Quick quiz. Suppose you read a headline in the online version of the Wall Street Journal (or NY Times etc) stating that, from now on, US Treasury bonds would be redeemed in crypto. Would your response be
(i) That’s absurd. Either it’s April Fools Day or someone has hacked the website
(ii) That’s unlikely. Surely [1] Wall Street will be able to kill this crazy idea
(iii) That will be tricky. Which cryptocurrencies will be included and what will be the exchange rates?
If your answer was (i) you can stop reading here (and don’t bother commenting to justify your position). This answer assumes that, despite Trump’s bluster, nothing has fundamentally changed. You’re still in the denial stage, with six more to come..
If you’re answer is (ii) or (iii) you are paying at least some attention. I’ll point to some evidence suggesting (iii) is a plausible answer, and look at what that implies for the global financial system.
Looking specifically at debt, the idea of defaulting on US government debt, or threatening to, has long appealed to Republicans. Here’s a piece I wrote back in 2013 [2] Unsurprisingly, Trump has embraced the idea, suggesting not only that a default might not be too bad, but also that some (unspecified) debts might be fraudulent.
But there are lots of other possibilities. One, raised by Paul Krugman is that the US Federal Reserve might be coerced into understating the inflation rate, thereby reducing the return on Treasury Inflation-Protected Securities.
Another, already taking place, is that the government may be able to coerce private banks into reversing legal payments. Henry Farrell and Felix Salmon discuss this here.
The longer-term implication is that the existing global financial system, built around the US dollar can no longer be regarded as a reliable basis for organising trade, investment and banking. Some alternative will have to be constructed at an international rather than global levle. Moreover, this will have to be done on the fly, as the existing system crumbles around us.
This will doubtless be seen as good news for the BRICS countries, which have long chafed under the dominance of the dollar. But the obvious alternative, the Chinese Renminbi (aka yuan) is no better. As well as not being fully convertible, it is subject ot the political control of the CCP dictatorship.
An important point to start with is that the rapid growth in international financial integration that characterised the era of neoliberal globalisation came to an end with the Global Financial Crisis. As in this case, at least part of the adjustment to the end of the US will occur autonomously, as investors either steer clear of US financial markets or decide to play the increasingly corrupt games that will be required to survive there.
In this context, it’s crucial to understand the “weaponisation” of the global financial system, most notably by the US, as discussed by Henry Farrell and Abe Newman. The most striking instance of this so far has beem the seizure of Russian financial assets after the 2022 (further) invasion of Ukraine. Most of these assets were held by EU financial institutions, which Putin imagined to be safe from the US.
Until now, the main complaint of critics about weaponisation of the financial system was that it was being overused in the pursuit of secondary objectives But with Trump in power, it will be used to do direct harm. Reliance on the US dollar is giving hostages to his regime.
Deconstructing and replacing a global system based on the assumption that the US is a reliable guarantor of stability will be a huge task, but the alternative of a system run by Trump and Musk is even worse.
We need to recognise that the idea of a single global financial system, which has been dominant since the 1980s, is done for. It’s not a loss to be mourned, but that won’t make the task of replacing it any easier.
I’m thinking about an alternative system, centred on the Eurozone, but incorporating other countries that don’t want to be dominated by either the US or China. That’s a mammoth problem
I’ll put up two ideas to start with.
The first is the need for unremitting hostility towards crypto. Should proposals for recognition of crypto as a reserve asset for the US turn into reality. the result will be to make the $US itself useless as a reserve currency. Governments and financial institutions outside the US should be ready to dump dollars if this looks like becoming a reality. In the meantime, financial institutions should be prohibited from dealing with it in any way, and individuals should be required to report crypto holdings and transactions.
My other suggestion is to take seriously a mildly snarky reference, in comments to my Crooked Timber post, to a “Brisbane Woods” conference. (I live near Brisbane and the allusion is to the 1944 Bretton Woods conference which established, among other things, the World Bank and the International Monetary Fund.) These were set up in Washington both because the US was by far the largest contributor and because they could be colocated with the US Treasury. The famous “Washington consensus” of the 1990s referred to the neoliberal policy views shared by these three institutions.
But US contributions have been dropping steadily in both real and nominal terms and will doubtless be cut further by Trump. And proximity to the Musk-controlled US Treasury is now a danger not an asset.
The World Bank needs to move out of the US and drop the convention by which the president is always a US citizen (along with the parallel convention where the IMF managing director is European). Rather than moving to a single new location, both the Bank and the IMF need a more decentralised setup, ideally with significant centres in every continent[3]. This would involve both competition and co-operation with the BRICS group, which shares the aim of breaking with $US hegemony, but is not so keen on legal and democratic governance.
Those items are challenging enough, and just scratch the surface of what needs to be done. But repeating myself from previous posts, the idea of the US as the indispensable centre of a stable and democratic global order is gone for good. The sooner we realise that, the better.
fn1. Quiggin’s Rule of Surely: It’s a Sure Sign that you are not Sure
fn2. I didn’t pick the headline which was obvious overblown even at the time. Now, if we wake up in four years time with Trump gone and nothing worse than a US default to worry about, it will have been the pleasantest of dreams
fn2. Except Antarctica and maybe Oceania, though of course Brisbane would be a great choice.
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John Quiggin 
Your suggestions are sound but long term solutions. For the short term there will have to be a return to the gold standard. This is the only internationally recognised value stabiliser after the USD. I agree that any block chain currency suggestion is a non starter. To have confidence in a reserve currency or its alternative then financial markets must know and trust the option chosen. The Euro would be my pick but I realise that this is not universally accepted. So it will be back to the gold standard until a globally accepted alternative to the USD is agreed to by most trading countries. This must be agreed to as a long term solution and supported by the majority of central banks.
I’d like option (ii), please.
Again, I apologize for all this unnecessary hardship. (Though I had nothing to do with it.) But it would just be too stupid if our elite financiers allow the dollar to be undermined. (Not that I am usually that big a fan of theirs.)
I was just reading about our congressional budget shenanigans this morning. Darned if we aren’t living in interesting times! I keep waiting for conservatives to dooooo something. There must be a few of them left. What a strange time it is.
It’s not a black swan if it flies by twice, right? I need a new way to think about all this.
Some Dark Greens, maybe from Extinction Rebellion, maybe from elsewhere, used to advocate sabotage of the capitalist system. I never considered that advisable, moral or even necessary. For a long time now, I have essentially predicted that unfettered, corporate-oligarchic capitalism would sabotage and destroy itself. This prediction is coming true in real time while we watch.
Most of us are watching powerlessly at this point in time. We have no way to influence what is happening unless it be by acting in enlightened self-interest and then these multitudinous tiny vectors of enlightened self-interest actions finally add up to a positive force in the right general direction. I am thinking of the seemingly chaotic clumps of ants pulling big food items back to the nest. They appear to pull in all directions. Some appear to be free riding on the item. Some free riders appear to be simply seeking a place where they can get a purchase to lift, pull or push themselves. In the end, the food item is dragged erratically back to the nest. Enlightened self-interest might conceivably work this way.
J.Q. and other progressive economists around the world, acting in general concert, again may have some power, should theoretically have some power, to incrementally influence and lift, pull, push, nudge ideas and thinking in the right general direction.
I don’t think there is any doubt that Trump and co. are acting to sabotage and destroy the USA, the world system and crucial earth systems like the climate. This is true whether or not this is their express or unconscious set of intentions. The question is how soon it becomes time to “pay the piper”, a phrase that can have a number of meanings. “Pay the piper” could mean pay the pied piper’s extortionate demands or it could mean give him pay back for destroying everything of value and necessity to ordinary working, productive humans. Matters could go either way. Matters could, and likely will I think, flip from one state to the another state very quickly when a crisis inflection point is reached.
One has to say that one of Marx’s crucial insights and predictions has turned out to be correct. Namely, that capitalism would destroy all other values. Capitalism has now reached that point where it is torching all other values, both human values and natural system intrinsic values. It is even torching its own values, namely all natural capital, all physical and fixed capital and now even all financial capital and the integrity of the financial system. They are all being torched. Capitalism essentially torched Pacific Palisades and every other piece of infrastructure and natural environment that is now burning down, being desiccated, blown away, flooded out and so on by climate change induced weather extremes. Capitalism has destroyed an epoch of the earth. The Holocene is over. It’s done. Any last chances to save anything are being blown away by Trump and Co.
Their reactionary political program goes far beyond that of the libertarians. The libertarians wanted to keep government instrumental power in the minarchist form of the Fisc or Treasury, the Military / Security system and the Law and Criminal Justice system. A key plank of the Libertarians was retaining contractual law as a basis for business, for free enterprise. Of course, the Trumpists are no libertarians on the human ethics and morality side. They are fascist fundamentalists in every sense with the hypocritical cloak of fundamental religion thrown over their moral pronouncements.
The Trumpists are working to divert governance from the Minarchist model to the Anarchic Tyranny model. They are taking over the Fisc, or the Treasury, in order to divert all of its funds, and new corruptly created funds as well, to their own uses and indeed to their own complete ownership. A similar process is in progress with respect to the entire financial system and with respect to the Judicial system; at least at the level of the Supreme Court where the takeover process is in effect complete enough to deliver the President immunity from any and all crimes, related or not related to Office, in perpetuity.
That leaves the military. Logically, they must also take over the military; full command and control of the military for all operations domestic (as should not be) and foreign. Imagine if you will, Musk and his minions with the launch codes. Everything else improbable or “impossible” has happened. This is not just a reactionary revolution, it is a tech/political revolution. Tech is being used to take command and control of all these systems; Treasury, Justice and one can only imagine, soon the military. All command and control flows through tech channels these days. He who controls information, communication and specific command/control tech, controls the nation.
But as I said, operating in this tyrannical fashion and ignoring natural and human limits, destroys the environment and destroys functioning society. All will collapse on this path. I believe the time to collapse can now be measured in years, very possibly a few short years. I might be wrong. We might have a whole decade left. I highly doubt we have any more time than that.
Test. Does everything I write go to moderation?
With Trump’s USA abandoning all partners and allies, except Israel at this point, the lesson that Russia and China are taking – unsurprisingly – is that the USA abandons abandons all partners and allies. In addition, the USA can be depended on to opportunistically shake down former allies and partners, even by doing deals with Russia and China. This has been seen with the rare earths standover “deal” being pushed on Ukraine. Do these rare earths even exist? I can’t find any data or corroboration that they actually exist in Ukraine’s current or former territories in any significant quantities. Misdirection for Trump’s real deal?
With the above lesson taken, China has been conducting live fire exercises in the Tasman Sea. Preparation for “Tomorrow When the War Began”? Well, they do pretty well know now that Trump abandons allies. Yes, with the right aircraft and missiles we can sink Chinese surface ships in our sea approaches. But the issue is what would China’s reply be? My guess is a nuclear tipped ICBM on one of our capital cities. What would Trump’s response be? Most likely, “The socialist Australians asked for it. I’m not starting WW3 for them.”
So, we can’t use our missiles anyway if the US alliance is dead. And we can only assume it is dead, given Trump’s modus operandi.