There has recently been much talk that the hegemony of the United States is crumbling, from the decline in its share of world GDP to its possible submission to a new economic power such as China. However, little has been said about the fundamental pillar that sustains the power of the United States, the US dollar.

Globally, the dollar is the most utilized currency, both in trade in products and services and in cross-border financial operations. Given the continued dominance of the US dollar as the key currency of the international monetary system, it is difficult to speak of a declining US hegemony. But how to explain the power of the dollar and the apparent immunity of the United States hegemony in times of financialization?

A number of authors from a variety of schools of thought have recently dedicated themselves to elaborating explanations about this phenomenon. On the one hand, Post-Keynesian economists analyze the hegemony of the dollar using the concept of the currency hierarchy. According to Fritz et al. (), this notion is inspired by at least two theoretical traditions. First, the work of John Maynard Keynes (particularly his Treatise of Money (2013, [1930]) and his preparatory studies for the Bretton Woods Conference (2013, [1944])) in which he identified the hierarchical nature of the international monetary system, as well as the absolute dominance of a key currency. Second, Latin American Structuralism and its traditional center-periphery notion (), according to which center-periphery relations are also reproduced in the financial sphere.

The currency hierarchy notion allows us categorizing currencies based on their 鈥榣iquidity premium.鈥� Following the classical Keynesian approach, liquidity represents the ability of assets to be converted in cash (the easier an asset is convertible, the more liquid it is). For Post-Keynesians, the currency hierarchy is akin to a pyramid. The US dollar is the most liquid currency and lies at the top of this pyramid. Just below the US dollar in the currency hierarchy are the elite currencies, which are the currencies of other developed countries (). Lastly, there are the dominated currencies, which are the currencies of peripheral countries and which are situated at the bottom of the currency pyramid.

Inspired by the notion of the rate of return and the liquidity preference theory of Keynes (2003, []), Bortz and Kaltenbrunner () identify that within the currency hierarchy, the country issuing the main currency has an 鈥榚xorbitant privilege.鈥� This expression was first coined in the 1960s by Val茅ry Giscard d鈥橢staing, the French Minister of Finance at the time, to analyze the benefits that the US dollar obtained after the Bretton Woods agreements. However, the exorbitant privilege has acquired new implications in current times, given that it allows the United States to offer a lower interest rate on its financial assets compared to the one of other countries. Also, the liquidity premium of the dominated currencies is lower so that underdeveloped countries have to: a) offer higher interest rates to maintain the demand for their financial assets; b) are subject to short-term speculative operations, since foreign investors tend to prefer not to commit to long-term funds); and c) are predisposed to the possibility of a capital flight that may arise at any time and for reasons potentially disconnected from their domestic conditions. Therefore, the countries of the periphery are subordinated to US monetary policy, and any change in the international liquidity preference could send macroeconomic shocks and put at risk the future of their economies. The international liquidity preference refers to the tendency of investors to choose the most liquid assets in order to convert them easily in cash.

On the other side of the discussion, Marxist authors propose to analyze the hegemony of the US dollar and the currency hierarchy using the classical notion of world money, developed by Karl Marx in Capital Vol. 1 (2004, [1867]). According to Marx (2004, [1867]), world money functions as universal means of payment, universal means of purchase and as universal social materialization of wealth. Before the hegemony of the dollar, gold used to function as world money. This means that all the countries had to keep a great number of reserves in gold to participate in the global commodities exchange, so its hoarding and transfer were fundamental for the functioning of the international monetary system. Subsequently, with the breakdown of the Bretton Woods system of fixed exchange rates in 1971, the dollar assumed the role of world money, creating a direct link between the US financial system and the international financial system. According to Lapavitsas (), the US dollar has become a problematic substitute for gold inasmuch as, rather than serving as a world market coordinator, it has become an instrument of US power.

Additionally, Painceira (2011) argues that the 2007-2008 crisis that began in the United States became a global catastrophe because the financial operations at its origins were denominated in dollars. It is no surprise, then, that the financial crises faced by underdeveloped countries of Latin America in the 1980s were related to the shortage of world money they suffered during this period. The scarceness of US dollars during this period had to do with the increase of the US interest rate, and the following capital flight they suffered as a consequence, which depreciated their exchange rates, and made their external debt harder to pay.

Furthermore, it is commonly accepted that all countries that participate in the world market have to maintain a certain part of their wealth in dollars to exchange the goods they produce. Besides, most of the financial assets are also denominated in the US currency. Under these conditions, countries that cannot issue dollars are subordinated to the world money issuing country. Consequently, underdeveloped economies need to accumulate a large amount of foreign exchange reserves, largely denominated in US dollars, to protect themselves from external imbalances and capital account reversals (Painceira, 2011: 326-330).

For Marxist scholars, the accumulation of US dollars as international reserves is a contemporary manifestation of imperialism. Given their specific position in the world market, as well as their role in the international financial systems, emerging economies present characteristics of subordinate financialization, a phenomenon similar to the financialization presented in developed economies, but limited and shaped by their peripheral position in the world market. The notion of subordination was first proposed by Powell () and later developed by authors such as Lapavitsas () and Alami ().

Following this approach, Alami () argues that the accumulation of reserves denominated in US dollars is a manifestation not only of subordinate financialization but of imperialism as a whole, given that this implies a continual transfer of a share of the surplus-value created in the periphery toward the developed countries, mainly the US, who constantly benefit from the subordinate financial conditions of underdeveloped economies, given that the resources that could be used to promote development policies are used to invest in low-interest US treasury bonds, and other types of US debt financial assets (Alami, : 45).

To sum up, the role of the US dollar as world money has granted the United States several privileges such as its complete autonomy in terms of monetary policy and the possibility of accumulating trade deficits. This brief essay intended to present two approaches that invite us to unpack the role of the US dollar as a pillar of the United States hegemony. On the one hand, Post-Keynesians analyze the power of the dollar with the notion of the currency hierarchy. On the other, Marxist authors analyze this phenomenon with the notion of world money. It is worth concluding by saying that, irrespective of the tradition or approach one chooses to start from, it is crucial to continue analyzing this pressing issue.

References

Alami, Ilias (2020), , RIPE Series in Global Political Economy, Routledge, Oxon and New York.

Bortz, Pablo; Kaltenbrunner, Annina (2018), 鈥溾��, Development and Change 49:2. pp. 375-393.

Cohen, Benjamin (1998), , Cornell University Press, Ithaca, NY.

Fritz, Barbara; De Paula, Luiz Fernando; Prates, Daniela (2018), 鈥溾��, European Journal of Economics and Economic Policies: Intervention, vol. 15 No 2. pp. 208-218.

Keynes, John Maynard 2013 (1930), 鈥淭he Treatise on Money, II: The Applied Theory of Money鈥�, , vol. VI. Cambridge University Press, Cambridge, UK. pp. 189鈥�367.

Keynes, John Maynard 2003 (1936), . Fondo de Cultura Econ贸mica, M茅xico.

Keynes, John Maynard 2013 (1944), 鈥淎ctivities 1941鈥�46: The Clearing Union鈥�, ,聽vol. XXV. Cambridge University Press. pp. 1鈥�238.

Lapavitsas, Costas (2016) , Traficantes de sue帽os, Madrid.

Marx, Karl 2004 (1867), El Capital. Siglo XXI, M茅xico.

Painceira, Juan Pablo (2011), 鈥淟os pa铆ses en desarrollo en la era de la financiarizaci贸n: de la acumulaci贸n del d茅ficit a de reservas en divisas鈥�, Carlos Morera y Costas Lapavitsas (coordinators), . UNAM, Instituto de Investigaciones Econ贸micas, Consejo Latinoamericano de Ciencias Sociales, M茅xico. pp. 309-358.

Powell, Jeff (2013), . PhD Thesis. SOAS, University of London.

Prebisch, Ra煤l 1998 (1949), 鈥溾��, Cincuenta a帽os del pensamiento de la CEPAL: textos seleccionados, Fondo de Cultura Econ贸mica/CEPAL, Vol. I, Santiago, Chile. pp. 63-129.

Giovanni Villavicencio has a degree in Economics from the Universidad Nacional Aut贸noma de M茅xico. .

In his acclaimed poem “America” from 1956, Allen Ginsberg warned about the new vices of American society. Beyond the clear demonization of communist ideals, the star of the beat generation warned about the growing influence of the media on the thinking of individuals.

With globalization, the commodity fetishism disguised as the American dream entered not only the minds of the citizens of the United States but the rest of the globe. In addition, with the financialization of the economy, the debt culture also surpassed the American borders, reaching the countries of the Global South.

There is no day when the media does not bombard us with advertisements that promote a consumer culture, inciting us to acquire goods that we cannot afford with our income. This is where credit plays the role of a “savior entity” through which we can satisfy our deepest desires. However, unlike the developed countries, which have high levels of access to financial services, the underdeveloped countries are subject to a subordinated financialization that limits the possibilities of households and non-financial companies of acquiring a loan and, consequently, complicates the satisfaction of our consumerist spirit and the development of the productive sphere. The notion of subordinated financialization was first proposed by Jeff Powell聽() to designate the specific way in which financialization manifests itself in underdeveloped economies. The level of access to financial services that a country has is known as financial inclusion, however, in the case of Mexico, this level is so low that we are facing financial exclusion.

Financial exclusion in Mexico

Let鈥檚 look at some basic data. In Graph 1 we can see the percentage of individuals who have a credit card in Mexico and eight developed countries. All the developed countries that appear in the graph had a percentage higher than 50%, except for the Netherlands, which had a proportion of 39.10%. However, this value is much higher than Mexico鈥檚, which barely reached 9.52%.

What would be the cause of this exclusion? Taking a small step back, we can try to find the root of the problem in the modus operandi of the institutions responsible for lending to individuals: the banks. Focusing our attention on Mexico, let鈥檚 consider which banks are operating in this country.

Before moving on to the data and in order to delve a little into the new way of operating of the big banks in times of financialization, it is convenient to remember that, in 2011, when the Financial Stability Board published the first list of (G-SIFIs), a select group of banks assumed the status of too big to fail and therefore, the perception of risk diminished for this select group of financial institutions.

The question now would be, can we talk about banks too big to fail in Mexico? Table 1 shows the composition of the Mexican banking sector, where the top 5 banks 鈥揃BVA Bancomer, Santander, Banamex, Banorte and HSBC鈥� together reached 6,834,944 million Mexican pesos at the end of 2018, equivalent to 36.73% of that year’s GDP. The only national bank that appears on the list is Banorte which, in terms of its percentage of participation in the banking sector, 12.41%, is much smaller than the first bank on the list, BBVA Bancomer, which in 2018 represented the 22.05% of total bank assets. On the other hand, Santander’s parent company is in Spain. Banamex (recently renamed Citibanamex) is a subsidiary of Citigroup, the largest financial services company in the world, and the headquarters of HSBC is in the United Kingdom. The names of these four banks will seem familiar to us if we have looked at the of G-SIFIs, published by the Financial Stability Board in 2018. Indeed, the four main foreign banks that operate in Mexico form part of the select group of financial institutions too big to fail.

It is, therefore, necessary to ask ourselves, why the predominance of large banks in the Mexican banking system has not been reflected in a larger increase in access to financial services. Banks operating in Mexico impose restrictions when granting credit so that only people who prove to have a medium or high monthly income are granted a loan. It鈥檚 well known that banks tend to not lend to low-income individuals to reduce the risk of default in the case of a recession, but what risk? Are they not supposed to be too big to fail? One explanation could be that being immune to risk, banks that are too big to fail are more concerned with participating in complex financial operations than by increasing their credit portfolio to citizens. This new business model of banks, in which its income became more dependent on commissions for the purchase and sale of securities, and part of its profitability comes from shadow banking operations, involves higher risks than traditional lending.聽

To wrap up, banks too big to fail have a strong presence in the Mexican banking sector. However, the participation of foreign banks has failed to promote financial inclusion to an adequate degree, given that Mexico鈥檚 population still has a low level of access to financial services. It therefore becomes clear that subordinate financialization involves not only the lack of funding of non-financial companies but also the financial exclusion of individuals.

References

Financial Stability Board (2011), .

Financial Stability Board (2018), .

Powell, Jeff (2013), . PhD Thesis. SOAS, University of London.

Giovanni Villavicencio聽has a degree in Economics from the Universidad Nacional Aut贸noma de M茅xico. .