the U.S. should embrace the diversification of foreign currency reserves as a good thing for the world. The current monetary system of unbalanced costs and benefits is unsustainable. A new financial architecture is needed. For too long the U.S. has been both the lender and consumer of last resort. A shift to more consumer demand in China and less consumption in America will be mutually beneficial. 

Foreign currency reserves are becoming more diversified, reflecting the shift towards a more multi-polar system. U.S. budgets and the dollar’s influence will undoubtedly be reduced as a result. But the American economy can remain strong and the dollar can continue to be a major world currency if the right policies are undertaken today. The future of the dollar remains, for a short while longer at least, in the hands of U.S. policymakers. Debt reduction, investments for growth, a responsible monetary policy, more balanced trade, and a commitment to open immigration will ultimately require political discipline and compromise. But action is needed now. The markets are growing uncomfortable.