An apocalyptic end to the dollar hegemony is coming - by Dee Woo

The US debt crisis and the recent downgrade of its sovereign rating by rating agency Standard & Poor’s have brought the whole world to a point where there’s great uncertainty about the future. Nobody knows how to respond to a possible US default. The whole world has taken the US’s solvency for granted for way too long. The global trade boom has been so heavily collateralised against the US deficit that we don’t know how it will function in an alternative scenario.

World trade today is a game in which the US produces dollars and the rest of the world produces things that dollars can buy. All the other central banks need to accumulate dollars to keep their currency undervalued against the dollar and retain comparative trade advantage. So what happens if the US government goes bankrupt and the dollars become worthless?

This is really a wake-up call. The world needs to decouple its well-being from the US deficit. We can’t delay the inevitable forever, because next time it will be more than just a close call.

We need to be prepared for a world without the dollar as the dominant reserve currency, and without the US consumption economy as the vital export growth engine. We need the Euro to step up and take over more responsibilities from the dollar. And we need China to unleash a consumption economy to help address the global imbalance.

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