The U.S. emerged out of the ruins of World War II as the world’s hegemonic power. Although the world had divided in political terms back then as the “democratic world” backed by the U.S., and “communist world” backed by the USSR, the U.S. apparently was the “sole” hegemon of the world in terms of economic power and financial outreach. The extent of the economic and financial power of the U.S. was so great that no empire or state the world had seen before could be compared to it. Therefore, we can easily conclude that the most powerful state the world has ever seen by now is certainly the U.S.

As a direct result of this rather unique situation in world history, the U.S. almost singlehandedly shaped the economic and financial system of the world in the immediate aftermath of the Bretton Woods meetings. Although several countries other than the U.S. participated in these meetings, their effect on the final outcome and “agreement” was rather limited. To add insult to injury, the unique and central place of the U.S. dollar in the emergent Bretton Woods system was “never” discussed in the meetings and added to the final agreement by the U.S. itself singlehandedly as if it was a second thought. Yes, because the U.S. was the hegemonic power of the world, its national currency, dollar, became the international reserve currency without any discussion. Other countries had no other option other than to sign this final “agreement.” In the final analysis, it is the U.S. itself who was ruling the roost.

Back then, the unique and central place of the U.S. dollar in the emergent Bretton Woods system was “never” discussed because the U.S. was the hegemonic power of the world.

However, we are not living in such a polarized world in terms of economic/political power. The extremely polarized economic world between 1940s and 1970s gave way to an increasingly multi-polar world and the economic center of the world shifting towards Asia rapidly. That said, the U.S. is still the most powerful country in the world. However, this is not enough to dominate the whole world in economic and financial terms.

The relative power of the U.S. has decreased tremendously since the 1970s and particularly since 1990s. And this has been what had to happen. The world needs to get “flat.” You cannot sustain a world in which some countries have the upper hand indefinitely. Sooner or later things have to change. And we are in this transition right now. It will be very slow to human eyes, but very rapid from the perspective of history.

The share of the U.S. in the world economy was a staggering 40 percent in 1950 according to market prices. It is 24 percent right now. On the other hand, the share of the U.S. economy according to purchasing power parity (PPP) has declined from 27 percent to 15 percent. So, according to both market prices and PPP, the economic power of the U.S. diminished dramatically.

I can assert that we are living in a watershed period, which will shape the future trajectory of the world.

Actually, China has surpassed the U.S. in 2013 and became the biggest economy in the world according to PPP, and it will be so in terms of market prices in the very near future. So, I can easily assert that we are living in a watershed period, which will shape the future trajectory of the world.

This general framework signals that the unique role of the U.S. dollar will cease to exist in the foreseeable future. This will not happen anytime soon, but it will happen. In a world in which several countries are competing with each other in economic, political and financial terms, a single country could not impose its will as easily as it was the case in the 1940s, where the U.S. was dominating so thoroughly. More to the point, with a diminished relative power, the U.S. cannot afford its national currency to play an international role. Yes, this was the case up until now, but the U.S. will find it increasingly harder and troublesome as its relative economic power dwindles.

We attested that in the last years the U.S. has been using the dollar and U.S.-controlled payment system, as a weapon to promote its political goals. Financial attacks against the Turkish Lira, sanctions against China, Russia and Iran can benefit the U.S. politically or look so to an extent in the short/est term. However, this inconveniently hawkish and shortsightedly bold standing is a colossal mistake for the U.S., which will only expedite the transition from the existing financial/commercial system to another one waiting to emerge.

Using the US Dollar and US-controlled payment system is inconveniently hawkish and shortsightedly bold standing as well as a colossal mistake for the US.

The “rise” of the currency swap agreements between countries around the world is just first steps on the way to a new global economic/financial order. China, Russia, India, Japan and other countries are signing billions of dollars’ worth swap agreements in an effort to use national currencies more in bilateral trade. This is de-dollarization in action. And it will continue to morph into a much broader and bolder multilateral trade agreements in the long run. I now shall answer the question I asked on the title: The future of the U.S. dollar is to revert to a national currency role without a unique place in the global economy/finance.

China, Russia, India, Japan and other countries are signing billions of dollars’ worth swap agreements in an effort to use national currencies more in bilateral trade. This is de-dollarization in action.

This is inevitable.

Then, what will replace the U.S. dollar? Another national currency? Not necessarily. A multi-polar world cannot afford a national currency acting an international currency. This holds for the U.S. dollar and also for… the Chinese yuan. In a multi-polar world, international trade will most probably be conducted via regional clearing unions, which could eventually give way to the international clearing union. And these regional clearing unions will have union-specific supranational currencies such as Bancor, which could eventually coalesce into the international “abstract” currency of the world.

The world economy has been witnessing a rapid transformation for the last four decades together with staggeringly growing influence of financial industry under the current economic and financial system, a.k.a. neoliberalism, which will definitely give way to another system sooner or later.

One should note that the previous system, namely Bretton Woods, had lasted only three decades, and the neoliberal system still lingers on, though showing real signs of strains. For example, the current system needs constantly growing economies, however the 2008-09 global financial crisis pointed out that this would be more and more difficult for the world economy to achieve under the “current” economic and financial system, or paradigm.

However, we live in the here and now and have to cope with all the “intricacies” of neoliberalism. First and foremost, with the rapid financialization of the world economy, countries around the world have become much more susceptible to the caprices of global finance. We witnessed hundreds of financial crises in the last four decades, unlike the Bretton Woods era, in which only a few of them occurred. Moreover, most countries in the world have seen their ability to pursue an independent monetary policy and fiscal policy to erode significantly.

Ironically, this is the same era in which the rhetoric that central banks around the world gained their “independence” has become widespread. What happened actually was central banks have become dependent on the financial industry, as they were dependent on states in the Bretton Woods era. There is nothing as real independence and it is very clear that for central banks being dependent on the state is much more democratic than the other way around. However, one has to take into account the sheer power of global finance and the “rules” of the current system when talking about monetary policy. A country can freely and happily pursue looser monetary policy than other countries when international capital flows are restricted. For example, this was what France did for a long time in the Bretton Woods era, when her neighbor West Germany had been implementing stricter monetary policy.

Moreover, fiscal policy in the current system is much more critical than in the previous system. A country who is pursuing a somewhat loose fiscal policy could be punished intensely and with a mind-boggling rapidity by “financial markets.” Even a rumor that this country will spend beyond her means and that “there is now a possibility” that the financial situation of the country will deteriorate could trigger some kind of a “panic” in the financial markets. So, in the new system not only central banks, but also most countries have been “tamed” to a great extent.

It should be underscored that for a government being fiscally responsible is a good trait. However, the line between being fiscally disciplined and profligate is significantly blurred and apparently it is “up to” the financial markets to decide which country falls which side of that line through various and numerous “country reports” of credit rating agencies, IMF and the like.

All in all, we need to understand clearly what neoliberalism has to offer and dictate us, and what choices we have in the current system. One should note that “good” governance does not mean being as much fiscally prudent or monetarily strict as possible, i.e. to the extent that financial markets are totally satisfied with the “governance” of the country. In the end, one should remember that the nature of the relationship between financial industry and real industry/households is conflict of interests. This is a redistribution game afterall.