A Ticking Time Bomb

Recent geopolitical strains across the world, due to disruptive moves by the newly elected US President, indicate that USA needs a major surgery to get rid of the cancerous cell in the form of strong domestic currency that got embedded in its economy since 1944 when the US dollar was accepted, as the global currency (the Gold Equivalent Standard), at the Bretton Woods conference. By now, the carcinogenic cell has spread into the entire economy and political system of the United States of America, which needs immediate medical attention. Willy-nilly Donald Trump and Elon Musk have lifted the scalpels to perform the high risk surgery which was overdue.

It may be recalled that, in 2024, the US dollar completed 110 years of its birth in 1914. In addition to the US Dollar, WW1 also gave birth to a US defence establishment—the infamous military industrial complex (MIC). Thus, an era of US dominance began. During this long period, the US dollar has dominated the global economy and helped establish the USA as a global economic and military superpower.

Donald Trump has rightly identified the two major challenges the USA is facing at the present:

(i) Strong dollar has made the US economy uncompetitive and import-dependent. The federal government currently has USD 36.22 trillion in federal debt, which is over 122 per cent of US GDP.

(ii) In the 21st century, China, North Korea and other states have made major advancements in new weapons, challenging the USA’s century-long hegemony in the war industry. Compared to China, the USA is lagging on all the fronts—economy, armaments and innovations. The president is now trying to reshape the USA and make it fit for the present century. For this, he needs Elon Musk.

To understand the present US crisis, we have to analyse, in brief, the 110 years of global geopolitical history when the USA dominated the world with the help of its strong currency and highly sophisticated military industrial complex (MIC).

Life Cycle of the US Dollar

This long journey can be divided into four distinct phases—(i) 1914-1944 when US dollar attained its dominance through market mechanism; (ii) 1944-1971: the gold equivalent standard when US dollar was recognised as the global currency; (iii) August 1971-June 1974: a turbulent phase in the global monetary system when gold equivalent standard was abandoned; and (iv) June 1974-June 2024: emergence of the Oil Equivalent Standard when petrodollar ruled the global currency market.

Phase 1 (1914-1944): The Federal Reserve Bank was created in 1913 to provide stability against a currency system based on bank notes issued by individual banks in the USA. By then, the US had already become the world’s largest economy, but Britain was still the centre of commerce. Great Britain, and most of the developed countries, used the gold standard to benchmark their currency. With the advent of World War I, in 1914, many countries abandoned the gold standard as their reserves dwindled, and used paper money to cover military expenses. This often led to devaluation of their currencies. It was during this time that the first US Dollar was printed in 1914 by the Federal Reserve Bank. After WW1, it was impossible to reconstitute the gold standard, mostly because the US owned almost the entire world’s gold! Nonetheless, Britain remained on the gold standard to maintain its position as the world’s leading currency. However, Britain also had to borrow money from the US. In 1931, Britain finally abandoned its strict adherence to the gold standard amid the Great Depression. This allowed the Dollar to replace the Pound as the world’s leading reserve currency.

Phase II (1944-1971): The fall of the gold standard and subsequent chaos, between two World Wars, resulted in a new system (the Bretton Woods System) in 1944. Under the new system, all members of the newly set up International Monetary Fund (IMF) were to fix the par value of their currency either in terms of gold or in terms of US dollar. The par value of the US dollar in turn was fixed at USD 35 per ounce of gold. For the purpose of such conversion, adequate gold reserves had to be maintained by the US government. Thus, the dollar, the national currency of the USA, was made equivalent to gold which, for centuries, had been used as the most acceptable currency across the globe.

The unique status of the dollar had encouraged the US Fed to act as the de facto Central Bank of the world. It enjoyed the liberty to print US dollars to finance US deficits. The extended Vietnam War during the 1960s had forced the US government to print dollars to meet its war expenditure at a disproportionately higher value compared to the official gold reserve the government had at its disposal. As the US government was not in a position to honour its commitment of paying USD 35 against every ounce of gold, on August 15, 1971, they allowed their currency to float. As expected, the value of the US dollar started to erode.

Phase III (August 1971-June 1974): The USA government tried to salvage the crisis by entering into an agreement (Smithsonian agreement) with 10 major members of the IMF. As part of this agreement, the dollar was devalued by raising the price of gold from USD 35 to USD 38 per ounce. In February 1973, it was further devalued to USD 41.22 per ounce, and finally in mid-March 1973, when major industrial countries had decided to float their currency, the Bretton Woods system of Gold Equivalent Standard was finally abandoned. Economic historians claim that the oil shock of 1971 had aggravated the US BoP crisis that ultimately led to the breakdown of the global financial system in 1973. Interestingly, the USA had turned the Arab anger and the associated oil shock of the 1970s into their advantage.

Phase IV (June 1974-June 2024): On October 6, 1973, Egypt and Syria had attacked Israel, and on October 19, the US President declared an aid package of USD 2.2 billion to Israel, knowing fully well that it would force the Arabs into taking drastic actions. As anticipated, Arab oil producers, led by Saudi Arabia, imposed a total embargo on oil shipments to the United States, and by January 1974, the price of Saudi crude leaped to a new record. The USA formulated a strategy to (a) ensure that OPEC would funnel the billions of additional dollars earned on increased oil price back to US shores; and (b) establish a new ‘oil standard’ to strengthen the weakening dollar.

In return to US’ promise of keeping the Saudi royal family in power, the latter had agreed to (i) invest a large portion of their petrodollar in US government securities; (ii) allow the US government to utilise trillions of dollars, payable as interest on these investments, to hire US corporations to westernise Saudi Arabia; and (iii) maintain the price of crude within limits acceptable to the corporations. The second objective was achieved by earning a commitment from the Saudis to trade oil exclusively in US dollars.

On June 8, 1974, the USA and Saudi Arabia signed a six-page agreement. The deal was about economic cooperation and supplying Saudi Arabia’s military needs. Thus, the dollar sovereignty was re-established.

After five decades, in a significant geopolitical shift, Saudi Arabia has decided to terminate its petrodollar agreement with the United States. The deal, signed on June 8, 1974, expired on June 9, 2024, and Saudi Arabia has decided not to renew it. It marked a historic turn in the economic and diplomatic relations between the two nations, which had long been anchored by their oil for dollar pact.

The end of the decades-long petrodollar deal and continuous discussion, among the BRICS member nations, of a gold-backed potential BRICS currency, has already reduced the significance of the US dollar in cross-border currency.

The US Armament Industry

The American arms industry saw unprecedented growth during WWI. Before the war, US arms firms primarily relied on international contracts. That changed in March 1916 when the federal government launched the National Defence Preparedness Program, which awarded arms manufacturers’ cost-plus contracts. These contracts guaranteed payment of all production costs plus a fixed profit margin. Two major beneficiaries were the Winchester Repeating Arms Company, a leading rifle producer, and Colt’s Patent Fire Arms Manufacturing Company, which supplied US soldiers with the iconic M1911 handgun.

In August 1945, three months after Germany surrendered to the Allied Forces on May 7, the USA dropped two atom bombs in Japan, which killed thousands of civilians. The atomic bombings of Hiroshima and Nagasaki in 1945 resulted in an estimated 140,000 deaths in Hiroshima and 74,000 in Nagasaki, with many more suffering injuries and long-term health effects from radiation exposure. War statistics showed that from the end of World War II to 2001, among the 248 armed conflicts that occurred in 153 regions of the world, 201 (81 per cent), were initiated by the United States. The USA still dominates the global war zones – be it in Ukraine, Syria or Palestine.

Changes in military technology have shaped warfare in the 21st century. Unmanned aerial vehicles (UAVs), commonly known as drones, have been increasingly used by both state and non-state actors, with the number of drone strikes and associated fatalities rising significantly in the past five years, reports the Global Peace Index 2024.

The USA could retain its hegemony over the world, even after the fall of the gold equivalent standard in 1973, by using its lethal military establishment. Though, currently, the US far outstrips China in traditional military capabilities, with far more nuclear weapons in its stockpile (13 to 1), a more powerful Navy with more firepower and a far larger fleet of submarines, and many more advanced combat aircraft; the US-China balance is less clear in emerging technologies like AI-driven systems, pilotless vehicles, planes and ships, and hypersonic missiles.

Defence analysts fear that Starlink—SpaceX's flagship internet satellite technology—will negatively impact global stability, in light of its clear military applications, increased risks of accidents and collisions in space, and SpaceX’s close relationship with the US military. Elon Musk's involvement with the US defence establishment is not new. In 2018, Musk’s company SpaceX won a contract to blast a USD 500 million Lockheed Martin GPS into orbit. All the big surveillance agencies, including the CIA and the NSA, use these spy satellites. In today’s world, where so much intelligence gathering and target acquisition is done via satellite technology, SpaceX has become every bit as important to the American empire as Boeing, Raytheon, and General Dynamics. Simply put, without Musk and SpaceX, the US would not be able to carry out such an invasive program of spying or drone warfare around the world.

Nevertheless, the USA's ambition to control space faced a serious setback when Elon Musk's Starship exploded and crashed over the Bahamas on March 7. This incident follows a previous failure in January, where the upper stage of Starship exploded over the Caribbean. The Starship rocket, designed to be the most powerful ever built, was intended to conduct a suborbital flight, deploying four dummy Starlink satellites and testing re-entry manoeuvres. The mission, which aimed to test the rocket's capabilities and deploy dummy satellites, ended in disaster shortly after reaching space.

Present Status of US’ Economic Power

According to NASDAQ, until recently, nearly 100 per cent of oil trading was conducted in US dollars. However, in 2023, 20 per cent of oil trades were reportedly made using non-US dollar currencies. IMF data suggests, at the end of 3rd Quarter of 2024, the share of the US dollar as the World’s reserve currency declined to 57.39 per cent from a high share of 71 per cent in 1999 when Euro was launched. This explains why Donald Trump is so upset with BRICS, and in early December, he posted a direct threat to BRICS nations on the social media platform, Truth Social, saying, “We require a commitment from these countries that they will neither create a new BRICS currency nor back any other currency to replace the mighty US dollar or they will face 100 per cent tariffs and should expect to say goodbye to selling into the wonderful US economy.”!

Between 1950 and 2022, the USA's share in World Goods Exports declined from over 16 per cent to nearly 9 per cent. During this period, the corresponding share of China rose to 15 per cent from a low of 1 per cent. From the 1990s, many American, Japanese, Korean, and European corporations started to relocate manufacturing facilities to China. Coupled with the opening of China to international trade through economic reforms, its share of exports surged in the 2000s.

Trade analysts believe that the long-running US trade deficits and the emergence of China as a major creditor nation to the US seem to be the result of two major economic forces: (i) the breakdown of the Bretton Woods system, which caused the US currency and US government debts to become the world currency and a global form of liquidity and store of value; and (ii) the shifting of comparative advantage in goods production, which caused the reallocation of labour-intensive manufacturing from the US to nations with cheaper labour. Given this perspective, a trade war may not necessarily solve the US trade imbalance problem. There are three likely outcomes from an extended trade conflict: (i) Imports will become more expensive; (ii) US trade deficits will shift to other countries with similar comparative advantages in producing labour-intensive goods; and (iii) US exports to China will become more expensive as a result of China’s retaliation. None of the above is likely to increase US exports and reduce its trade deficits.

In a significant development during the first week of March, it is reported that the breakout success of China's AI start- up, DeepSeek, has cost US tech titans billions this year, with Tesla CEO Elon Musk leading the pack. The world's richest person lost USD 90 billion, Fortune reported, and was followed by Nvidia CEO Jensen Huang and Meta CEO Mark Zuckerberg, who reportedly lost USD 20 billion and USD 11 billion, respectively.

Observation

The Trump administration is facing enormous resistance against the President's disruptive policies and war cries. It appears that by threatening its weaker allies like Ukraine, India, Mexico, Canada, and Taiwan, the USA wants to extract the maximum economic advantage to continue its reform process. Recently, Trump has threatened 25 per cent or more tariffs on semiconductor imports and accused Taiwan of stealing America's chip making industry. In response to this threat, Taiwan Semiconductor Manufacturing Corporation (TSMC), the world's largest chipmaker, on Monday, pledged USD 100 billion in fresh funds, to build factories in the United States. It also committed to set up a major research and development centre stateside, despite an earlier assurance from boss CC Wei to keep innovation on the company's home island. Making high-end chips in the US risks diluting TSMC's "Taiwan First" pledge. Wei had wanted to keep the chipmaker "rooted in Taiwan" and to retain its most advanced tech at home, reports Reuters.

The future of fossil fuel, which helped USD to remain strong, is bleak. Citing a declassified survey, which ended in 2020, a news agency reported that China’s thorium reserves, already known as the world’s largest, may actually exceed previous estimates by orders of magnitude. According to a report published in the Chinese journal, Geological Review, in January, there is enough thorium to meet US household energy demands for more than 1,000 years.

Reuters reports that on March 6, the Euro rose to a four-month high versus the US dollar and the Dollar index had hit a four-month low. On Tuesday (March 4), the US stocks nosedived after President Donald Trump levied tariffs on Canada and Mexico, paving the way for a global trade war. After dropping by around 800 points in the morning, the Dow recouped its losses before plunging at the end of trading to close lower by around 670 points, or 1.55 per cent, at 42,521. The broader S&P 500 fell 1.22 per cent and the Nasdaq Composite fell 0.35 per cent.

There is a growing apprehension that the hefty tariffs imposed by the Trump administration could contribute to a crash in the global economy, similar to the Great Depression of the 1930s. It was followed by WW2. AI-induced unemployment of this century, analogous to technological innovations that led to a concentration of economic power in the hands of a few firms in the 1920s, is worsening the present crisis.

Views expressed are personal