What would happen to the global market if the US dollar hegemony declined?

According to news from the Wind Chasing Trading Platform, on May 8th, senior economic advisor at HSBC, Stephen King, released a report that examined the rise and fall of reserve currencies from a historical perspective, delved into the status of the US dollar as the world's reserve currency, and studied and analyzed the Trump administration's attitude towards the dollar's reserve status and its potential impact. The report shows that history indicates that "destroying a reserve currency is easier than creating it." The collapse of a reserve currency system often accompanies significant economic turmoil and sharp fluctuations in asset prices, rather than a smooth transition to a new system. King pointed out that some members of the Trump administration are concerned about the burden the current reserve currency status of the US dollar places on the US economy and are trying to weaken the dollar's international position through various measures. The report warns that this approach may lead to market instability - the success of a reserve currency system partly depends on the issuing country being willing to sacrifice some economic sovereignty for greater overall economic benefits. Once the issuing country begins to believe that these economic benefits are being outweighed by costs, it may adopt policies to suppress international use. From the collapse of the gold standard in the 1930s to the disintegration of the Bretton Woods system in the 1970s, these events were accompanied by significant economic and financial turmoil, with asset prices and exchange rates experiencing sharp fluctuations. King believes that US government efforts to correct the "overvaluation" of the dollar could lead to financial turmoil, disrupt international capital markets, and raise doubts about the continued support of the US for the Bretton Woods institutions (which have long helped to set international economic and financial "rules of the game"). King believes that if the US tries to "reclaim" control of the dollar and the Fed is no longer willing or able to continue acting as the world's "lender of last resort," global capital markets lose access to dollar swap lines and the risk would be a mass movement towards gold, which lacks elasticity in supply, leading to severe liquidity shortages. This would result in a continued rise in gold prices and potentially trigger financial turmoil similar to that of the 1930s or 1970s. The decline of reserve currencies from a historical perspective The report first reviews the history of reserve currencies. King points out that the issuing country of a reserve currency typically sacrifices some economic sovereignty for international economic cooperation. He emphasizes that historical experience shows that negative policies designed to prevent the international use of a currency are more effective than positive interventions encouraging its use. The report mentioned the gold standard as an early reserve currency system that restricted a country's ability to maintain competitiveness through uncompetitive wage or price levels. By linking paper currency to gold and making it impossible for any country to change the supply of gold, the loss of competitiveness would be reflected in deteriorating international balances, leading to gold outflows. The report states that these outflows forced a contraction in domestic money supply, which, in turn, reversed initial losses in competitiveness by lowering domestic prices and wage levels. By the 1930s, the collapse of the gold standard had a significant impact on the world economy. In that context, to meet international demand, the Fed set extremely low interest rates, leading to a stock market bubble in the US. The collapse of the Bretton Woods system and the resurgence of the dollar After World War II, under a new international order, the US dollar became the new reserve currency. The report points out that outside of the IMF, World Bank, and the General Agreement on Tariffs and Trade (predecessor of the World Trade Organization), the dollar became the "first among equals." The 1944 Bretton Woods Conference established a new monetary system where the dollar could be exchanged for gold, while other currencies were pegged to the dollar. However, the Bretton Woods system also exposed some key weaknesses. Some countries seemed to benefit from the fixed exchange rate arrangement, experiencing rapid economic growth and accumulating current account surpluses. Others seemed to continuously lose competitiveness and were prone to international balance of payments crises. The report notes that French Finance Minister Valry Giscard d'Estaing described the dollar as American "exorbitant privilege." Eventually, as the US increased its spending in the late 1960s due to activities like the Apollo moon landing program and wars, and faced an uptick in inflation, the dollar came under pressure. In 1971, the Nixon administration implemented the "Nixon shock" - ending the automatic convertibility of the dollar into gold, imposing price and wage controls, and imposing a 10% tariff on US trade partners. The report suggests that this marked the collapse of the Bretton Woods system. In the 1970s, following the collapse of the Bretton Woods system, the world experienced significant turmoil. OPEC decided to double oil prices, reflecting in part the reluctance of oil-producing countries to receive payments in a devaluing dollar; during this period, although US stocks outperformed US bonds, investors experienced volatile markets. The price of gold skyrocketed from $35 per ounce in the early 1960s to between $500 and $850 per ounce. The report notes that the dollar eventually regained its role as the dominant world reserve currency, partially due to the extraordinary domestic policy shift undertaken by Paul Volcker after he was appointed Fed chairman - Volcker implemented high-interest rate policies that attracted international investors to flock to dollar assets, leading to a strong appreciation of the dollar. The Trump administration's approach to the dollar may be more critical than its tariff policy The report further analyzes the potential impact of the Trump administration's approach to the dollar's reserve status. The report notes that while the Trump administration's tariff policy has dominated headlines, its attitude towards the dollar's reserve currency status may be a bigger issue. The report quotes Stephen Miran's view that the current international trade and financial system has harmed the US economy; as the world's reserve currency, the dollar burdens the US economy because "with the US shrinking relative to global GDP, the proportion of domestic economic output required for current account or fiscal deficits needed to fund the global trade and savings pool is increasing." The report also points out that the Trump administration believes the dollar is "overvalued."These measures can be corrected through a series of measures, which will actually redefine the reserve currency role of the US dollar. These measures may include:Imposing sanctions on countries holding US dollar assets but seemingly damaging Washington's strategic interests; Using tariff policies to "encourage" countries to appreciate the US dollar; Encouraging other countries to restructure their holdings of US assets in exchange for tariff exemptions or continued US security support; Calling on the Federal Reserve to pay more attention to its rarely mentioned "third mission," that is, "moderate long-term interest rates"; Replacing decision-makers at the Federal Reserve with those more willing to closely cooperate with the Trump administration. After the "exit" of the US dollar hegemony, will global capital flow into gold and trigger financial turmoil? In the report, King summarized past historical lessons and made predictions about future trends. He believes that if the US abandons or neglects the international institutions that have set the "rules of the game" in the past, the credibility of these institutions will be difficult to maintain. He believes that if the US dollar is no longer trusted as the world's reserve currency, establishing a new reserve currency will be neither easy nor achieved quickly. The report further analyzes that if the US attempts to "take back" control of the US dollar, that is, if the Federal Reserve is no longer willing or able to continue to act as the world's "lender of last resort," global capital markets lose access to US dollar swap lines, the risk would be a massive shift in the market towards gold, which lacks complete elasticity of supply, leading to severe liquidity shortages. The gold price continues to soar, which may trigger financial turmoil similar to the 1930s or 1970s. The report predicts that emerging economies may adopt a "safety first" approach to balance their international payments, which could lead to a decrease in global total demand. The report believes that if the US government fails to create manufacturing job opportunities, this policy may ultimately disappoint. This article is reprinted from "Wall Street See News," by Li Xiaoyin; GMTEight editor: Liu Jiayin.