Capitalism is old
My name is Photis Lysandrou and I am a research professor at City University Political Economy Research Centre (CITYPERC), in the Department of International Politics at City University of London. My current research interests are in the areas of global finance, shadow banking, bank regulation and other issues related to financial governance. I have published many journal articles on these topics, the most recent being those on the global economic fallout of the COVID-19 pandemic and Ukraine crisis-generated crises. By building on the material covered in these articles, in this blog I will focus attention on some of the key issues concerning the present state of the global financial system and the role of the US dollar as the dominant currency in this system.

Capitalism is old, but only at the point of communism's collapse in the 1990s did it become a fully globalised system. No sooner had it done so, however, than it began to be dealt a series of heavy blows. The first of which was the great financial crisis of 2007-8, followed by the COVID-19 pandemic-generated crisis of 2020-21, hot on the heels of which followed the Ukraine crisis whose ramifications continue to unfold at the present time. While there is no questioning the degree to which these crises have caused disorder, dislocation and fragmentation in global capitalism (all words that figure prominently in recent publications discussing the current state of affairs) what is in question is whether they will also on that account threaten the foundations holding up the US dollar's dominance in the global financial sphere.

For much of the second half of the 20th century, those foundations were provided by the US' production and trading strengths, but in experiencing the same combination of de-industrialisation and manufacturing job transfer as have other Western nations over recent years, the US has seen both a steady decline in its percentage share of world production and a sharp deterioration in its trade accounts. Proceeding on the assumption that no substitute foundations for dollar dominance have replaced the traditional ones as determined by the US' production and trading positions, many commentators have concluded that this dominance will soon come to an end and all that is required to bring this about is to put sustained pressure on its fragile foundations. In this context, Russia's invasion of Ukraine in early 2022 is widely seen as having pivotal importance because, following the sanctions on Russia and her allies that included the withdrawal of all dollar facilities to them, there was now likely to be a more determined and concerted political effort to set up rival currency systems.

The harsh reality is that dollar dominance will not end soon, or indeed at any time in the foreseeable future, because that dominance now has new solid foundations. The reason it does so is to be found in the financialisation of the global capitalist economy, by which we mean the growing size of the world's financial securities markets relative to the size of the world's production base. In 1980, the combined nominal value of the world's equity and bond stocks was roughly on a par with that of nominal world GDP in that year. By 2000, these stocks had grown to about one and half times the size of the world GDP and by 2020 to over two and a half times the size of the world GDP. Just as striking as the huge growth in world equity and debt securities volumes, is their hugely uneven geographical breakdown, for where at one extreme the US on its own accounts for an average of about 40% of these volumes, at the other extreme the combined average share of all the emerging capitalist countries taken together, China and India included, comes to no more than 13%. Translated into currency terms, the size disparities separating the different securities markets are expanded by order of magnitude for where the US' average 40% share of world equity and bond stocks translates into correspondingly sized dollar-denominated masses of securities, the local currency-denominated securities markets of the emerging capitalist countries shrink to fragments by comparison. It is because the dollar securities markets are huge not only in absolute terms but also in relative terms that they exert great power of attraction for the world's institutional investors, and it is through that power of attraction that the world's small currencies are held captive to the gravitational pull of the US dollar.

The above argument puts dollar dominance in a whole new light because the irony in the fact that recent crises have shaken the foundations of global capitalism is that, while on the one hand, they have on that account caused further weakening of the US political power along with that of other Western nations in general, they have on the other hand served to further strengthen the dollar's dominance by further strengthening the size and gravitational force of its backing mass of securities. The crux of the matter is that just as crises cause economic and social dislocation and instability, so does the resulting uncertainty lead the world's institutional investors to put a premium on safety, and there is no other place in the world that offers a greater safe harbour for investment funds in times of turbulence and disorder than does the US dollar market.

The four lectures prepared for the London Banking Academy are structured around the central theme of financialisation and dollar dominance. The first lecture defines financialisation and explains its drivers before going to argue that the root cause of the financial crisis of 2007-8 was the excess pressure of global investor demand for US debt securities for use as stores of value. The second lecture on shadow banking explains how the US bank-sponsored off-balance sheet special purpose vehicles (SPVs) stepped up the rate of supply of artificially created debt securities (the mortgage-backed collateralised debt obligations (CDOs)) to crisis-threatening proportions to take the overflow of foreign investor demand for US securities that was spilling over from the US treasury, agency and corporate bond markets. The third lecture examines the dollar's dominant position in the global forex market and explains how this is sustained by the US role as the world's dominant supplier of investable securities. The final lecture on the dual impact of the COVID pandemic and Ukraine-generated crises spells out exactly how the dislocation and instability caused by them in the production and trade domains have served to further reinforce the dollar's dominance in the financial domain.
Photis Lysandrou
Professor of Global Political Economics
City University of London
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