The perception that the old monetary order is shifting is no new thing. For years, a coterie of “sound money” enthusiasts, from goldbugs to cryptocurrency evangelists, have revelled in the notion that the days of the over-leveraged dollar-reserve system are coming to an end.
Time and time again, however, the dollar has defied such assertions, not least because key contenders, chiefly the euro and the yuan, have failed to make the grade on the attributes that matter.
Last week, the dollar was once again subject to speculation regarding its imminent downfall. This time, the rationale is based on reports that the Iranian regime is not just selectively restricting the safe passage of ships through the Strait of Hormuz, but charging a toll for such passage in yuan, not dollars.
For many, this new extortive element of the yuan is seen as a game-changing moment for the currency and China.
As Mallika Sachdeva of Deutsche Bank put it last week in a much-circulated report “The conflict could be the catalyst for erosion in petrodollar dominance and the beginnings of the petroyuan.”
She framed this in the context of a wider shift against the dollar based on its energy dependence.
But the prognosis misses the bigger picture.
Not only does the dollar still have meaningful levers to pull — the rise of dollar stablecoins being one — the narrative that it must fall because China is rising is far too simplistic. It mistakes a complex evolution for a simple handover.
Most monetary economists agree that a reserve currency must be 1) a stable form of value thanks to prudent monetary policy, 2) benefit from open trade in deep and liquid markets, and 3) be underpinned by the rule of law.
The euro is open, stable, and underpinned by the rule of law, but it is not nearly as liquid or deep as the dollar, in part because its bond market remains fragmented and cumbersome to invest in — an expression of the bureaucratic deadlock of Brussels. The other contender, the yuan, is stable but still overly restricted by capital controls, a rulebook governed by an authoritarian state, and a reluctance to ever become indebted at the sovereign level to foreign creditors.
That last point is crucial. The dollar’s rise to prominence was closely associated with the U.S. government’s willingness to manufacture the safe dollar assets the system demanded, at its own fiscal expense. The structure appealed to foreign creditors because the assets were underwritten by the full faith and power of the U.S. government — and, in the case of its arrangements with oil-exporting states, by the security guarantees that came with its military supremacy.
Even more importantly (and sometimes controversially) the U.S. proved itself willing to backstop the wider free market in dollars offshore — the eurodollar system — with abundant liquidity when it mattered.
China’s strategy to internationalise the yuan, by contrast, is built around exporting a digital currency it controls across the entire monetary stack — down to the personal data itself. That, so far, has failed to prove especially appealing. The uptake problem is reflected in the People’s Bank of China being forced in January to consider paying interest on e-yuan — a rule most jurisdictions still resist.
Thus, while this conflict may be upping the yuan’s game, it is not doing so in a way that is necessarily conducive to global growth and trade. Indeed, if being an extortionist’s preferred currency really was enough to make a reserve currency, then surely bitcoin, the preferred currency of ransomware attackers, would be an even stronger contender than the yuan?
The irony is that while bitcoin’s association with extortion is derided, many are now cheering as foreign entities scramble to raise yuan in much the same way corporates under ransomware pressure are forced to source it.
But there is another issue with that reality. Raising yuan for use in offshore transactions is not straightforward. The most obvious route is to raise yuan onshore — via so-called panda bonds, as BNP Paribas and Deutsche Bank have done this month — and lend those proceeds onwards.
Mechanically, the funds are raised inside China, sit within its domestic banking system, and are credited to a client’s account at a Chinese bank. From there, payments can be routed internationally via CIPS — China’s cross-border payments network. Transactions through that system are indeed increasing, something many dollar bears like to highlight.
However, what they miss is that CIPS is even more draconian than SWIFT. So, if your issue with SWIFT was too much American influence over the network, all you’re doing by adopting CIPS is opting to send transactions through an even more tightly controlled channel.
The deeper issue is that, because these funds remain subject to capital controls, they cannot circulate freely enough to establish a true market price or be invested where individuals see growth opportunities rather than bureaucrats. What emerges is not a system of price discovery, but one of allocation.
The beauty of dollar markets is that their depth and reach mean they can be raised almost anywhere, moved freely, and priced by the market — not by permission. Yes, sanctions have restricted some of the dollar’s reach. But penalising bad actors who abuse the good faith of the system is not the same as controlling allocation or price discovery throughout the system.
As Fed Governor Stephen Miran told me in a recent interview, “those types of [sanctions and AML] tools are deployed on people who are violating the law or undermining the system that the United States is underwriting … so the use of those tools ends up reinforcing the system itself rather than undermining it.”
In the long run, he added, money follows opportunities, so “if you think that the U.S. economic growth story is a good story, whatever the reason is … in the long run, capital is going to follow that”.
A system built on control and permission may seem to function very well at the superficial level. But it struggles to generate the kind of demand that does not need to be compelled.
That’s why, ultimately, when it comes to tales of the death of the dollar, I am reminded of a scene in Top Gun: Maverick: the moment the beleaguered but ever individually minded hero of the story, Pete Mitchell — aka Tom Cruise at his finest — is rebuked for his stubborn refusal to “retire”, or even to “die”.
“The end is inevitable, and your kind are headed for extinction,” he is told by a commanding officer who is seemingly delighted at the prospect that autonomous systems will soon make insubordinate fighter pilots like him redundant.
An indignant Maverick replies: “Maybe so. But not today.”
The line is delivered just as the film’s iconic melody begins to swell: a cinematic effect clearly intended to rouse the legions of 40- and 50-something men quietly wondering whether they face a similar fate.
By the film’s end, in classic Hollywood style, Maverick wins the day. However, it’s not because of a superior technological system or better discipline. It’s down to the resolve of a single individual who is prepared to take a risk no one else is prepared to take. Even when the odds appear totally against him. The moral of the story, in that sense, is that sometimes it pays to break the rules, especially if it’s due to a belief in something bigger than oneself.
The true value of the dollar system is similar. Yes, at the superficial level, the system throws its weight around by controlling the entire stack from the top down. But, in reality, it leaves just enough wiggle room — aka an ability to break the rules, when it matters — for a ghost in the machine to arise. That equates to just enough system tolerance for uncertainty to avoid system stasis.
That doesn’t mean that in the long term, the dollar, just like Maverick, isn’t on its way out. The system really is changing. But the real threat isn’t from China or the yuan. It is from the collapse of a legacy financial model that has for centuries been grounded in scarcity, notably energy scarcity.
The fact that America is no longer dependent on energy imports has posed enough of a system shock for energy-dependent countries. But now that renewables, nuclear, and soon enough, fusion too, stand to liberate everyone’s energy dependencies, it’s becoming increasingly clear that, soon enough, entirely different variables will determine leverage and geopolitical supremacy in the global economy.
That’s why it seems logical to conclude that this war is about more than just Iran.
Far more likely, it’s about determining what sort of system gets to prevail in the new order to come. Will it be one that respects individual autonomy and the right to be defiant and err, for the sake of free will? Or will it be one where the levers of power will be controlled from the top down to the point where all free will is suppressed in the pursuit of a supposedly perfect system?
The dollar may not be perfect. But it’s still our best bridge to a future that makes room for autonomy, for dissent, and for the uncomfortable truth that progress is often driven by individuals willing to get it wrong before they get it right.
