John Taskinsoy 2022 SSRN Basel I and II Aggravated April

Basel I & Basel II Have Aggravated the Man-Made Dollar Virus
Dr. John Taskinsoy a
ABSTRACT
Metaphorically speaking, prior to the man-created dollar virus leaked from the 1944 Bretton Woods
Conference (i.e. the virology lab), financial crises were termed as a panic and the Panic of 1907 was
the last financial crisis termed this way. The roaring 1920s (equity and housing bubbles in the U.S.),
the Fed’s unwarranted tight-money policy error to curtail speculative activities on Wall Street and to
avoid a potential stock market crash (1929), and a severe economic recession with massive bank
failures at the onset of the 1930s resulted in catchy economic jargons to be coined such as the Great
Crash of 1929 and Great Depression of the 1930s. At the backdrop of no large-scale conflicts, the Cold
War era (i.e. bipolarity and two superpowers) gave the dollar virus a rare opportunity to gain strength
during the halcyon periods of economic growth (1950s and 1960s), but the Nixon shock (President
Nixon’s decision to cut dollar’s link or convertibility to gold) caused the dollar virus to mutate into a
more dangerous variant, the upshot of which was an epidemic (i.e. Latin American debt crisis) as the
dollar virus began to infect major economies in Latin America through commercial banks’ short-term
lending of the dollar glut from rich oil-producing countries to Latin American states. Risk insensitive
rules of Basel I banking standard (released to banks in July 1988) aggravated the dollar virus and
forced it to mutate into a more severe variant in the late 1990s which caused another epidemic in the
East Asia and Pacific (Korea, Indonesia, Malaysia, Philippines, Singapore, and Thailand), but this time
was different than the antecedent, the Asian financial crisis of 1997-98 in systemic nature (President
Clinton called it a “glitch”) made investors lose $700 billion ($30 billion by Americans). The criticism
and mounting pressure prompted the Basel Committee on Banking Supervision (the standard setter)
to overhaul Basel I; contrary to the hyped optimism and promises, Basel II (Revised Framework) has
made developing and emerging economies more crisis-prone. Thanks to the selfish “America First”
policy, weaponization of the dollar, and abuse of the sanction power, now the dollar virus has reached
a pandemic status with the objective of enslaving the humankind and bringing on the Armageddon.
Although COVID-19 pandemic (Great Health Crisis – GHC) has killed over 6 million people worldwide,
if not contained by designing of a new monetary order (no hegemony of one nation and one currency),
the dollar virus as a weapon of vast economic destruction will take more lives, maybe by billions.
Keywords: Basel I and Basel II; Latin American Debt Crisis; Dollar Virus; Asian Crisis; Pandemic
JEL classification: O31, G12, E42, C40, Q32, Q54, H23
 This research did not receive any specific grant from funding agencies in the public, commercial, or not-for-profit sectors.
a Corresponding author email address: johntaskinsoy@gmail.com
Faculty of Economics & Business – Universiti Malaysia Sarawak (Unimas), 94300 Kota Samarahan, Sarawak, Malaysia.
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1.0 Introduction
In medical terms, the U.S. dollar is of course not a virus (i.e. COVID-19); but in terms of the dollar’s
infectious damage to developing and emerging economies, it functions as one. COVID-19 like viruses,
also known as SARS-CoV-2 or coronavirus, are characterized as zoonotic that use an intermediate
source (domesticated animals) before spilling over to humans (Marra et al., 2003; Thiel, 2007).1 The
U.S. is a man-made empire without colonial roots (settlers initially were from colonial powers), which
did not even have its own national currency as a newly independent nation from the British Empire
(July 4, 1776), therefore some foreign currencies were used as legal tender (i.e. Spanish milled dollar)
until Congress passed the Coinage Act of 1857 to end legal tender to all foreign denominated coins
(Hudson, 1972; Zinn, 2014). Metaphorically, the dollar’s evolution into virus can be illustrated as; the
dollar virus was created at the 1944 Bretton Woods Conference (i.e. the virology lab) and then moved
into a host (i.e. periphery war-torn Europe) before infecting countries in Latin America and Asia. So
far, coronavirus has killed six million globally2, but deaths from the dollar infection are countless.
The recurrence of financial crises3 is a testimony to the fact that various economic theories, models,
and risk management frameworks have failed miserably to promote stability. Moreover, Basel I and
Basel II banking standards had aggravated the dollar virus; the inherent flaws (i.e. risk insensitiveness
to capital) of these early micro/macro prudential measures ushered greater risk-taking. If the past
history is instructive, it should not come as a total surprise that financial booms and busts are normal
manifestations of a free-capitalist economy4, but what is disquieting is that the industry participants
seem to have not learned important lessons over the years how to make the severest implications of
financial crises milder. The antecedent crises may provide a simpler explanation; after all, each faced
similar causes and consequences such as; greater risk-taking by investors, banks, and households;
excessive on-and off-balance sheet leverage; significant cross-border and shadow-banking activities
(arbitrage); inadequate liquidity (both in quality and quantity); asset liability mismatch (short-term
1 NBC News, https://www.nbcnews.com/science/science-news/where-did-new-coronavirus-come-past-outbreaks-

provide-hints-n1144521
2 https://www.worldometers.info/coronavirus/
3 Financial crises are usually inevitable outcomes of banking panics, in most part, facilitated by stock market crashes,
bursting of bubbles (e.g. the Internet, housing), sovereign defaults leading to sovereignty debt crisis (2009-12 in euro
area), and currency crises (Asian crisis of 1997-98 was a perfect example for contagion and systemic risk).
4 Simplistic risk sensitiveness of Basel I and a regulatory flaw under Basel II conversely encouraged internationally active
banks to engage in cross-border and shadow banking activities which fostered economic booms in Asia and Latin America
through massive capital flows. A sudden reversal of capital flows combined plus repeated attacks on currencies caused
Asian crisis. Invention of the Internet and successful commercialization of the web-enabled technologies created the
Internet boom (1997), and about three years later, the Internet bubble deflated (2000-01). Mortgage-backed securities
(MBS) and collateralized debt obligations (CDO) played a key role in formation of housing bubble in the U.S. MBS and CDO
saw major declines as subprime mortgages began to default facilitated by lax lending conditions and banks’ aggressive
push on innovative refinancing and consumer loans enabling barrowers with subprime ratings to qualify for mortgage
loans which later led to the subprime debacle in 2006.
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borrowed foreign funds lent back domestically to long-term projects); procyclical deleveraging;
insufficient capital buffers held by banks to absorb losses from credit defaults under highly adverse
market conditions; and crisis-intensifier role played by the investor herd behavior (contagion).
Although majority of modern-time financial crises had taken place in the 19th5 and 20th6 centuries,
financial and economic crises however can be traced back as early as the 3rd century when the Roman
Empire nearly collapsed due to economic depression. England’s default in 1340 as a consequence of
its massively mounting war debt from the Hundred Years' War with France could be cited as one of
the earliest sovereign debt crises (Reinhart & Rogoff, 2009). However, for the sake of this article along
with crises are concerned, a closer attention will be paid to the term “golden decade” (Haldane, 2009)
which defines a period of unprecedented growth in many facets of life (technology, financial markets,
company profits, employment, living standards, and earnings). A mere coincidence or not, golden
decades (the roaring 1920s and the 1990s) are usually culminated by a major economic or financial
crisis; the Wall Street (stock market) crash of 1929, the collapse of the gold standard7 and the
subsequent Great Depression epoch (1930-39), Asian financial crisis, and global financial crisis.8
There has been an abundance of economic theories9, academic papers, and ample macroprudential
and microprudential standards as well as risk assessment/management frameworks provided by the
5 Total of 13 major financial and economic crises in the 19th century, caused by bank failures except the panic of 1893
(collapse of the railroad in the U.S.) and the panic of 1896 (a drop in silver reserves, depression in the U.S.). Six of these
crises originated in the U.S. and five of them in Britain (see e.g. Kindleberger & Aliber, 2005; Laeven & Valencia, 2008).
6 Unlike the 19th century, about 20 major crises in the 20 th century were caused by different types of factors such as; stock
market crashes (Wall Street crashes of 1901, 1929, and 1987; Shanghai in 1910); speculative attacks on currencies (Asian
crisis in 1997, attacks on European Exchange Rate Mechanism in 1992-93, Mexican peso in 1994-95, and Brazilian real in
1998-99); assets bubbles (Japan in the 1990s), and sovereign debt defaults (Mexico in 1982, Russia in 1998). By the 21 st
century, the nature and severity of financial crises not only have become more complex and costly, but also longer lasting.
Again, the three mammoth crises of the new millennium had the US origin (bursting of the Internet bubble in 2000-01,
mortgage debacle in 2006 (formation of the bubble during 2004-06 and bursting in 2006), and the 2008 of 2008.
7 Gold has been used as currency or monetary value of exchange for goods and services for centuries; but for the first time,
gold standard was officially inaugurated in 1844 by the British Empire which marked the new beginning of British pound
sterling fully backed by gold. By 1908, most countries adopted gold standard; however, the use of gold as a currency or
monetary value had been interrupted from time to time due to certain national or global situations (e.g., insufficient tax
revenue, World War I). Speculative currency attacks on British pound in 1931 forced Britain along with other European
countries to abandon gold standard, this in turn sparked numerous bank failures. Many economists including Eichengreen
(2003) and Bernanke (2000) believe that the underlining reason behind the Great Depression was gold standard and
Britain’s decision to drop it in 1931.More details on monetary factors leading to the Great Depression of 1930s can be
found in; Eichengreen (2003) “Golden Fetters: The Gold Standard and the Great Depression 1919-1939”; Bernanke (2004)
"Money, Gold and the Great Depression"; Hamilton (1987) “Monetary Factors in the Great Depression”; Fisher (1933) "The
Debt-Deflation Theory of Great Depressions"; and Bernanke (2000) “Essays on the Great Depression”.
8 For a historical perspective and longer discussions on this topic and other related topics, interested readers are welcome
to check out various articles by Taskinsoy (2012; 2013; 2018; 2019; 2020; 2021; 2022).
9 Among a long list of theories, here are just a few: Maynard Keynes (1936), “The General Theory of Employment, Interest
and Money”, argues that during economic downturn, governments will have to run larger deficits in order to keep people
employed; Hyman P. Minsky (1986), “Stabilizing an Unstable Economy”, argues financial fragility as an obvious component
and expected outcome of excessive risk taking; therefore, the level of fragility increases as the level of risk taking
significantly goes up; Marxist theories (Karl Marx sees recessions and depressions as normal unavoidable occurrences in
capitalism); and for Austrian theories (see Hayek & Rothbard, 1963).
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multilateral organizations such as World Bank, International Monetary Fund (IMF), Basel Committee
on Banking Supervision (BCBS), Organization for Economic Co-operation and Development (OECD),
and Institute of International Finance (IIF, 2011) offering ways (theories, models, tools, and systems)
how to prevent future financial crises from striking. Conversely, repeated financial crises since the
1980s have proved three things; 1) more regulation through macroprudential reforms (e.g. Basel I, II,
III) not only has failed but has been gravely ineffective to prevent financial crises or make their effects
milder; 2) the new breed of financial crises in this millennium have been more frequent, costly, and
longer lasting; and 3) the current financial system is extremely vulnerable to exogenous shocks
arising from acute stress and has inability to predict times and extents of crises beforehand.
Industrial development and economic progress during the early years of 20th century was plagued
by crises and, at some point, severely disrupted due to a catastrophic economic warfare between Nazi
Germany and the British Empire, largely facilitated by the formation of exclusionary trading blocs and
currency zones that inevitably led to the destabilization of global capital and investment flows in the
1920s (Nurkse, 1944). This situation was further deepened by the Great Depression of the 1930s as
massive contractions in global money supply resulted in devastating declines in worldwide aggregate
demand, which almost brought global trade to a complete halt. Additionally, the structurally flawed
gold standard had been both insufficient and inadequate as a monetary system to handle increasing
complexity as well as volumes of global trade involving innovative and highly intricate transactions.
Each of the last five crises10 was caused by an infection of the dollar virus, and the farfetched impact
is not hard to imagine; as such, record levels of unemployment; fast deterioration in living standards;
widening gap of inequalities; jolted societies from their roots with millions of displaced people; a
general mood of pessimism; and augmented financial instability coupled with increased uncertainty
about future prospects. The new millennium began with its own breed of crises; residents, businesses,
investors, and governments have agonizingly witnessed a new strain of shocks. The financial
cataclysm of 2007-08 and its massive tsunami effect thereafter resulted in the worst economic output
(double recession) in U.S. since the 1929 stock market crash and the ensuing Great Depression (1930-
39). Blinder (2013) called the 2008 global financial crisis a “perfect storm” and Bernanke (2005)
characterized it as “a global financial meltdown”. A brief history would be informative.
Developments and Events Prior to the Great Depression Epoch (1930 - 1939)
The US residential mortgage market was unevenly regulated with light banking supervision and in
short term nature (5-10 years) with variable interest rates (Blank, 1954; Cho, 2004; Klaman, 1961).
10 Asian crisis of 1997-98, dot.com crisis of 2001-02, subprime debacle of 2006, GFC of 2008, and sovereign debt crisis of 2009-12.
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As urbanization grew rapidly in the U.S. between 1870 and 1930 (e.g. Gray & Terborgh, 1929;
Friedman & Schwartz, 1963), nonfarm housing starts soared, peaking at 930,000 in 1925 compared
with just average 300,000 units per year between 1905 and 1916 (Snowden, 2014; Diamond, 2004;
Feldman, 2002). Despite the 1890 farm mortgage crisis, agricultural output in the U.S. entered its
“Golden Age” (1910-14); as a result, farmers increased their income substantially, but the downside
was, the farmers’ total mortgage debt on their properties also increased over 50% during 1918-22
(Snowden, 2010; Wickens, 1937). The golden decade (1919-29) saw an unsurpassed rise in the U.S.
equity prices (9 years of growth, peaking at little over 381 before the crash). A speculative boom in
the 1920s fueled growth in manufacturing activity in the U.S., this led to the utopia belief that the US
stock market was going to be the predominant beneficiary of the industrial boom. As a result, rising
stock prices in Wall Street lured investors with the driving motive to invest more in equities through
barrowed money, however significant margin buying also increased the counterparty risk.
Source: Adapted from Williamson (2013)

Figure 1: Daily closing values of the Dow Jones Average (1928-30)
Despite a stellar run by the Wall Street (Figure 1), the economic output in the U.S. was confined to the
bull stock market activity; sales figures for cars and homes plummeted while a large number of real
industries (construction) showed struggling signs with staggering short-term debt levels. On the
global front, extreme volatility in wheat prices sent signals to investors that high volatility might cause
the U.S. stock market to falter; increased ownership of stocks during the roaring 1920s reversed, and
a panic selling in a herd behavior forced liquidation of margin positions. The young and inexperienced
Fed rushed to raise the fund rate to curtail speculation on Wall Street and avoid a potential stock
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market crash, but the Fed’s unwarranted tight-money policy error backfired causing a sizable drop in
the money supply, a surge in unemployment (Figure 2) and a severe credit crunch.
Source: The US Bureau of Labor Statistics, created by the author

Figure 2: Unemployment rates in the U.S. (1929-39)
Easy credit conditions arising from excessive liquidity created a barrowing frenzy among consumers
and investors despite the already weak financial resources of the debtors to pay back the interest and
principle of the original debt (i.e. high credit default risk). These along with other factors instigated
an unprecedented stock market crash in 1929 (Figure 1); the Dow Jones Industrial Average (DJIA)
plunged two days in a row (-12.82% on “Black Monday” and -11.73% on “Black Tuesday”). Despite
heavy losses in Wall Street ($30 billion11), an ordinary recession following the 1929 crash would have
not descended into the Great Depression in the 1930s if the following three errors were avoided (e.g.
Eichengreen, 2003): 1) the gold-exchange rates after the gold standard resumed in 1920 not only
failed to mirror the countries’ trades but they were considerably inconsistent, for example, utterly
overvalued British pound12; 2) inconsistent exchange rate parities (i.e. US$4.86:£1) exposed British
pound to speculative attacks during economically challenging times (sluggish global economy), which
11 See "The Crash of 1929" by PBS. Retrieved from http://video.pbs.org/video/1308436568/, October 10, 2013; also see,
"Dow Jones Industrial Average All-Time Largest One Day Gains and Losses" by The Wall Street Journal. Retrieved from
http://wsj.com/mdc/public/page/2_3024-djia_alltime.html, October 10, 2013
12 The gold standard was suspended during World War I; the British pound was overvalued in the reenacted gold-exchange
standard in 1920, making British exports expensive (Keynes, 1925; Robinson, 1947; Officer & Williamson, 2013).
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forced some countries to abandon the gold standard in the 1930s (the UK was first to leave gold in
1931); 3) the passage of the Smoot-Hawley tariff in the United States resulted in an increase in the
"beggar-thy-neighbor"13 (protectionist) policies which were considered highly counterproductive and
disruptive in international trade activities (Bernanke, 2013; Eichengreen & Irwin, 2010; Field, 1992;
Hamilton, 1987; Kindleberger, 1986; Meltzer, 1976; Temin, 1976).
With the onset of the Great Depression (1930-1939), the property values plummeted 50% or more,
triggering a cascade of foreclosures, i.e. over 1 million homes went into foreclosure during 1931-35
(see Bodfish, 1931; Field, 1992; Foster & Wickens, 1937; Gottlieb, 1964). The US unemployment rate
skyrocketed (peaked at 24% before descending to below 10% with the start of WWII, see figure 2),
and the GDP got hit the hardest, nearly giving back all of the accumulated growth between 1910 and
1929. Opinions as to what triggered the Great Depression vary significantly (see Bernanke, 2000;
Eichengreen, 2003; Friedman & Schwartz, 1963), the following claims are found in the literature; the
death of Benjamin Strong in 1928 (head of the New York Federal Reserve Bank)14; the 1929 stock
market crash (Black Tuesday); the beggar-thy-neighbor policies (Eichengreen & Irwin, 2010); the U.S.
Smoot-Hawley tariff of 1930 (e.g. Irwin, 1998); collapse of the international trade (Eichengreen &
Irwin, 1995); banking panic and crashes (Kindleberger, 1978, 1986); a lack of gold reserves at the
Fed (Epstein & Ferguson, 1984); Great Britain’s decision in 1931 to leave the gold standard due to
speculative attacks on the British pound (Cooper, 1999); and the Glass-Steagall Act15 also known as
the Banking Act of 1933 which barred US commercial banks from investment banking activities (see
Crawford, 2011; Lardner, 2009; Mester, 1996). The value of dollar to gold changed from $20.67/oz to
$35/oz in 1934 as a defense by President Roosevelt to turn the economic tide.
The US Federal Reserve Act16 is often cited as a contributing factor to the credit crunch in the 1920s
and the funding freeze (severe illiquidity) that led to the Great Depression. According to the Act, up
to 40% of the new issuance of Federal Reserve Notes had to be backed by gold, but the vast problem
was that the Fed exhausted its entire limit of printing money before 1930. Consequently, at the very
severe episode of the crisis, the Fed helplessly watched some large public banks become insolvent
with no lender of last resort, this in turn impelled other banks to fail as panicked customers rushed
13 One country tries to solve its own problems on the expense of other countries (i.e. what the U.S. is doing currently).
14 Although the New York Federal Reserve Bank had no prior authority granted by the federal government, Benjamin Strong
allowed the bank to engage in the open market bond operations to keep the money supply stable despite volatility in gold
inflows and outflows. This meant bending the rules of banking rules which was not legal.
15 As a reactionary response to drafted by Senator Carter Glass and Representative Henry Steagall
16 The US Congress created the Federal Reserve System (the central bank of the U.S.) which was signed into law by President
Woodrow Wilson on December 23, 1913. Over the years, the Federal Reserve’s (Fed) actions have been hot topics of huge
debates as well as criticism and many people have blamed the Fed and its policies for turning an ordinary recession into
the Great Depression (severe contraction in liquidity). The Fed’s actions regarding the periods of booms-busts in the
2000s are also highly refuted (see Johnson, 2010).
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to withdraw their money. Economists argue that the Fed could have avoided more bank collapses if
it injected additional liquidity to the troubled banks. However, the Fed defended its stand by claiming
that rescuing the failed banks via the use of more gold in its vaults would have put more pressure on
the credit markets, forcing more people to default or foreclose on their loans (Griffin, 2002).
The extent and severity of the Great Depression varied across countries and regions, but the U.S. was
at the epicenter as the depression first originated there before spreading globally. Labor-intensive
industries such as mining, farming, and logging saw the biggest impact as prices of commodity items
persistently declined (over 50%) due to plummeting demand which led to significant deterioration
in major economic indicators during 1929-1932. Blum et al. (1970) show how industrial production
contracted by almost half (-46%) in the United States, but not as nearly bad in Great Britain (-23%),
France (-24%), and Germany (-41%). The Fast declines in wholesale prices were similar throughout
the four countries; -32%, -33%, -34%, and -29% respectively. The U.S. foreign trade saw the austere
impact (-70%), dropping more than two thirds of its volume before the depression took place; Great
Britain (-60%), France (-54%), and Germany (-61%). As shown in Figure 2, the unprecedented jump
in US unemployment17 (see figure 2) was just mind blowing, which was significantly greater than
Great Britain (129%), France (214%), and 232% in Germany (Cochrane, 1958).
Keynes and the Keynesian economists argue that at times of severe financial crises, governments
must not be overly concerned with running large deficits; after all, they only have the means of funds
to keep people employed.18 Furthermore, Keynes (1936) argue that pulling economies out of slump
or recession or even depression will not be possible if the government spending is inadequate due to
concerns of running deficits or balancing the budget. Franklin D. Roosevelt, 32nd U.S. President, tried
to pull the United States out of recession preceding World War II through government spending in
the form of subsidies for farmers and other government sponsored social programs, but his spending
was insufficient to pull the country out of recession as claimed by Keynes. Fisher (1933), on the other
hand, stressed that the two underlying reasons behind the Great Depression were excessive debt and
deflation which resulted in significant appreciation in asset values which in turn led to the formation
of a financial bubble. 19 The 1929 stock market crash, the cataclysmic collapse of the gold standard in
the early 1930s, the Great Depression and the breakout of World War II paved the road for the 1944
17 See US Bureau of Labor Statistics, retrieved from http://data.bls.gov/pdq/SurveyOutputServlet, October 10, 2013
18 For more on the Great Depression and related policies, see; Keynes (1936); Friedman and Schwartz (1963); Fisher (1933,
1998); Bernanke (1995); Klein (1947); and Allgoewer (2002)
19 Besides the two key reasons already mentioned the Smoot-Hawley Tariff Act (June 17, 1930) is often cited as an important
factor and believed to be the underlining reason behind plummeting international trade. Although exports were not large
part of the U.S. economy at the time of the Great Depression, but they were for most European countries; so, the Act raised
the U.S. tariffs on more than 20,000 imported goods which resulted in a significant decline (more than half) in American
exports (see Barry, 1989; Irwin, 1998, 2011; Bernanke, 2013).
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Bretton Woods system of fixed exchange rates, which is viewed by many economists and historians
as the inauguration of the US dollar hegemony. John Maynard Keynes (“Baron Keynes”), distinguished
British economist and the leader of the British delegation at the Bretton Woods Conference in 1944,
made a compelling argument against the use of a fixed exchange rate regime pegged to the U.S. dollar,
but his proposal of a supranational currency along with the creation of two watchdog institutions to
monitor and avoid significant global trade imbalances was rejected (Schumacher, 1943); nonetheless,
the IMF and the World Banks as the two watchdog institutions were created.
The Emergence of the Dollar Virus before the Conclusion of WWII
After the Continental Congress (original 13 British colonies) issued the Declaration of Independence
from Great Britain (July 4, 1776), the newly independent nation was busy with expansionism in the
1800s. Excluding the Civil War (1861-65), by winning the Mexican-American War (1846-48), the U.S.
expanded its territory by more than 500,000 square miles of land that belonged to Mexico (1.3 million
square km). Under the Treaty of Guadalupe Hidalgo, several states were added to the Union; Nevada,
Utah, California, New Mexico, Arizona, Colorado, Texas, Kansas, Wyoming, and Oklahoma (Figure 3).
Source: Wikipedia, https://en.wikipedia.org/wiki/American_Civil_War

Figure 3: Map of the division of the states before the start of the Civil War (1861-65)
Notes: The Union had 34 states including border states and territories; West Virginia 35th in 1863 and Nevada 36th
in 1864. Territories: Colorado (1876), North Dakota and South Dakota (1861), Nebraska (1867), Nevada (1864),
New Mexico (1912), Arizona Territory (1912), Utah (1896), Washington (1889), Idaho (1890), Montana (1889).
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The American Civil War (the North vs. the South) ended on 9 April 1865 with the Union’s victory; at
this point, the U.S. dollar was still a national currency without a global dominance, but this changed
with the U.S. winning the Spanish-American War (April 21 – August 13, 1898) which also made the
US expansionism via intervention and annexation the new norm. The treaty of Paris (December 10,
1898) ended the Spanish colonial rule in Americas as the U.S. ceded ownership of Puerto Rico, Guam,
the Philippine islands, and temporary control of Cuba (Corbin & Levitsky, 2003). The emergence of
the dollar virus, nourished by strong economy and military might, craved more and began searching
for the next host (i.e. cocoon), this prompted the U.S. to win insular possessions in the Caribbean and
Hawaii and to play a leading role in the power-reshuffling among Germany, France, and the UK which
were also each other’s chief enemy (see Adams, 2008; Hudson, 1972, 2003).
Source: National Park Services, https://www.nps.gov/civilwar/facts.htm

Figure 4: US Civil war facts (1861-65)
Farmers: Union (48%), Confederacy (69%); Mechanics: Union (24%), Confederacy (5.35)
Military: Union (2,672,342 enlisted), Confederacy (750,000 – 1,227,890)
Union war casualties: 642,427; 110,100 battle, 224,580 from diseases, and 275,174 wounded in action.
Confederacy war casualties: 483,026; 94,000 battle, 164,000 from diseases, and 194,026 wounded in action.
Border states (only states in the Union with slavery): Maryland, Delaware, West Virginia, Kentucky and Missouri.
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2.0 Literature Review
Modern humans (Homo sapiens) during the Middle or Upper Paleolithic Age20 (Figure 6), commonly
known as the Old Stone Age, may have used a primitive form of barter to facilitate exchange of tools
and agricultural goods. There is no shortage of conflicting viewpoints found in the literature as to
whether barter as a medium of exchange had ever existed or it was just a man-created hypothetical
experiment. Anthropologists, archeologists and researchers who have traveled to rural areas found
no ethnographic evidence to confirm the existence of a barter economy in prehistoric times.21 On the
other hand, Adam Smith in his seminal book “The Wealth of Nations” explained barter as a primitive,
crude and unrefined method of exchange, but he also believed that barter economy existed and the
textbooks, despite a lack of evidence, have repeatedly endorsed his viewpoint (Kaikati, 1976).
Source: Author
Figure 5: Evolution of money
20 The Stone Age lasted roughly 2.5 million years and ended about 5,000 years ago, which was broken into three distinct
periods such as Paleolithic, Mesolithic, and Neolithic Periods. Wikipedia, https://en.wikipedia.org/wiki/Paleolithic
21 For more detailed information, see History.com, https://www.history.com/topics/pre-history/stone-
age#:~:text=The%20Stone%20Age%20began%20about,Mesolithic%20Period%20and%20Neolithic%20Period.
11
Source: Wikipedia, https://en.wikipedia.org/wiki/Paleolithic
Figure 6: Hominin timeline
Homo habilis: An extinct species of archaic human from the Early Pleistocene of East and South Africa about 2.3 to 1.65 million years ago
Homo erectus: An extinct species of archaic human from the Pleistocene about 2 million years ago (first recognizable members of the genus Homo.
Homo bodoensis: An extinct archaic humans that lived during the Chibanian in Africa around 500,000 years ago.
Neanderthals: An extinct species or subspecies of archaic humans who lived in Eurasia until about 40,000 years ago.
Modern humans: A suite of behavioral and cognitive traits that distinguishes current Homo sapiens from other anatomically modern humans, hominins, and primates.
12
Until the debut of the US dollar as a national currency (1792), the evolution of money had concluded
the stages of barter and commodity money (Figure 5). Barter trade involves no dollar virus, therefore
no harm to the user; unlike a monetary-based economy, a barter transaction is very simple, which is
executed unilaterally or multilaterally between two or more people, and no monetary payment other
than goods or services is used in the exchange; more importantly, no credit (deferred payment) is
accepted and immediate delivery takes place at the conclusion of a mutual agreement. Contrary to the
capitalism where exploitation of labor supersedes social welfare, barter trade is a purely peer-to-peer
exchange without the need of a third party intermediation such as banks or credit card companies.
This unique aspect of barter it free from the crisis-prone instability of a capitalist economy; as such,
one nation (U.S.), one main currency (dollar hegemony), and repeated systemic crises underpinned
by dollarization as a weapon of mass destruction. The dollar virus gains strength and mutates through
expanding (print of dollars) or contracting (unprint of dollars) the aggregate dollar supply, its main
nutrition is constant indebtedness (debt hangover) by public, private and household sectors.
Since the global financial crisis of 2008, there has been a noticeable spike in barter trade volume (e.g.
Chapman, 1980; Lithen, 2002). Experts believe the rise in barter as a mode of exchange is attributable
to the United States’ weaponization of the dollar and increased abuse of sanction power as a foreign
policy. Former US President Donald Trump has aggravated U.S. alias and rivals alike forcing them to
resurrect the primitive barter system from its grave as a sanction-avoidance maneuver to skirt the
dollar’s might (Stodder, 2000). Creating no billionaires is probably the best feature of barter system,
in which people are not vast consumers; contrary to modern capitalism, a reciprocal and mutually-
beneficial exchange of the barter system does not result in over production, inflation, or deficits.
This paper is not insinuating in any way that barter is a viable alternative to the current dollar system,
it is clearly not, because there are no other credible currencies to end dollar’s undisputed hegemony;
despite barter’s key advantages, the disadvantages make it grossly inadequate to handle such high
volumes of transactions and solve today’s complex problems. Before 1950s, stock markets were not
deep enough which lacked both risk mitigation tools and financial innovation; therefore, insurance
policy was predominantly used by people and companies as a protection against financial losses arose
from natural disasters, accidents and work related injuries; however, pure financial risk arising from
market risk, credit risk, operational risk, and liquidity risk was not covered under an insurance policy
(see Allen & Carletti, 2006; Bernstein, 1996; BIS, 1994; Cline, 1984). An efficient diversification of
investment risks was an arcane topic until Markowitz (1952, 1959) attacked the portfolio selection
problem through the mean-variance criterion, under which he assumed that all investors were risk-
averse who always considered minimizing the variance and maximizing the expected returns of their
portfolios consisting of different investment options with varying degrees of perceived risks.
13
2.1 Spreading the Dollar Virus
The 44 delegates of Allies in U.S. leadership agreed to the creation of the dollar virus at the Bretton
Woods lab in 1944 (new dollar-centric monetary order in the post-WWII era). Since 1950, the dollar
virus has mutated (e.g. dollar dilemma, see Triffin, 1960), but since the Nixon shock22 in 1971 (Bordo
et al., 2017; Dooley et al., 2004; Garber, 1993), it has turned into a global pandemic as dollarization of
the private banking sector has created over 95% of the world’s fiat money out of thin air through the
process of fractional reserve banking23 (Eichengreen, 2009; Eichengreen & Flandreau, 2009; Kirshner,
2008; Nicolo´ et al., 2003; Triffin, 1960, 1965). Shockingly, and contrary to a perceived belief by many,
only less than 5% of the money comes out of a mint, i.e. printed by central banks (i.e. the Fed).
Economics is broken into many unfixable pieces, no such thing as a capitalist economy anymore, there
is only dollar economy plagued by the dollar virus, which is more crisis-prone than ever before. The
economic schools of thought and their outdated economic theories (i.e. neoclassicism, neoliberalism,
Keynesianism, monetarism, and a host of others) have failed to promote global financial stability, but
instead created a world that was hijacked by a handful of billionaires who are destined to enslave the
humankind; Figure 7 shows how the super-rich has gotten sickeningly richer in this millennium.
Sources of data: Human Journey24 (2005 and 2015); Business Insider25 (2020); B: $billion USD
Figure 7: Top 10 richest persons in the world in 2005, 2015, and 2022
22 Runs on gold due to speculative attacks on dollar in 1971 drained the U.S. gold stock (i.e. the dollar was again devalued to
$42.22/oz). Subsequently, to defend the American economy and dollar’s hegemony, President Nixon was prompted to
terminate the dollar’s link to gold in May 1971, which was commonly referred to as “Nixon shock” (i.e. inflation at 4.7%).
23 By law, each individual bank is a financial intermediary without the power of creating money, only the Fed in the U.S. and
central banks in other countries are allowed to print money (physical or digital); however, the banking system collectively
is allowed to create money through credit expansion (money multiplier), which is called fractional reserve banking.
24 https://humanjourney.us/the-changing-world-economy-section/capital-in-the-twenty-first-century/
25 https://www.businessinsider.in/business/news/top-10-richest-persons-in-the-world-in-
2022/articleshow/90291860.cms#:~:text=%232%20Jeff%20Bezos,his%20%24178%20billion%20net%20worth
14
Source: OXFAM (2021), www.oxfam.org
Figure 8: The inequality virus
15
The Figure 7 attests how the dollar virus has favored the super-rich while augmenting inequalities
and poverty levels in every sense throughout the world (Figure 8); for instance, the combined wealth
of the top 10 richest people nearly tripled in spite of three massive financial shocks26, i.e. from $203.9
billion (2005) to $550.6 billion (2015). The danger of the prevalent dollar virus has been clear and
visible during the COVID-19 pandemic which has cost the world’s economies over $20 trillion not
including unforeseen and uncalculated costs related to future societal and health issues. In terms of
coverage and cost, coronavirus pandemic easily qualifies to be the worst health crisis in humanity
(Table 1), but shockingly, even this has not stopped the greedy super-rich to get richer; between 2015
and 2022, the aggregate wealth of the top ten billionaires has risen from a whopping $550.6 billion
(2015) to $1.33 trillion by the end of 2021 which is a record in history; furthermore, first time in
history, the top 10 billionaires more than doubled their wealth in just six years.
Table 1: Coronavirus cases
Country Total Cases Total Deaths Total Recovered Serious - Critical
World 473,358,518 6,108,933 409,518,450 60,884

United States 81,460,646 999,451 63,294,896 3,013
India 43,010,971 516,574 42,470,515 8,944
Brazil 29,641.848 657,363 28,214,095 8,318
France 24,161,339 141,085 22,699,221 1,632
United Kingdom 20,413,731 163,929 18,700,082 299
Germany 19,017,693 127,739 14,904,100 2,494
Russia 17,637,795 365,373 16,346,800 2,300
Turkey 14,726,276 97,437 14,364,955 975
Italy 13,992,092 158,101 12,633,384 455
Spain 11,378,784 102,053 10,707,169 682
Top 10 Total 245,828,969 3,329,105 244,335,217 29,112

Top 10 % of World 51.93% 54.50% 59.66% 47.82%
Source: Worldometer, https://www.worldometers.info/coronavirus/
The Dollar Virus is the Armageddon
 The world was unequal before the creation of the dollar virus, but it is now profoundly unlivable
thanks to the strength of the virus which is controlled and manipulated by a tiny group of 1,000
wealthiest billionaires (Gods) who have more money than the bottom half of the global population.
 The gap between rich and poor has never widened this much since the invention of money; the
dollar virus has exacerbated inequalities in every sense (i.e. income, gender, race, etc.).
 Contemporaneous crises in this millennium underpinned by the dollar virus have tossed at least
1% or more of the world population into poverty (i.e. close to one billion people).
26 US subprime crisis of 2007, global financial crisis of 2008, and European sovereign debt crisis of 2009-12.
16
 Vaccines can be developed for viruses, cures can be found for diseases, and drug-addicted people
can be rehabilitated, but unfortunately, addiction to dollar can’t be rehabilitated (i.e. IMF strings-
attached programs in this sense have aggravated the dollar virus in developing and emerging
economies) and there is no vaccine for the dollar virus, those infected (i.e. states, private and public
entities, and residents) are left to die. It is sad that inequality and oppression will only increase.
 Many things that happen around us can be explained by classical physics (i.e. Newtonian science),
but life is not all about physics and its complex linkages (interdependent ends and means of life)
are not always explainable by unorthodox methodologies involving money (i.e. the dollar virus).
 Instead of economists and experts trying to come up with fancy jargons of economic terms after a
high-magnitude financial crisis (i.e. Great Depression, Great Recession, or Great Contraction), they
should spend more time for finding reasonable answers why the dollar virus hits the deprived
poor (i.e. marginalized and oppressed communities) while the super-rich is highly immune to the
dollar virus which, in fact, works for “a White patriarchal elite”.27
 Professional economists, those who are enslaved by the dollar virus, persistently use the outdated
production-based economic theories (monetarist, neoclassical, or Keynesian) to explain systemic
modern financial crises since the late 1990s. They are either arrogant or ignorant, or both because
the modern finance throughout the 1990s and in the new millennium is not the same as before,
the dollar virus has transformed the old production-based global economy into a debt-based non-
production economy (i.e. making money from money) which is not only vulnerable to shocks but
open to gaming via speculation, manipulation, abuse of sanctions, and weaponization of the dollar.
 The Great Depression of the 1930s was an early sign of the dollar’s potential destructive power if
it turned into a global scale virus in the future. In the post-WWII era (after the dollar virus was
created in 1944 along with two watchdog institutions, the IMF and World Bank), between 1945
and the 1970s, economic problems and solutions to them were explained by the Keynesian school
of thought (see Keynes, 1936 for a larger role by the government to inject the needed liquidity); in
the 1980s, neoclassical economics28 was at the center stage, and its flawed ideas favoring private
enterprises such as reduced government role, neoliberal policies, privatization of public entities,
maximization of profit and shareholder value accelerated the spread of the dollar virus.
 In the 1960s and 1970s, private banks in the U.S. and Europe were prompted to search-for-yield
to make up for the squeezed profit margins resulted from low interest rates (i.e. negative real
returns due to inflation), therefore Latin American countries were on dollar’s radar to infect.
27 https://humanjourney.us/the-changing-world-economy-section/doughnut-economics/
28 President Ronald Reagan of the United States and Prime Minister Margaret Thatcher of the UK made privatization become
a household name; their eternal legacies and unique approaches are referred to as “Reaganomics” and “Thatcherism” (see
Jacob, 1985; Fair & Hutchinson, 1987; Hills, 1996; Riddell, 1985; Gramm, 2011).
17
 Since the leak of the dollar virus out of the Bretton Woods lab (figuratively speaking), the rich got
super-rich (White-man club, i.e. no woman in the 2022 top billionaire list, see Figure 7) and the
poor poorer. Amid the dollar virus-induced financial shocks plus the farfetched cost implications
of the Great Pandemic (COVID-19), the aggregate wealth of 1,000 billionaires (i.e. over $12 trillion)
saw a staggering surge in 2020, up $4 trillion in just nine months (March-December 2020); during
the same period, the top 10 billionaires increased their wealth by $500,000 billion.29
Source: OXFAM (2021), www.oxfam.org

Figure 9: The Bezos: new and improved protectors of the dollar virus and tax revenue change
 For over half a century, the dollar virus has created its own eco system (i.e. dollar-centric monetary
tools are used to besiege economies and enslave humans) underpinned by various nocuous public
and private organizations (i.e. the Fed, CIA, IMF, World Bank, UN, WTO, BIS, etc.) that are fully
committed not only to spread the virus but to defend it at any cost from attacks originated at home
29 OXFAM, www.oxfam.org
18
or abroad by the opposition. Economists’ theories (the old and the new) with a narrow view are
absolutely useless against the destructive power of this man-made virus; the only possible solution
is to get rid of the dollar virus (i.e. successful vaccine) by creating a supranational unit of account
as suggested long ago by the influential British economist John Maynard Keynes, which will not be
in control of (the Fed) and dominated by a single country (exorbitant privilege).
 The current state of the dollar virus (degenerative, fast consumerism fueled by vast exploitation)
is utterly unsustainable, which must be supplanted by a more fair mechanism (not complemented
by ill-advised economist’s theories) before the dollar virus enslaves the entire world population.
This time is different (e.g. Reinhart & Rogoff, 2009), we must urgently make a decision; do we want
to continue with the dollar’s “caterpillar economy” based on degenerative cancerous growth and
face the Armageddon, or do we want to focus on the regenerative “butterfly economy” to build far
greater civilizations? Although the answer is rather obvious, but not for the richest billionaires.30
 Capital and accumulation of wealth in the twenty-first century are profoundly different than what
Karl Marx explained in his book entitled Das Kapital31 (1867) where exploitation of labor is cited
as the main motivating force for creating surplus value in capitalism. This is only reminiscent of
Karl Marx (economies in the 18th and 19th centuries were mainly agrarian and the accumulation
of wealth was bound to land ownership), he himself would have been shocked and in disbelief to
see a handful of billionaires own more than the bottom half of the world population (4 billion);
this is the work of no other than the dollar virus (over abuse of dollar-denominated debt, infinite
capital growth via credit expansion), the mindboggling concentration of wealth can’t possibly be
generated via exploitation of labor in a world where sources of labor and capital are finite32.
 At the time of the dollar virus’ debut (i.e. post-WWII monetary order), land, labor and money were
the main sources of growth and economic expansion, but these “fictitious commodities” were finite
and (unlike real commodities) could not be grown or manufactured.33 However for survival and
longevity of the virus, the dollar system needed financial and technological innovations and related
tools to infect and enslave more victims; therefore, between 1950s and 1990s, a slew of financial
products were introduced in the U.S. which were complemented by the passage of various laws
and legislations (see Table 2), regulation/self-regulation/deregulation, accommodative monetary
policies, privatization, globalization of finance, fiscal/structural reforms; as such, mutual funds,
derivatives, adjustable rate mortgage (ARM), securitization of debt, collateralized debt obligation
(CDO), mortgage-backed securities (MBS), and credit default swap (CDS). As the dollar virus has
gained more strength (dollarization), repeated systemic crises became the new norm (Table 3).
31 Original title in German: Das Kapital. Kritik der politischen Oekonomie (translated as Capital: A Critique of Political Economy.
32 https://humanjourney.us/the-changing-world-economy-section/capital-in-the-twenty-first-century/
19
Table 2: Federal legislation to strengthen the dollar virus (USA)
1933 The Federal Deposit Insurance System and Home Owners Loan Corporation were established.
1936 The Federal Housing Administration was created.
1938 Fannie Mae was created to provide a secondary market by for FHA-insured loans.
1944 VA loan program was created as part of the Veterans Bill of Rights.
1948 Fannie Mae begins to purchase VA loans.
HUD and Ginnie Mae were created, and Fannie Mae became a shareholder-owned government-
1968
sponsored enterprise.
1970 Freddie Mac was created (the Federal Home Loan Mortgage Corporation Act).
1981 Savings & loans were allowed to invest in ARMs, and deposit ceilings were removed.
1982 Savings & loans securitize and sell off below-market-rate mortgages.
The Tax Reform Act of 1986 eliminated all interest-related personal deductions except for mortgages
1986
and home equity loans.
Freddie Mac was restructured as a publicly traded corporation, and the Federal Institution Reform
1989
Recovery and Enforcement Act passed.
Source: Green & Wachter (2005)
Table 3: Dollar virus-induced crises

1970s energy crisis
OPEC oil price shock (1973)
1970s 1979 energy crisis (1979)
Secondary banking crisis of 1973–1975 in the UK
Latin American debt crisis (late 1970s, early 1980s) known as "lost decade"
Early 1980s Recession
Chilean crisis of 1982
Bank stock crisis (Israel 1983)
1980s Japanese asset price bubble (1986–1992)
Black Monday (1987) (1987) (US)
Savings and loan crisis, 1,043 out of the 3,234 S&Ls failed from 1986 to 1995 in the U.S
Special Period in Cuba (1990–1994); Early 1990s Recession; 1991 Indian economic
crisis; Finnish banking crisis (1990s) (1991–1993); Swedish banking crisis (1990s)
1990s Black Wednesday (1992); 1994 economic crisis in Mexico; 1997 Asian financial crisis
1998 Russian financial crisis; 1998–1999 Ecuador economic crisis; 1998–2002
Argentine great depression; Samba effect (1999) (Brazil)
Source: Wikipedia, https://en.wikipedia.org/wiki/List_of_economic_crises
The Dollar Virus Engulfed Latin America in the 1980s
By the onset of 1900 (20th century), all industrialized countries were on the gold standard; Germany
(1871), the U.S. (unofficially in 1873, officially in 1900), France (1878), and Japan after 1895 (Bordo
& Schwartz, 1984; Metzler, 2006; Cassel, 1936; Cooper, 1982). Despite its three decades of halcyon
days in terms of remarkable economic growth and stability, the classical gold standard (1870s –
1914) ended with the start of WWI in 1914 which was described as “the war to end all wars”. However,
the unresolved problems of WWI coupled with Adolf Hitler’s grievances to the Treaty of Versailles’
harsh conditions unfortunately left the door wide open to the outbreak of WWII (1939-45). Even
before the conclusion of WWII, United States and its currency dollar were clear winners, and now the
time was to remove beggar-thy-neighbor policies and spread the dollar virus across all continents.
20
From the famous first three bubbles to the famous last three bubbles, times have changed but many
of the crisis-inflicting elements (triggers) have remained unchanged; as such, excessive leverage, debt
overhang, inadequate risk assessment/management, search-for-yield, poison ivy (capital flows), and
various agents of the economy with a constant propensity to invent loopholes (i.e. gaming the system)
to circumvent banking regulation and supervision. By 1960, many of the European nations completed
reconstruction (graduated from periphery to center) and joined the search-for-yield frenzy. Pension
funds grew exponentially in the immediate post-WWII era, however profit margins were squeezed by
the ultra-low interest rates, so banks and pension funds were forced to enter new markets with higher
interest rates. Economies in Latin America, the first major experiment of the dollar virus, initially
benefited from the dollar glut but the excessive sovereign debt resulted in costly crises (Beek, 1997;
Coes, 1998; Delvin & Davis, 1995; Edwards et al., 2007; Ertürk, 2014; Felix, 1990; Masiello, 2001).
Table 4: Capital flows to 7 largest Latin American economies
7 LACs 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987
External Debt (% of GNI)

Brazil 18.13 20.31 23.00 30.53 35.60 46.38 55.04 46.82 65.15 60.89 49.52 55.18
Mexico 22.17 24.27 27.83 28.01 31.47 32.14 35.15 51.46 52.68 49.09 42.56 42.35
Argentina 58.96 42.81 49.52 46.73 45.52 50.45 77.63 99.74 115.0 141.5 133.9 112.2
Colombia 26.31 26.36 22.26 21.22 20.91 24.24 27.28 30.56 32.79 42.94 45.76 49.09
Chile 27.62 39.18 35.86 32.79 30.53 32.59 53.31 66.53 57.28 55.20 82.75 82.02
Peru 49.96 70.83 83.76 63.48 47.65 35.85 45.03 63.04 65.63 72.98 86.85 76.51
Ecuador 13.56 25.33 35.64 43.17 43.51 42.24 42.80 50.10 68.46 63.44 59.93 79.07
External Debt (% of Exports)

Brazil 202.5 173.3 172.4 213.6 243.9 303.3 448.9 472.3 495.1 495.3 596.0 698.6
Mexico 299.6 314.6 379.8 343.4 309.3 304.2 402.3 406.8 345.5 355.4 436.3 419.3
Argentina 238.0 230.0 251.8 199.8 194.4 281.0 338.0 373.1 427.6 435.6 388.5 330.4
Colombia 144.7 149.1 129.0 124.9 121.8 178.0 211.5 283.7 230.4 313.6 235.6 245.3
Chile ----- ----- ----- 244.5 240.0 261.1 288.5 293.6 260.7 286.8 356.7 309.5
Peru ----- 434.9 408.4 227.3 197.3 207.0 259.7 299.6 310.2 329.1 442.2 486.1
Ecuador 48.18 98.57 153.2 147.8 132.2 131.1 159.9 221.0 195.6 205.6 305.2 268.4
Source: Ertürk (2014)
Although theoretically capital mobility helps the integration of developing and emerging economies
into major trade hubs and financial centers and contributes to economic growth; in reality, capital
mobility as part of financial liberalization (free market capitalism) was a bitter experience for Latin
America and Asia (ADB, 1997; Baig, 2001; Baig & Goldfajn, 1999; Bello, 1998; Berg, 1999; Bisignano,
1998; Boughton, 2001; Calvo, 1998; Calvo & Reinhart, 1999). Prior to and during both events, greater
risk-taking on the debtor side and predatory lending (lax credit environment) on the creditor side
were at the epicenter; in the aftermath, contraction (capital hoarding by banks) due to tight-money
policies and a sharp reversal of capital flows (flight to safety) resulted in costly financial crises.
21
Onset of the 1970s began with the “Nixon shock” as President Nixon cut dollar’s link (convertibility)
to gold, followed by the collapse of the Bretton Woods system of fixed exchange rates, negative impact
of which was amplified by the Yom Kippur (Arab-Israeli) War in 1973; oil shock in 1973-74 as OPEC
sharply raised oil prices (Figure 10) as a retaliation for the U.S. aid to Israel during the war; the forced
liquidation of Germany’s Cologne-based Bankhaus Herstatt34 in 1974, and intensified Vietnam War
(Cline, 1984; Delvin & Davis, 1995; Kindleberger & Alibar, 2005; Manasse & Roubini, 2005).
Sources: EIA; World Bank

Figure 10: Oil prices and increase in Latin America’s outstanding debt (1970-89)
The barrowing activity in Latin America had not lost any steam in the 1970s; the sovereign debt levels
of Brazil, Argentina, and Mexico reached unsustainable levels in an alarmingly fast pace that took only
several years (Dunstan, 2007). Latin America’s total external debt35 increased exponentially36 (Figure
1137) from $75 billion (1975) to $315 billion (1982); additionally, the amount of debt equaled to 50%
of the region’s GDP of over US$600 billion in 1982. The recessionary global economy in the late 1970s
together with the looming oil crisis prompted a huge price surge in food and commodity prices. Hence,
in order to better cope with their own economically challenging times (untamed inflation and rising
interest rates in G2), foreign lenders to Latin America raised the interest rates of their loans. This was
34 The sudden bankruptcy of a small privately-owned Bankhaus Herstatt in June 1974 is a famous as well as a shocking
incident that clearly illustrated the settlement risk in foreign exchange payments, plus ignored regulatory issues.
35 According to a report by the World Factbook (2006), Brazil’s external debt in 2005 was US$211 billion, Mexico had
US$275 billion as of 2011, and Argentina’s external debt was US$119 billion in 2005. The remaining 16 countries in the
region had a combined total external debt of US$214 billion which almost equaled to the debt of Brazil alone. The report
can be accessed at; https://www.cia.gov/library/publications/the-world-factbook/
36 Latin America’s external debt increased in four folds between 1970 and 1980 while its interest and principal payment
skyrocketed in more than five folds; increasing from US$12 billion in 1975 to US$66 billion in 1982. For more
information, see Signoriello (1991); Sunkel and Jones (1986); Felix (1990); and The World Factbook at,
https://www.cia.gov/library/publications/the-world-factbook/
37 Adapted from “History of the Eighties - Lessons for the Future”, Chapter 5: The LDC Debt Crisis, pp.193-94
22
the final breaking point for the large economies in Latin America to default on their external debt
obligations one after another. Mexico was the first country to default on its sovereign debt in 1982,
which immediately impelled actions by lenders to reduce or halt any further lending to Latin America.
Lewis (1990) blamed the exploitative power of foreign capital and saw massive capital inflows as the
main reason behind Argentina’s economic collapse. The IMF was called in for monetary assistance,
but its reforms to turn Latin America into a capitalist free-market38 economy were not appreciated;
in fact, some domestic supporters of the IMF’s actions were even discharged from public office.
Sources: World Bank – International Debt Statistics (2013)

Figure 11: External debt stocks of large Latin American countries (2000)
International capital movements (i.e. both capital inflows and outflows) did not contribute to long-
lasting positive economic developments in Latin America for the following reasons;
 In the 1960s and 1970s, several Latin American countries (notably Brazil, Argentina, and Mexico)
wanted to borrow huge amounts of foreign capital to finance mega infrastructure programs, and
the creditors (commercial banks) in advanced economies were happy to oblige (i.e. savings glut).
However, this was a bit unusual because traditionally (in the past) the IMF and the World Bank
were the only sources that would be willing to lend to risky developing or poor countries.
38 Margaret Thatcher, former British Prime Minister (commonly known as the “Iron Lady”) introduced economic reforms in
the 1980s that are remembered as “Thatcherism,” which meant smaller government, free enterprises, and tamed
inflationary pressure. It also meant an end to protectionism and reduction in state-owned companies.
23
 Liability dollarization saw a surge in the 1970s and early 1980s, making Latin American nations
become more crisis-prone; governments engaged in a borrowing spree of dollars (i.e. large current
account and budget deficits); individuals stored savings in dollars (i.e. inflation, fear of default risk
and devaluation of national currencies); and private companies and households borrowed more
in dollars than domestic currencies (i.e. high interest rates and access to foreign borrowing).
Table 5: Structure of long-term debt

1981 1982 1983 1984 1985 1986 1987 1988 1989
Argentina
Long-term debt (% of GDP) 41 52 60 51 69 61 67 56 98
Public and publicly guaranteed
46 59 71 72 89 90 96 96 97
(% of long-term foreign debt)
Private non-guaranteed
54 41 29 28 11 10 4 4 3
Brazil
69 69 74 79 81 85 86 89 93
31 31 26 21 19 15 14 11 7
Chile
36 38 45 62 73 81 86 85 78
64 62 55 38 27 19 14 15 22
Mexico
81 86 82 81 82 83 86 93 95
19 14 18 19 18 17 14 7 5
Source: Ramos-Francia et al. (2014); World Bank
 The structure of external borrowing was varied among the four large Latin American economies
(Table 5); therefore, the degrees of impact also differed substantially (see Obstfeld, 2012). While
the governments of Argentina, Brazil and Mexico borrowed foreign capital to finance their fiscal
deficits, the private sector indebtedness in Chile predominantly caused imbalances not the fiscal
expansionary policies (e.g. Sachs, 1989). Explicit government guarantees were a common feature
in four highly indebted Latin American countries, which played a crisis-intensifier role.
24
 In just less than a decade (between 1975 and 1983), the aggregate long-term foreign debt of the
four Latin American economies nearly quadrupled, i.e. from about $65 billion to circa $240 billion
(in terms of percentage of GDP, from 20% to 38%); when the short-term debt included, the total
debt figure rose close to 50% (over $330 billion). This massive debt overhang contributed to the
build-up of macroeconomic imbalances across Latin America (Rodrik, 1989, 1998; Wiesner, 1985).
 Credit expansion to Latin American economies by financial institutions including central banks in
advanced nations failed to improve the efficiency of world resource allocation (Mathieson & Rojas-
Suárez, 1993); on the contrary, vast international capital mobility from rich countries (i.e. glut of
savings and negative real interest rates) to capital-poor economies in Latin America fostered the
development of the biggest debt crisis after the Great Depression of the 1930s and prior to the
global financial crisis of 2008 (Bianchi, 2011; Caruna, 2011; De Gregorio, 2014; Diaz-Alejandro,
1985; Fanno, 1939; Ghosh et al., 2016). Is the massive increase in external debt levels (Table 6) of
Latin American economies in recent years a sign of another debt crisis knocking at their door?
Table 6: External debt of Latin American countries (2014 and 2020)

External Debt39 External Debt40
Country – Entity Increase (%)
2014 ($ billion) 2020 ($ billion)
Brazil 535.40 548.20 2.39%
Mexico 438.40 462.50 5.50%
Chile 140.00 238.30 70.21%
Argentina 115.70 271.50 134.66%
Colombia 84.00 153.62 82.88%
Venezuela 69.66 110.16 58.14%
Peru 56.47 93.27 65.17%
Cuba 25.23 30.00 18.91%
Ecuador 21.74 57.47 164.35%
Dominican Republic 19.72 44.47 125.51%
Costa Rica 18.37 31.28 70.28%
Uruguay 17.54 48.12 174.34%
Guatemala 15.94 25.14 57.72%
Panama 15.47 31.73 105.11%
El Salvador 15.46 18.33 18.56%
Nicaragua 10.25 12.05 17.56%
Paraguay 8.75 19.55 123.43%
Bolivia 8.07 13.51 67.41%
Honduras 7.11 11.02 54.99%
Total 1,623.38 2,220.22 86.77%
Source: World Bank; Wikipedia
 A chorus of economists argue that the Latin American debt crisis was an inevitable outcome of the
virus that infected the respective governments without macroeconomic discipline, which led to a
39 Wikipedia, https://en.wikipedia.org/wiki/Latin_American_debt_crisis
40 World Bank, https://data.worldbank.org/indicator/DT.DOD.DECT.CD?locations=NI
25
spike in inflation and a surge in dollarization levels by public, private, and household sectors (i.e.
ordinary citizens); furthermore, partial dollarization (or liability dollarization where locally
issuance of government debt in dollars was a widespread practice, see Table 7) made monetary
decisions in these countries noticeably less effective, however this view was not validated by
empirical studies based on currency substitution models which show only little support for the
dollarization hindering policy decisions (see Calvo & Reinhart, 1999; Nicolo´ et al., 2003).
Table 7: Degrees of dollarization: composite scores, 1996-2001
No. of
Composite
countries in Countries
Index Level
category
Very High 16
25 1 Ecuador
22 1 Bolivia
21 1 Uruguay
20 1 Argentina
19 1 Bulgaria
17 2 Lao, Nicaragua
16 2 Angola, Peru
15 2 Cambodia, Paraguay
Guinea-Bissau, Lebanon, Mozambique, São Tomé &
14 5 Príncipe, Zambia
High 34
Bosnia & Herzegovina, Ghana, Honduras, Jordan,
13 6
Tajikistan, Turkey
Congo DR, Croatia, Guinea, Indonesia, Malawi, Sierra
12 8
Leone, Tanzania, Yemen
11 4 Kyrgyz Republic, Mongolia, Russia, Vietnam
10 5 Bahrain, Côte d'Ivoire, Jamaica, Moldova, Philippines
Armenia, Belarus, Costa Rica, El Salvador, Estonia,
9 11 Georgia, Hungary, Pakistan, Thailand, Turkmenistan,
Uganda
Moderate 32
Egypt, Israel, Latvia, Lithuania, Macedonia, Papua New
8 9
Guinea, Romania, St. Kitts and Nevis, Ukraine
Brazil, Chile, Czech Republic, Guatemala, Haiti, Hong
7 9
Kong, Kazakhstan, Malaysia, Slovak Republic
Azerbaijan, Mauritius, Poland, Trinidad and Tobago,
6 6
United Arab Emirates, Venezuela
5 5 Albania, Colombia, Mexico, Solomon Islands, Uzbekistan
4 3 Saudi Arabia, Slovenia, South Korea
Low 8
3 1 Kuwait
2 5 China, Fiji, Netherlands Antilles, Singapore, South Africa
1 1 Taiwan
0 1 Oman
Source: Reinhart et al. (2003)
26
 After a sudden reversal of capital flows in the early 1980s, massive short-term credit exposures
had devastating consequences in the biggest Latin American economies; namely, Brazil, Mexico,
and Argentina. The economic expansion funded by external borrowing (and low domestic savings)
and fueled by vast consumption was not sustainable in these economies; with credit rationing (i.e.
capital hoarding), output in each affected country was disrupted and returns were distorted. Apart
from various macroeconomic developments/country-specific factors, borrowing frenzy (craze) by
the large Latin American economies (see Figure 12), similar to the 16th century Dutch tulipmania,
was not sustainable in any terms (short, medium, or long), so crises in the region were inevitable
(Edwards et al., 2007; Felix, 1990; Masiello, 2001; Signoriello, 1991; Williamson, 1990).
Source: World Bank, https://www.ceicdata.com/en/indicator/brazil/external-debt

Figure 12: External debt by top players in Latin American debt crisis
 Markets across Latin America lacked the fundamental valuation efficiency which, as Tobin (1984)
strongly argued, was a prerequisite for an accurate assessment of valuations in order to prevent
formations of asset bubbles (i.e. inaccurately or overpriced assets) induced financial crises.
 Although price movements are not always explainable by market fundamentals, i.e. supply and
demand curve (Stiglitz, 1993; Stiglitz & Weiss, 1981), nevertheless bubbles on asset prices served
as a perverse signal for capital re-allocation, which was amplified by lax credit conditions.
 In the post-WWII era (i.e. there was stability between 1950 and through 1960s), the IMF became
acquainted with the current account deficits during the Latin American debt crisis in the 1980s.
This was a major opportunity, but the IMF flunked and its politically influenced neoliberal strategy
(free market capitalism) aggravated the crisis and the ensuing financial losses. The IMF’s one-size-
27
fits-all textbook strategy of tighter-money along with budget deficit reduction policies not only
played a crisis-intensifier role but failed to restore confidence in Brazil, Mexico, and Argentina (see
Danielsson et al., 2016; Eichengreen & Bordo, 2003; Feldstein, 1998; Devlin & French-Davis, 1995;
Reinhart & Rogoff, 2009); nevertheless, the arrogant IMF economists always defended the actions
and instead blamed government officials of the respective countries. After this bitter experience,
in the eyes of people in Latin America, the ability of IMF to prevent financial crises lost credibility,
and repeated failures via misguided policies left a scuff on the IMF’s unblemished reputation.
 In the aftermath of the Latin American debt crisis in the 1980s, IMF economists have been brutally
criticized for being “too arrogant” and not accepting their crisis-intensifier role in the application
of univariate solutions to multivariate problems. Irrespective of symptoms or country-specific
variances, the IMF stubbornly gave the same medicine (metaphorically speaking) to every patient;
consequently, patients either went into coma or died. The cases of Latin America and Asia are a
clear and visible testimony to the IMF failure; when an economy is on the verge of a meltdown,
solutions should be tailored towards stopping the crisis first, and then structural reforms.
Various levels of addictions to dollar are linked to instability. Whether partially or fully dollarized41,
or liability dollarization42 is the case, economies and governments being addicted to dollar aggravate
instability when it is not properly managed. In a stable economy (i.e. advanced nations), dollars may
still be used by residents and entities, but not in the form of an addiction that will lead to instability.
Table 8 shows that the U.S. dollar is the most widely held currency in foreign reserves ($7 trillion).
Table 8: Currency composition of official foreign exchange reserves (COFER)
Category Q3 2020 Q4 2020 Q1 2021 Q2 2021 Q3 2021
Total Foreign Exchange Reserves 12,250.97 12,705.33 12,583.07 12,813.74 12,827.45

Allocated Reserves 11,459.20 11,864.53 11,730.64 11,946.27 11,973.21
Claims in U.S. dollars 6,927.23 6,990.97 6,971.79 7,065.05 7,081.39
Claims in euro 2,359.64 2,526.41 2,404.80 2,446.82 2,452.10
Claims in Chinese renminbi 247.44 271.60 293.32 314.24 318.99
Claims in Japanese yen 668.19 715.35 686.30 688.11 697.35
Claims in pounds sterling 523.64 561.39 554.28 571.55 572.76
Claims in Australian dollars 199.51 216.87 214.89 220.77 217.19
Claims in Canadian dollars 231.10 246.57 250.01 267.81 262.17
Claims in Swiss francs 19.30 20.74 19.44 20.25 20.42
Claims in other currencies 283.15 314.63 335.82 351.69 348.87
Unallocated Reserves 791.77 840.80 852.43 867.47 856.22
Source: IMF, https://data.imf.org/?sk=E6A5F467-C14B-4AA8-9F6D-5A09EC4E62A4
41 In a partially dollarized economy, domestic residents hold dollars for personal or business reasons, dollar-denominated
loans, assets, and investment instruments are available. In a dollarized economy, unstable national currency may no
longer be issued, or replaced by a more stable foreign currency (dollar).
42 Excessive borrowing of dollar by the private and public sectors and households.
28
The levels and reasons for dollar addiction are varied and disparate, here are some examples;
 Dollar is the official currency of the United States and other countries (i.e. Panama and Liberia are
fully dollarized); except the U.S., virtually all countries need dollars to pay for imports of most
commodities which are priced in dollars (i.e. oil, gold, steel. aluminum, etc.).
 The US dollar is the main international reserve currency since the 1944 Bretton Woods Agreement
which was ratified by the delegates from 44 Allied countries; as of 2020, most central banks have
stashed circa 60% of their foreign reserves in U.S. dollars (i.e. over $7 trillion in Q3 – 2021).
 As the strongest and most stable currency of the world, a large portion of the international capital
flows and foreign borrowing instruments are dollar-denominated43, i.e. over $12 trillion in 2020.
 Developing and emerging economies need a constant flow of foreign capital in order to leap into a
higher level of economic performance, and since the majority of international capital flows are in
dollar, therefore they need dollars to finance fiscal deficits along with infrastructure projects.
 People, companies, and governments worldwide prefer to invest in the U.S. financial markets due
to their size and security aspects; the combined January 2022 market cap of the three largest U.S.
equity indices and bond market was nearly $150 trillion; Dow Jones Industrial Average – DJIA44
consisting of only 30 companies is the most popular but not the largest ($11 trillion), Russell 3000
index ($47.7 trillion), and S&P 500 index45 ($42.4 trillion), and US bond market46 ($46 trillion).
 The degree of dollarization in developing and emerging economies spread widely in the 1970s and
1980s, but has risen since the late 1990s; on account of inflation and macroeconomic imbalances,
households, private and public sectors have heavily relied on dollar’s role as a stable medium of
exchange and store of value. Following the 2008 global financial crisis, the Basel Committee on
Banking Supervision introduced Basel III in December 2010 (fully effective by Jan. 2019), higher
capital and liquidity rules of which required banks to put aside more reserves (capital buffers).
2.2 The Aggravated Dollar Virus Began to Infect its Own
The global economy was severely wounded in the 1970s, macroeconomic events together with the
intensified Vietnam War47 were enough to rattle financial markets worldwide. The next events turned
the dollar virus into a pandemic; the Nixon shock, in August 1971 U.S. President Nixon cut the dollar’s
link (convertibility) to gold which sent chills to the world’s markets; the Bretton Woods system of
43 Barron's. "Dollar-Denominated Debt Outside U.S. Hits $12.6 Trillion, and Two More Numbers to Know."
https://www.barrons.com/articles/dollar-denominated-debt-outside-u-s-hits-12-6-trillion-51596186002
44 https://en.wikipedia.org/wiki/Dow_Jones_Industrial_Average
45 https://en.wikipedia.org/wiki/S%26P_500
46 https://www.forbes.com/sites/kevinmcpartland/2018/10/11/understanding-us-bond-market/?sh=1978a31f1caf
47 After China became communist in 1949 (despite the Cold War that began 1947), United States became highly alarmed
that communism from China and North Vietnam would spread to South Vietnam and the rest of Asia. In March 1965, US
President Johnson sent combat forces to Vietnam, the war ended on May 7, 1975.
29
fixed exchange rate regime collapsed (1968-73), currencies were left to float; the Arab-Israeli conflict
– Yom Kippur War48 (1973); OPEC’s oil embargo to the U.S resulted in an oil crisis (1973), i.e. the price
of a barrel of oil skyrocketed from $2.90 in October 1973 to $11.60 in March 1974; forced liquidation
of Germany’s Cologne-based Bankhaus Herstatt (1974); and global energy crisis (1979). These mega
events in systemic nature provoked a panic-induced surge in most commodity prices and disrupted
the world trade as a consequence. In response, the central bank Governors of G-10 were prompted to
harmonize the existing disparate capital standards within G-10 as internationally active banks had a
constant propensity to invent loopholes to circumvent banking regulation/supervision. The upshot
of the immediate cooperation and financial collaboration among G-10 gave birth to the establishment
of the Basel Committee on Banking Supervision (“the Basel Committee”) in 1974.49
After the turbulent years of the 1970s, the 1980s began with a global economic recession (1980-83)
which was the severest (double-dip) since WWII. According to economists and historians, the “global
recession of 1982” (World Bank) was mainly caused by the Iranian Revolution50 (7 January 1978 – 11
February 1979) and the ensuing energy crisis (1979 oil shock). Throughout 1979 and early 1980, the
steep rise in oil prices spooked the already high inflation rates in G7 countries, this in turn prompted
the governments there to tighten their monetary policies to control double-digit high inflation. Long-
term side effects of the 1980s recession contributed to stagflation (i.e. high inflation, low growth, high
interest rates and unemployment, see Figure 13); the upshot of that was the Latin American debt
crisis (early 1980s), S&L (savings and loan) crisis (1986-95) followed by the 1987 stock market crash
in the U.S. (see Brunnermeier, 2001; Hamao et al., 1991; Reinhart & Rogoff, 2011; Shiller, 1989).
The U.S. grand strategy backfired, the dollar virus’ prodigy the 1987 stock market crash was probably
the early example of a severe systemic shock sending chills through the spine of the global financial
system where even the basic market functioning became totally incapacitated. The 1987 crash was
significant in many fronts, but most importantly, it was an eye-opening single event that clearly
showed how the dollar virus made modern trading systems immensely fragile under extreme but
plausible conditions. Some economists and industry participants (banks, dealers, and market makers)
had argued that the program trading was the primary cause; and others had claimed that uncertainty
arising from a lack of information (asymmetry) along with system wide technical incapability were
actually what made the crash so severe (Carlson, 2006; Diaz-Alejandro, 1985; Kindleberger, 1978).
48 For more details, see Dunstan (2007).

49 For economic effects of the 1973 oil crisis, see Burbidge and Harrison (1984), Finn (2000), Conraria and Wen (2005).
50 The Iranian Revolution (the Islamic Revolution) resulted in the overthrow of the Pahlavi dynasty under Shah Mohammad
Reza Pahlavi. The new ruler Ayatollah Ruhollah Khomeini changed the government system with an Islamic republic under
the rule of Sharia where the Qur'an is the principal source of Islamic law.
30
Sources: Inflation, https://inflationdata.com/articles/inflation-cpi-consumer-price-index-1980-1989/; Interest rate, https://www.bbc.com/news/business-34286230
Unemployment rate, https://www.gcu.edu/blog/gcu-experience/us-unemployment-rates-by-year-and-state;
GDP growth, https://en.wikipedia.org/wiki/Early_1980s_recession#/media/File:Early-80s_recession.jpg
Figure 13: US inflation, interest, unemployment and growth rates (1980s)
31
The dollar virus (i.e. creating money out of thin air) became so out of control that it began damaging
those who created it in the first place. Consequently, the US has been subject to many so called “black
days”; as such, Black Monday (Oct. 28, 1929); Black Tuesday (Oct. 29, 1929), Black Thursday (Oct. 24,
1929), Black Monday (Oct. 19, 1987), Black Monday (Sep. 29, 2008), and another Black Monday (Oct.
6, 2008). Similar to the preceding crash of 1929 (i.e. Wall Street recorded several years of growth, see
Figure 14), the stock market during the 1980s had been overheating with strong gains in equity prices
which led to overvaluation of assets prior to the crash in October 1987 (Anders & Garcia, 1987). The
Fed’s actions following the 1987 crash were different, i.e. expansive monetary (quantitative easing)
as opposed to tight-money (contractionary) policy stance ensuing the stock market crash of October
1929. This time around (1987), the Fed was more proactive in its policy response to liquidity needs
of financial markets51. Investor confidence was reinstated and markets’ functioning was bolstered
with the Fed’s easing of short-term credit conditions to avoid further losses. The Fed’s assurance of
additional liquidity plus clear public statements were effective in normalization of financial markets’
volatility (see Carlson, 2006; Greenspan, 1998, 2007; Hull & White, 1987; Shiller, 1989).
Source: Adapted from Carlson (2006)

Figure 14: Stock market indicators leading to the 1987 crash
Innovation in different forms played a huge facilitating role in spreading the dollar virus and making
of the 1987 stock market crash (Figure 14); as such, financial innovation (futures & options markets,
derivatives, and securitization of debt); technological innovation (program trading as in “portfolio
insurance and “index arbitrage”, the designated order turnaround (DOT) system, and short sales);
and legislative (beneficial tax treatment for mergers and home ownership). All of these innovative
51 The term “financial markets” includes the following exchanges in the United States: The New York Stock Exchange (NYSE),
National Association of Securities Dealers Automated Quotations (currently the NASDAQ Stock Market), the Chicago
Mercantile Exchange (CME), and the Chicago Board of Trade (CBOT).
32
developments attracted new investors (e.g. pension funds) and resulted in significant gains for equity
markets in spite of a fast deterioration in the macroeconomic outlook, therefore, Winkler and Herman
(1987) argued that the policy rate and prime interest rates in the U.S. had to move upward because
of weakening dollar coupled with growing trade deficit. Markets became quite jittery on Wednesday
morning (Oct. 14, 1987) when two critical reports hit the markets at the open (Figure 15); the first
report was about a new legislation proposal asking for the elimination of tax benefits for mergers
which was filed by the Ways and Means Committee of the U.S. House of Representatives; the second
report was the announcement by the Commerce Department regarding the widening US deficit.
Source: Adapted from Carlson (2006)

Figure 15: S&P 500 index around the time of the 1987 crash
The markets responded negatively as soon as the two key reports were announced, which triggered
an uncontrollable chain reaction of events; dollar immediately began its descend against other major
currencies which put upward pressure on interest rates that in turn increased expectations that the
Fed would alter its monetary policy from expansive to contractionary(monetary tightening). Rising
interest rates and weakening dollar brought the already high pressure on equities to a boiling point
and forced stock prices to tumble on Wednesday (Oct. 14); from this point on going forward, markets
overreacted to any bit of bad news, so the decline continued on Thursday (Oct. 15) as well as on Friday
(Oct. 16). Although the crash first began in the dollar-backed Honk Kong (-45.5%) stock exchange on
October 19, it engulfed other major world markets, see Figure 16 for the London Stock Exchange. The
event’s global scale sparked fears of a recurrence of the Great Depression. By end of October (in 10
trading days), major financial centers (contagion) had a massive nosedive in a free-fall style from
33
their peaks; Canada (-22.5%), Australia (-41.8%), Spain (-31%), the United Kingdom (-26.45%), and
the United States (-22.68%). While Austria was the least affected (11.4%), with 60% New Zealand
was the most affected (see Carlson, 2006; Shiller, 1989; Sobel, 1988).
Source: Wikipedia, https://en.wikipedia.org/wiki/Black_Monday_(1987)#/media/File:Black_Monday_FTSE.svg

Figure 16: FTSE index (19 June 1987 – 1 January 1988)
Background of the Crash: Possible Causes
 The risk insensitiveness of the Federal Deposit Insurance Corporation (FDIC was created in 1933
under President Franklin D. Roosevelt) was the root cause of the S&L crisis. Regardless of varying
riskiness of individual S&Ls, the unsound FDIC insured every dollar deposited by a flat rate.
 Lingering impacts of the antecedent macroeconomic events (i.e. the Nixon shock, collapse of the
Bretton Woods, oil shock of 1973 and energy crisis of 1979) and warfare in the 1970s (Yom-Kippur
War of 1973 and Vietnam War of 1965-75), which led to a severe recession in the early 1980s.
 The spread of the dollar virus (i.e. printing of dollars through credit expansion) was fueled by fixed
rate home mortgages (i.e. borrowing short to lend long), but the S&L was not the right structure
34
to accomplish this because of their inherent vulnerability to maturity mismatch. The operation of
each S&L was funded by short-term deposits, this worked in benign economic times underpinned
by low interest rates, but rising interest rates between 1980 and 1982 brought on S&Ls’ demise.
 Distortions caused by price-fixing (price controls) also contributed to the S&L crisis and the 1987
stock market crash subsequently. Following the Great Depression of 1930s, to restore confidence
and respond to public outcry, in 1933 the Fed decide to limit the interest rates banks could pay for
deposits (commonly referred to as Regulation Q), which was extended to S&Ls in 1966. As price
fixing always results in distortions, Regulation Q played a crisis-intensifier role; as a result, cross-
subsidy favoring home buyers made maturity mismatch significantly unbearable.
 Too many restrictions thanks to the Glass-Steagall Act52 (the Banking Act of 1933) which barred
commercial banks from investment banking activities (see Crawford, 2011; Lardner, 2009; Mester,
1996). Until the early 1980s, S&Ls were not permitted by law to charge higher interest rates on
home mortgages (Congress removed the rate ceiling in 1980); due to a federal ban (lifted in 1981),
S&Ls were not allowed to offer adjustable rate mortgages (ARMs) or set up new branches across
state lines (i.e. nationwide banking). The creation of government-sponsored enterprises such as
Fannie Mae (the Federal National Mortgage Association) and Freddie Mac (the Federal Home Loan
Mortgage Corporation) increased affordable home ownership, but at the same time augmented the
severity of S&Ls’ maturity-mismatch (i.e. over 1,000 S&Ls became insolvent due to massive losses).
 A contractionary monetary policy (i.e. monetary tightening) in late 1979 by the Fed Chairman Paul
Volcker dropped the A-bomb on S&Ls. Skyrocketing short-term interest rates (from circa 9% in
June 1979 to 15% in march 1980) caused the S&L industry to report massive losses, and by mid-
1982, the situation got a lot worse (i.e. the S&L industry as a whole had a negative net worth).
 Most banking bans reminiscent of the Great Depression were lifted between 1980 and 1981, the
bungled deregulation of S&Ls in the early 1980s was attributable to; S&Ls were allowed to engage
in investment activities and make mortgage loans nationwide; S&Ls were ushered to greater risk
taking (i.e. inadequate capital both in quantity and quality, and insufficient capital buffers as nearly
half of their assets were invested in commercial real estate loans); corruption and fraud became a
normal practice, capital standards were debased and losses were counted as goodwill; overly inept
banking regulation and supervision created moral hazard (i.e. many insolvent S&Ls remained in
operation); despite conflict of risk (i.e. borrower and lender are the same person), concentration
of risk (i.e. excessive lending to one borrower) was totally overlooked; until Congress enacted the
Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), delayed closure
of the failed S&Ls along with a lack of true disclosures worsened the S&L mess (see Figure 17).
52 As a reactionary response to drafted by Senator Carter Glass and Representative Henry Steagall
35
Source: Library of Economics and Liberty, https://www.econlib.org/library/Enc1/SavingsandLoanCrisis.html
Figure 17: Accumulation of S&L losses during the 1980s and early 1990s
 Increased disruptive power of the dollar virus, i.e. glut of petrodollar, excessive printing of dollar
through massive credit expansion, and USD share of global reserves was over 80%, see Figure 18.
Source: IMF; https://en.wikipedia.org/wiki/Reserve_currency

Figure 18: USD share of allocated global official reserves
36
 Huge spending for various social programs (i.e. President Lyndon B. Johnson's "Great Society")
coupled with the massive military budget (i.e. intensified Vietnam War in the early 1970s) resulted
in the rising monetary inflation which prompted the Fed to end the rampant inflation by raising
interest rates, this in turn brought on a severe recession in the early 1980s and the ensuing S&L
crisis. Imprudent real estate lending (mortgage lending nearly doubled, from $700 billion in 1976
to $1.2 trillion in 1980)53, S&Ls’ vulnerability to rising interest rates, simultaneous failures of S&Ls,
and negative impact of the S&L industry’s deregulation54 contributed to the 1987 crash.
 Bubbles formed in equity markets (i.e. financial innovation and related investment vehicles lured
investors to stocks); for instance, the Dow Jones Industrial Average (DJIA) more than tripled in just
five years, rose from 776 in August 1982 to 2,722 in August 1987, just prior to the crash.
 Carlson (2006) asserted that three factors massively increased the severity of the market collapse;
first, vast margin calls during the severe episode of the crisis created a panic situation adversely
affecting liquidity and market functioning; second, program trading resulted in huge daily volumes
that increased the intensity of market losses causing panics; and third, asymmetry of information
such as lack of transparency and disclosures caused distrust among investors.
 Economists pointed out that the crash was originated from program trading; other economists
quickly refuted such claim and said that the trading patterns prior to the crash did not demonstrate
any characteristic of program selling (e.g. biggest price drops took place with light volume).
 Factors contributing to the 1987 stock market crash may include; overexposure to risks, capital
arbitrage, significant valuation of stock prices, and illiquid markets with banks holding insufficient
capital buffers. Some industry experts even claimed that the crash was attributable to; a monetary
policy dispute between the U.S., Japan, and other advanced nations; system related incapability of
executing transactions; and the collapse of the bond markets in the U.S. and Europe.55
 The Latin American debt crisis in the early 1980s and the subsequent recession exacerbated the
savings and loan (S&L) crisis (1986-95) in the U.S. In 1980, there were 4,590 S&Ls with aggregate
revenue of $781 million; between 1980 and 1982, 415 S&Ls became insolvent, 493 S&Ls merged
voluntarily and 259 S&Ls were forced to merge. When the S&L crisis ended in 1995, 1,043 out of
3,234 S&Ls failed. The General Accounting Office (GAO) estimated the total cost of the S&L crisis
to be $160 billion, including $132.1 billion taken from taxpayers (Brunner, 1983).56
The dollar virus has gained enormous strength in the post-WWII era through rebuilding of the war-
devastated Europe and Japan (i.e. the virus’ first peripheries for main nutrition after its inception in
53 https://en.wikipedia.org/wiki/Savings_and_loan_crisis
54 US Congress passed two laws; the Depository Institutions Deregulation and Monetary Control Act of 1980 and the Garn–
St. Germain Depository Institutions Act of 1982.
55 More on the stock market crash of 1987, see Ruder (1987), SEC Report (1988), and Anders & Garcia (1987).
56 https://en.wikipedia.org/wiki/Savings_and_loan_crisis
37
1944). The halcyon periods of growth (1950s and 1960s) spurred spread of the dollar virus (dollar-
denominated financial instruments, petrodollar, and most commodities priced in dollar); moreover,
macroeconomic events throughout the 1970s (i.e. oil shock of 1973 and energy crisis of 1979) and
the 1980s (i.e. Latin American debt crisis, S&L crisis and the stock market crash of 1987 in the U.S.)
forced the dollar virus to mutate (first mutation). The aforementioned events along with a confluence
of unmentioned factors prompted the Basel Committee (established in 1974) to introduce Basel I
(Table 9), “International Convergence of Capital Measurement and Capital Standards”, was released to
banks within G-10 in July 1988 (BCBS, 1988). The envisaged objective of Basel I was to harmonize the
disparate and substantially varied capital adequacy measurements and capital standards of banks.
Table 9: Arbitrary risk categories and risk weights under Basel I
Cash claims on OECD governments and loans either collateralized or and

1. 0%
guaranteed by them, claims on non-government domestic entities.
Claims on multilateral development banks incorporated within OECD and loans
2. 20% guaranteed by such entities, cash in collection, claims on OECD banks and short-
term loans (less than one year).
Fully secured mortgage loans on residential properties either occupied by the
3. 50%
borrower or rented out.
Claims on private sector, non-OECD banks (maturity of over one year),
4. 100% commercial firms owned by public entities, non-OECD governments, real estate,
and equity issued by banks.
Source: BCBS (1988)
2.2 Basel I: Dollar Virus’ Mutation into More Severe Strain
Although the Basel Committee promised that Basel I – first international banking standard57 - in the
long-run would make the global banking system more resilient, but Basel I instead made developing
and emerging economies more crisis-prone (Griffith-Jones, 2001). More importantly, Basel I gave the
dollar virus a chance to mutate into a more severe strain (i.e. Asian crisis of 1997-98). As soon as
Basel I was released to banks, it became apparent that the risk-insensitiveness of Basel I not only was
inadequate but lacked power to combat against the prevalent dollar virus pandemic. In line, former
Federal Reserve Vice Chairman Ferguson (2003) elaborated in a speech that “Basel I Accord is too
simplistic to adequately address the activities of the most complex banking institutions”.
Due to its arbitrary risk categories (OECD and non-OECD origination) and arbitrary risk-insensitive
buckets (0%, 10%, 20%, 50%, and 100%), Basel I faced enormous incredulity and became the target
of substantial criticism (see Jackson et al., 1999; James, 2000; BCBS, 2001; Powell, 2002). Simplistic
57 Basel I was an important milestone, which has been either adopted or implemented by more than 100 countries.
38
as well as risk sensitiveness of Basel I capital and liquidity regulation ushered greater risk-taking; as
a result, internationally active banks engaged in cross-border and shadow banking activities which
fostered economic booms-and-busts across Latin America and Asia (Adrian & Ashcraft, 2012; FSB,
2012; Hall, 1993; Prasad, 2009; Wagster, 1996). The inherent flaws under Basel I also enabled large
banks to move high-risk assets between on-balance and off-balance sheets via securitization (see
Blundell-Wignall et al., 2014; Cetorelli & Periatiani, 2012; Cumming, 1987; Rodríguez, 2002).
The dollar virus gets its nutrition (source of its strength) by causing instability in parts of the world
(i.e. China, Russia, Iran, the Middle East, etc.) that are not in alignment with the US grand strategy (i.e.
policing the world as the only superpower to look after its interests and the interests of its allies). A
series of systemic shocks in the 1970s, 1980s, and 1990s have turned the dollar virus into a weapon
of vast economic destruction, and its issuer (the Fed and US government) into an anarchic Hobbesian
who is determined to use its naval power, strong economy, technological power, and military might
in order to sustain American supremacy (imperialism) and dollar’s hegemony. For this exact purpose,
the following mechanisms play the role of the dollar’s guardian to protect it from attacks;
 Dollar is the official currency of the United States and other countries (i.e. Panama and Liberia are
fully dollarized); except the U.S., virtually all countries need dollars to pay for imports of most
commodities which are priced in dollars (i.e. oil, gold, steel. Aluminum, etc.).
 The US dollar is the main international reserve currency since the 1944 Bretton Woods Agreement
which was ratified by the delegates from 44 Allied countries; as of 2020, most central banks have
stashed circa 60% of their foreign reserves in U.S. dollars (i.e. over $7 trillion in Q3 – 2021).
 As the strongest and most stable currency of the world, a large portion of the international capital
flows and foreign borrowing instruments are dollar-denominated58, i.e. over $12 trillion in 2020.
 Developing and emerging economies need a constant flow of foreign capital in order to leap into a
higher level of economic performance, and since the majority of international capital flows are in
dollar, therefore they need dollars to finance fiscal deficits along with infrastructure projects.
 People, companies, and governments worldwide prefer to invest in the U.S. financial markets due
to their size and security aspects; the combined January 2022 market cap of the three largest U.S.
equity indices and bond market was nearly $150 trillion; Dow Jones Industrial Average – DJIA59
consisting of only 30 companies is the most popular but not the largest ($11 trillion), Russell 3000
index ($47.7 trillion), and S&P 500 index60 ($42.4 trillion), and US bond market61 ($46 trillion).
58 Barron's. "Dollar-Denominated Debt Outside U.S. Hits $12.6 Trillion, and Two More Numbers to Know."
https://www.barrons.com/articles/dollar-denominated-debt-outside-u-s-hits-12-6-trillion-51596186002
59 https://en.wikipedia.org/wiki/Dow_Jones_Industrial_Average
60 https://en.wikipedia.org/wiki/S%26P_500
61 https://www.forbes.com/sites/kevinmcpartland/2018/10/11/understanding-us-bond-market/?sh=1978a31f1caf
39
 The degree of dollarization in developing and emerging economies spread widely in the 1970s and
1980s, but has risen since the late 1990s; on account of inflation and macroeconomic imbalances,
households, private and public sectors have heavily relied on dollar’s role as a stable medium of
exchange and store of value. Following the 2008 global financial crisis, the Basel Committee on
Banking Supervision introduced Basel III in December 2010 (fully effective by Jan. 2019), higher
capital and liquidity rules of which required banks to put aside more reserves (capital buffers).
 Dollar-centric monetary order. The US dollar as a main global reserve currency was inaugurated
at the 1944 Bretton Woods Conference; due to its “exorbitant privilege”, the U.S. can bear a large
trade deficit in an ongoing basis (no other nation is able to do this). According to COFER 62, the US
dollar share of global foreign reserves is three times more than euro (see Table 10); nevertheless,
dollar accounting for 59.15% of total foreign exchange reserves is a 25-year low (Figure 19).
Table 10: Currency composition of official foreign exchange reserves (COFER)
Category Q3 2020 Q4 2020 Q1 2021 Q2 2021 Q3 2021
Total Foreign Exchange Reserves 12,250.97 12,705.33 12,583.07 12,813.74 12,827.45

Allocated Reserves 11,459.20 11,864.53 11,730.64 11,946.27 11,973.21
Claims in U.S. dollars 6,927.23 6,990.97 6,971.79 7,065.05 7,081.39
Claims in euro 2,359.64 2,526.41 2,404.80 2,446.82 2,452.10
Claims in Chinese renminbi 247.44 271.60 293.32 314.24 318.99
Claims in Japanese yen 668.19 715.35 686.30 688.11 697.35
Claims in pounds sterling 523.64 561.39 554.28 571.55 572.76
Claims in Australian dollars 199.51 216.87 214.89 220.77 217.19
Claims in Canadian dollars 231.10 246.57 250.01 267.81 262.17
Claims in Swiss francs 19.30 20.74 19.44 20.25 20.42
Claims in other currencies 283.15 314.63 335.82 351.69 348.87
Unallocated Reserves 791.77 840.80 852.43 867.47 856.22
Source: IMF, https://data.imf.org/?sk=E6A5F467-C14B-4AA8-9F6D-5A09EC4E62A4
 Dollarized economies. In the post-WWII era, most developing and emerging economies have
become increasingly dollarized. The triad instability (political, financial, and currency) has been
the usual motive behind dollarization in developing and low-income countries (LICs). Despite
great strides toward macroeconomic and political stability in some countries, dollarization has
continued to rise; in fact, foreign currency (mainly dollar) has exceeded 50% of national money
stock in a number of countries (see Berg & Borensztein, 2000; Chang, 2000; Galindo & Leiderman,
2005). Besides Panama and Liberia (fully dollarized), de facto dollarization63 has been prevalent
in Asia, Latin America and some parts of Europe (i.e. 20% in Greece, 45% in Turkey over $200
62 IMF, https://data.imf.org/?sk=E6A5F467-C14B-4AA8-9F6D-5A09EC4E62A4
63 Countries where there are cases of chronic inflation, political instability, and instability-inflicting developments, citizens
in such countries seek refuge in the dollar to hedge against inflation.
40
billion, and over 80% in Bolivia). Interestingly, only one-third of all dollar currency is held within
the United States and the remaining two-thirds is held outside of the U.S. (Figure 20).
Source: IMF; http://data.imf.org/?sk=E6A5F467-C14B-4AA8-9F6D-5A09EC4E62A4

Figure 19: Currencies percent of total foreign exchange reserves
Source: Research and Rank, https://twitter.com/researchandrank/status/1394935544203726855/photo/1

Figure 20: Dollar reserves of top 9 countries
 Dollarization at varying degrees occurs in economies with (Duma, 2011); hyperinflation and prone
to macro shocks (Turkey); financial repression and capital controls; dollar as an anchor currency,
capital flight to dollars to hedge against macroeconomic instability; dollar is increasingly used in
place of national currencies (known as currency substitution); and a deeply entrenched trend.
41
Table 11: World currency composition of official foreign exchange reserves
US Dollars, Billions
2015Q1 2015Q2 2015Q3 2015Q4 2016Q1 2016Q2 2016Q3 2016Q4 2017Q1 2017Q2 2017Q3 2017Q4 2018Q1 2018Q2 2018Q3
Total Foreign Exchange Reserves ($) 11,433 11,456 11,179 10,919 10,922 10,963 10,991 10,713 10,897 11,118 11,291 11,440 11,600 11,464 11,700
Allocated Reserves ($) 6,745 7,329 7,244 7,413 7,764 8,055 8,351 8,418 8,833 9,257 9,643 10,014 10,402 10,515 10,705
Claims in U.S. dollars ($) 4,452 4,785 4,748 4,874 5,082 5,254 5,403 5,502 5,713 5,909 6,125 6,281 6,531 6,561 6,631
Claims in euro ($) 1,350 1,458 1,434 1,419 1,518 1,563 1,643 1,611 1,703 1,847 1,935 2,019 2,118 2,129 2,192
Claims in Chinese renminbi ($) ----- ----- ----- ----- ----- ----- ----- 90.3 94.9 99.4 108.2 123.5 145.7 193.0 192.5
Claims in Japanese yen ($) 258.1 261.2 252.6 278.3 285.8 330.4 351.3 333.7 400.8 428.6 436.2 491.0 477.3 511.4 532.8
Claims in pounds sterling ($) 258.4 335.7 333.7 349.7 359.5 365.8 366.7 365.1 377.0 408.7 433.3 454.1 486.1 469.7 480.8
Claims in Australian dollars ($) 105.0 127.1 120.0 131.0 133.6 136.9 150.1 142.1 156.0 161.9 170.8 180.0 177.0 178.6 180.8
Claims in Canadian dollars ($) 115.4 130.3 126.4 131.6 140.4 147.7 159.8 163.1 167.5 178.8 192.9 202.8 193.3 200.2 208.7
Claims in Swiss francs ($) 17.8 21.4 18.3 19.8 14.9 14.4 14.9 13.9 14.7 16.0 16.5 18.1 17.9 16.6 16.6
Claims in other currencies ($) 188.4 209.8 211.3 209.7 229.5 243.0 262.0 197.3 206.1 207.3 224.8 244.7 256.5 255.0 270.0
Unallocated Reserves ($) 4,687 4,127 3,935 3,505 3,158 2,908 2,639 2,294 2,064 1,861 1,648 1,426 1,198 948.9 691.2
Shares of Allocated Reserves (%) 59.00 63.98 64.80 67.89 71.08 73.47 75.99 78.58 81.06 83.26 85.40 87.53 89.67 91.72 93.94
Shares of U.S. dollars (%) 66.00 65.29 65.54 65.74 65.46 65.22 64.70 65.36 64.68 63.83 63.52 62.72 62.78 62.40 61.94
Shares of euro (%) 20.02 19.90 19.79 19.15 19.55 19.41 19.68 19.14 19.28 19.95 20.06 20.16 20.36 20.25 20.48
Shares of Chinese renminbi (%) ----- ----- ----- ----- ----- ----- ----- 1.07 1.07 1.07 1.12 1.23 1.40 1.84 1.80
Shares of Japanese yen (%) 3.83 3.56 3.49 3.75 3.68 4.10 4.21 3.96 4.54 4.63 4.52 4.90 4.59 4.86 4.98
Shares of pounds sterling (%) 3.83 4.58 4.61 4.72 4.63 4.54 4.39 4.34 4.27 4.41 4.49 4.53 4.67 4.47 4.49
Shares of Australian dollars (%) 1.56 1.73 1.66 1.77 1.72 1.70 1.80 1.69 1.77 1.75 1.77 1.80 1.70 1.70 1.69
Shares of Canadian dollars (%) 1.71 1.78 1.74 1.78 1.81 1.83 1.91 1.94 1.90 1.93 2.00 2.03 1.86 1.90 1.95
Shares of Swiss francs (%) 0.26 0.29 0.25 0.27 0.19 0.18 0.18 0.17 0.17 0.17 0.17 0.18 0.17 0.16 0.15
Shares of other currencies (%) 2.79 2.86 2.92 2.83 2.96 3.02 3.14 2.34 2.33 2.24 2.33 2.44 2.47 2.42 2.52
Shares of Unallocated Reserves (%) 41.00 36.02 35.20 32.11 28.92 26.53 24.01 21.42 18.94 16.74 14.60 12.47 10.33 8.28 6.06
Source: IMF - Currency Composition of Official Foreign Exchange Reserves (COFER), International Financial Statistics (IFS)
Data extracted from http://data.imf.org/ on: 2/24/2019 11:30:57 AM
Notes: Total foreign exchange reserves has seen a decline in the second and third quarters of 2018, which may have been attributable to the recent trade war between China and the U.S. Between
2015Q1 and 2018Q3, allocated reserves have increased consecutively; similarly, excluding 2015Q3, claims in US dollars have moved upward for 14 quarters. Since the introduction of Chinese renminbi
as a reserve currency in 2016Q4, the shares of dollar have declined from 65.36% in 2016Q4 to 61.94% in 2018Q3 (a shrinkage of 5.23%). During the same period, shares of Chinese renminbi have
increased by 68.22%. Shares of unallocated reserves are at the lowest level, have dropped from 41% in 2015Q1 to 6.06% in 2018Q3.
42
Table 12: Currency composition of official foreign exchange reserves (1965-2022)
Percent (%) 1965 1970 1975 1980 1985 1990 1995 2000 2001 2002
US Dollar 72.93 84.85 84.61 57.88 56.66 47.14 58.96 71.13 71.51 66.50
Euro (ECU – 1999) ----- ----- ----- 17.46 14.00 11.64 8.53 18.29 19.18 23.65
Deutsche Mark 0.17 1.94 6.62 12.92 13.74 19.83 15.75 ----- ----- -----
Japanese yen ----- ----- 0.61 3.93 8.69 9.40 6.77 6.06 5.04 4.94
Pound sterling 25.76 11.36 3.42 2.40 2.03 2.39 2.11 2.75 2.70 2.92
French franc 1.11 0.73 1.16 0.97 0.58 2.71 2.35 ----- ----- -----
Canadian dollar ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Australian dollar ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Swiss franc ----- 0.61 1.34 2.25 1.40 0.84 0.33 0.27 0.25 0.41
Dutch guilder ----- 0.08 0.66 0.89 0.78 1.15 0.32 ----- ----- -----
Other 0.03 0.43 1.58 1.29 2.13 4.89 4.87 1.49 1.31 1.58
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
US Dollar 65.45 65.51 66.51 65.04 63.87 63.77 62.05 62.14 62.59 61.47
Euro (ECU – 1999) 25.03 24.68 23.89 24.99 26.14 26.21 27.66 25.71 24.40 24.05
Deutsche Mark ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Japanese yen 4.42 4.28 3.96 3.46 3.18 3.47 2.90 3.66 3.61 4.09
Pound sterling 2.86 3.49 3.75 4.52 4.82 4.22 4.25 3.94 3.83 4.04
French franc ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Canadian dollar ----- ----- ----- ----- ----- ----- ----- ----- ----- 1.42
Australian dollar ----- ----- ----- ----- ----- ----- ----- ----- ----- 1.46
Swiss franc 0.23 0.17 0.15 0.17 0.16 0.14 0.12 0.13 0.08 0.21
Dutch guilder ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Other 2.01 1.87 1.74 1.81 1.83 2.20 3.04 4.43 5.49 3.26
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
US Dollar 61.24 65.14 65.73 65.34 62.70 62.30 62.90 63.40 61.63 59.15
Euro (ECU – 1999) 24.20 21.20 19.14 19.13 20.15 20.30 20.10 19.80 19.60 19.25
Deutsche Mark ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Japanese yen 3.82 3.54 3.75 4.89 4.89 4.85 4.80 4.75 4.70 4.72
Pound sterling 3.98 3.70 4.71 4.54 4.54 4.45 4.30 4.25 4.15 4.25
French franc ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Canadian dollar 1.83 1,75 1.77 1.94 2.02 2.00 1.98 1.96 1.94 1.95
Australian dollar 1.82 1.59 1.77 1.69 1.80 1.70 1.65 1.59 1.55 1.60
Swiss franc 0.27 0.24 0.27 0.16 0.18 0.18 0.17 0.17 0.16 0.16
Dutch guilder ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Other 2.84 2.83 2.86 2.37 2.50 2.45 2.35 2.40 2.45 2.50
Source: IMF; https://en.wikipedia.org/wiki/Reserve_currency (accessed February 28, 2020).
Notes: We have estimated shares of currencies from 2019 to 2022; during which, shares of US dollar in official global allocated reserves will increase close to 65% due in
most part to the augmented uncertainty surrounding the macroeconomic environment, making the dollar flight to capital safety.
43
 Mast commodities are valued in dollars (i.e. gold, oil, diamond). The main reason for this
is that the U.S. dollar is the world’s main reserve currency; therefore, dollar as a stable
currency is a benchmark mechanism for several strategically important commodities.
Reasons for holding dollars may vary from country to country, but virtually all countries
across the world hold dollars as reserve assets either to hedge against macroeconomic
instability or to pay for imports of certain commodities such as livestock and meat, energy,
industrial and precious metals (Table 13). The 1945 agreement between the U.S. and Saudi
Arabia created petrodollar; the rich oil-producing countries get paid in dollars for the oil
they export and petrodollars are recycled through several large sovereign wealth funds64;
1. Norway Government Pension Fund Global--$1.187 trillion
2. U.A.E. Abu Dhabi Investment Authority--$697 billion
3. Kuwait Investment Authority--$534 billion
4. Saudi Arabia SAMA--$494 billion
5. Qatar Investment Authority--$328 billion
Table 13: List of traded key commodities
Commodity Contract Size Currency Main Exchange
Energy
WTI Crude Oil 1000 bbl. (42,000 U.S. gal) USD $ NYMEX, ICE
Brent Crude 1000 bbl. (42,000 U.S. gal) USD $ ICE
Ethanol 29,000 U.S. gal USD $ CBOT
Natural gas 10,000 million BTU USD $ NYMEX
Natural gas 1,000 therms USD $ ICE
Heating Oil 1000 bbl. (42,000 U.S. gal) USD $ NYMEX
Gulf Coast Gasoline 1000 bbl. (42,000 U.S. gal) USD $ NYMEX
Propane 1000 bbl. (42,000 U.S. gal) USD $ NYMEX, ICE
Industrial Metals
LME Copper Metric Ton USD $ London Metal Exchange, New York
Lead Metric Ton USD $ London Metal Exchange, New York
Zinc Metric Ton USD $ London Metal Exchange
Tin Metric Ton USD $ London Metal Exchange
Aluminum Metric Ton USD $ London Metal Exchange
Aluminum alloy Metric Ton USD $ London Metal Exchange, New York
LME Nickel Metric Ton USD $ London Metal Exchange
Cobalt Metric Ton USD $ London Metal Exchange
Molybdenum Metric Ton USD $ London Metal Exchange
Precious Metals
Gold 100 troy ounces USD $ COMEX
Platinum 50 troy ounces USD $ NYMEX
Palladium 100 troy ounces USD $ NYMEX
Silver 5,000 troy ounces USD $ COMEX
Source: Wikipedia, https://en.wikipedia.org/wiki/List_of_traded_commodities
64 https://www.thebalance.com/what-is-a-petrodollar-
3306358#:~:text=The%20dollar%20is%20the%20preeminent,nations%20own%20their%20oil%20industries.
44
The dollar virus-inflicted instability directly or indirectly was spread by deepened multidimensional
turmoil in the 1970s65; privatization66, fiscal consolidation, and financial deregulation in the 1980s67
(i.e. remedies to financial turmoil in the antecedent decade); fast-paced globalization, self-market
regulation, internationalization of finance, and capital flight to the U.S. equity and bond markets in
the 1990s; and digital revolution (financial and technological innovations) in the 2000s. Although
some of these developments were initially perceived positive, but their unforeseen risks and huge
vulnerabilities to macroeconomic shocks were unthinkable. At the backdrop of amplified financial
turmoil in the 1980s (“lost decade”), Latin America was the first field experiment of unproven Basel I
capital rules (i.e. 0% risk for government guaranteed loans to OECD countries, see BCBS, 1988). The
Basel Committee has admitted that the risk insensitiveness of Basel I capital and liquidity regulation
(see Figure 21) may have contributed to the severity of the Asian financial crisis in the late 1990s.
The Inherent Flaws and Criticism of Basel I Rules
 Basel I was introduced in 1988 to address credit risk only while ignoring other important risk
types such as market risk, operational risk, liquidity risk, and securitization risk.
 Capital, in terms of both quality and quantity, was vaguely defined under Basel I which also did not
address liquidity concerns in the event of extremely but plausible market scenarios.
 The total regulatory capital minima was fixed at 8% of risk-weighted assets (RWAs) and no capital
buffers. According to Jackson et al. (1999), this is another regulatory taxation imposed on banks.
 Capital arbitrage was rampant under Basel I. The simplistic risk insensitiveness of Basel I ushered
greater risk-taking and a regulatory flaw encouraged internationally active banks to engage in
cross-border and shadow banking activities which fostered economic booms across Asia.
65 The collapse of the Bretton Woods system and President Nixon’s decision to delink dollar from gold (1971); the Arab-
Israeli conflict – Yom Kippur War and the subsequent oil crisis (1973-74); secondary banking crisis & property crash in
the UK (1973-75); the Vietnam War (the US involvement began in 1955, but actual war was between March 1965 and
1973, Nixon became US president in 1969 and decided to pull US troops out of Vietnam); civil rights and women’s
movements in many capitalist centers (the U.S. in particular); with the failure of the US macroeconomic policies and the
resultant great inflation (1972-1980); wage and price controls by Nixon in 1971; and Iranian Revolution in 1979. The
belief that dollar as store of value and the US military might to protect private property anywhere in the world was shaken
by the defeat of the U.S. Army in Vietnam, and the U.S. financial superpower status was therefore doubted.
66 The US President Ronald Reagan and the UK’s Prime Minister Margaret Thatcher made privatization become a household
name; their eternal legacies and unique approaches have been referred to as “Reaganomics” and “Thatcherism”.
67 The decade of the 1980s began with the inheritance of great inflation from the previous decade which quickly turned into
recession; Latin America debt crisis (i.e. Chile in 1982); bank stock crisis in Israel (1983); Japanese asset price bubble
(1986-2003); the US stock market crash – Black Monday (1987); savings & loan (S&L) crisis in the U.S. (1986-95).
45
 Contrary to the hyped promises made by the Basel Committee to strengthen the global banking
resilience and reduce the existing competitive inequalities, Basel I rules gravely failed to diversify
among different risk types and enabled internationally active banks with constant propensity to
invent loopholes to circumvent banking regulation and supervision (BCBS, 1988).
 Arbitrary risk categories (OECD and non-OECD origination) and arbitrary risk buckets (0%, 10%,
20%, 50%, and 100%, see Table 1) were “too simplistic to adequately address the activities of the
most complex banking institutions” (Ferguson, 2003).
 Basel I capital regulation primarily focused on credit risk without the supervisory review process
and the market discipline (Figure 21). The upshot was a series of crises in the 1990s and 2000s.68
 The Basel I standard failed to achieve its key objectives: “to strengthen the soundness and stability
of the international banking system” and “to reduce competitive inequalities” (BCBS, 1988).
 Basel I also came short of its objective of achieving a level of playing field by requiring all banks
within G-10 to comply with the one-size-fits-all capital adequacy rules.
 Basel I lacked proper mechanisms to cope with securitization risk, market risk, liquidity risk (i.e.
funding freeze), and pipeline risk. Aggressive (predatory) lending by banks underpinned by lax
credit conditions caused significant distortions in cross-border lending, and resulted in massive
capital arbitrage (see BCBS, 2004; Elizalde, 2007; Rodríguez, 2002).
 Basel I contributed to a credit crunch in the 1990s as banks hoarded capital via disintermediation.
 Basel I created incentives for gaming the system, this enabled banks to move higher-risk assets
between on-balance and off-balance sheets via securitization, which in turn created a new and less
regulated bank type called shadow banking (Blundell-Wignall et al., 2014).
 Another deficiency of Basel I was that securitization was used as a technique to disperse risk;
conversely, this enabled the inherent risks of complex securitized instruments (i.e. CDO, MBS, and
CDS) to be deeply entrenched in the whole financial system, making it extremely challenging for
the financial authorities to assess whether or not each bank in the financial system had both
adequate capital and sufficient capital buffers to absorb losses in an acute stress.
 Under Basel I, the assessment of credit risk was based on one-dimensional historical statistical
correlations. Mark-to-market counterparty credit risk, credit valuation adjustments and wrong-
way risk were totally arcane. For instance, mortgage-backed securities (MBS), credit default swap
CDS), and collateralized debt obligation (CDO) played a major role in all financial crises in this
millennium. Blinder (2013) called this trio a “perfect storm” and the billionaire Warren Buffet
described derivatives as “weapons of mass destruction”.
68 Finnish and Swedish banking crises (early 1990s); Indian economic crisis (1991); Mexican peso crisis (1994); Turkish
economic crisis (1994); Asian crisis (1997-98); Russian financial crisis (1998); Argentine economic crisis (1999-2002).
46
Source: Author; BCBS (1988, 2004, 2010)
Figure 21: Basel I, Basel II, and Basel III requirements
47
2.3 Basel II: Dollar Virus’ Mutation into a Weapon of Vast Economic Destruction
The Latin American debt crisis in the 1980s, the systemic Asian crisis in the late 1990s, and the U.S.
origin crises at the onset of the 21st century prompted the Basel Committee to overhaul Basel I, the
outcome was a revised framework known as Basel II (BCBS, 2004). Basel II slightly improved capital
definition, although market risk and operation risk were included in the capital adequacy calculation,
the total capital requirement of RWAs remained unchanged at 8%’s (see Table 14).
The Inherent Flaws and Criticism of Basel II Rules
 Despite improvements, Basel II also failed to strengthen global banking resilience; furthermore,
supposedly risk-sensitive capital and liquidity rules of Basel II raised procyclicality and turned too-
big-to-fail banks into bigger-and harder-to-fail banks (i.e. augmented moral hazard).
 The global financial system was not safer nor was it more resilient than before. Basel II made banks
rely on ratings of external credit assessment institutions (ECAIs, see Figure 22) for many decisions
including dividend payouts, audit frequency, and deposit rates; consequently, both internationally
active large and systemically important banks (SIBs) felt the least urgency to strengthen existing
internal risk-management frameworks or develop far better ones (BCBS, 2004).
 Basel II amplified cyclical lending and reduced capital inflows to emerging market economies and
developing countries. More importantly, Basel II increased procyclicality, exacerbated boom-bust
cycles, and led to a severe process of deleveraging (Saurina & Trucharte, 2007).
 A single global risk factor of Basel II to capture firm defaults increased the likelihood of large
capital shortfalls (Gordy, 2003), which raised procyclicality (Blundell-Wignall et al., 2014).
 A heavy reliance on external ratings by ECAIs created three adverse incentives for banks (Figure
22); (1) banks felt no urgency to develop own internal risk-assessment frameworks; (2) ECAIs
misused the rating process to issue artificially-inflated ratings to clients from whom they earned
lucrative fees; (3) banks’ overreliance on ECAIs resulted in a cliff effect in capital requirements.
 Before a full implementation (2006), Basel II played a crisis-intensifier role in the subprime crisis
(2006-07) and the procyclical deleveraging made financial losses of the GFC substantially higher.
48
Table 14: Revised risk weights and credit assessments under Basel II
Option 1: Sovereigns
AAA A+ BBB+ BB+ Below

Credit Assessment Unrated
to AA- to A- to BBB- to B- B-
Risk Weight 20% 50% 100% 100% 150% 100%
Option 2: Banks & Corporations
AAA A+ BBB+ BB+ Below

Credit Assessment Unrated
to AA- to A- to BBB- to B- B-
Risk Weight 20% 50% 50% 100% 150% 50%
Short-term Risk
20% 20% 20% 50% 150% 20%
Weight
Corporate 20% 50% 100% 100% 150% 100%
ECA Risk Scores 0-1 2 3 4-6 7
Risk Weights 0% 20% 50% 100% 150%
Source: BCBS (2004)
Source: BCBS (2004), created by author

Figure 22: Six criteria used by ECAIs
49
In assessing bank soundness, answering the questions below will help to determine the resilience
(probability of solvency) of each bank as well as the overall stability of the whole financial sector.
Questions and their answers involve each critical component of the stress testing framework. Most
stress tests are done to assess credit risk (default risk), interest rate risk (fluctuation), and foreign
exchange (FX) risk. Supplementary questions as follow:
Credit Risk69
Credit Shock 1 (“Underprovisioning”)

1) Which banks would experience shortfalls of capital?
2) For insolvent banks, how much capital injection is required by governments?
Credit Shock 2 (“Increase in NPLs”)

3) Which banks will fail (inadequate capital buffers) when NPLs ratio is increased to 25%?
4) What happens if only risk-free assets are affected (e.g. government bonds)?
Credit Shock 3 (“Sectoral shocks”)

5) Which banks are over exposed to a specific sector (e.g. manufacturing)?
Credit Shock 4 (“Large exposures”)

6) Which banks are highly exposed to concentration risk?
Interest Rate Risk

7) Which banks can effectively manage interest rate fluctuations?
8) How much loss will governments undergo in the case of bank failures?
Foreign Exchange (FX) Risk
Direct FX Risk
9) Which banks would fail when exchange rates depreciate more 55% or more?
Indirect FX Risk
10) How do the results of a stress testing change when indirect FX risk included?
Each of the three instalments of the Basel standard was a reactionary response to financial shocks;
aftermath of the Latin American debt crisis and the U.S. S&L crisis in the 1980s, the Basel Committee
was prompted to introduce Basel I; high-magnitude events in the 1990s, the Asian financial crisis in
particular, resulted in the revision of Basel I and the outcome was a revised framework known as
Basel II; before even the ink was dry on the Basel II standard, the three U.S. origin financial shocks
(dot.com, subprime, and global financial crises) led to the launch of Basel III in December 2010 (Table
69
See Čihák (2007) for more detailed data.
50
15), under which, the Basel Committee introduced more stringent capital and liquidity regulations
which were enacted into law within the European Union through the Capital Requirements Directive
IV (CRD), however the first draft was only released to banks in mid-2011 (BCBS, 2010a, b, c).
Table 15: Basel III phase-in arrangements

Shading in grey indicates transition periods – all dates are as of January 1st
2013 2014 2015 2016 2017 2018 2019
Parallel run 2013 – 2017 Migration to

Leverage ratio
Disclosure starts 2015 Pillar 1 (2018)
Minimum CET1 ratio 3.5% 4.0% 4.5% 4.5% 4.5% 4.5% 4.5%
Capital buffer 0.625% 1.25% 1.825% 2.5%

0 to
Countercyclical buffer Phase-in
2.5%
1.0 to
G-SIB surcharge Phase-in
2.5%
Minimum common
3.5% 4.0% 4.5% 5.125% 5.75% 6.375% 7.0%
equity + capital buffer
Phase-in deductions
20% 40% 60% 80% 100% 100%
from CET1
Minimum Tier 1 capital 4.5% 5.5% 6.0% 6.0% 6.0% 6.0% 6.0%
Minimum total capital 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0%
Minimum total capital
8.0% 8.0% 8.0% 8.625% 9.25% 9.875% 10.5%
+ conservation buffer
Capital instruments that
Phased out over 10-year horizon beginning 2013
no longer Tier 1 or Tier 2
Liquidity coverage ratio Observation

Introduce minimum standard by 2015
LCR ≥ 100 (short-term) Begins 2011
Net stable funding ratio Observation Introduce minimum

NSFR ≥ 100 (long-term) Begins 2011 Standard by 2018
Source: BCBS (2010a, b)

Notes: The minimum capital requirement increased significantly (4.5% Tier 1 + 2.5% capital buffers). Two new
liquidity standards (LCR > 100% and NSFR > 100%) and a leverage ratio (3%) have been introduced. Further, new
charges (2.5% G-SIB surcharge) and a 2.5% countercyclical buffer apply. When the minimum capital requirements,
capital buffers, and surcharges are added; banks may have as much as 13% capital charge.
Although Basel III is a significant improvement over Basel II, many large banks have kept complaining
about higher capital ratios, capital charges, and a tighter liquidity regulation under Basel III (i.e. rules
were fully enforced on January 1, 2019). Carmassi and Micossi (2012) assert that the international
banking system will become more susceptible (crisis-prone) to shocks. Economists and experts argue
that the rigorous capital and tighter liquidity rules of Basel III may potentially reduce the amount of
capital for banks to invest while substantially increasing their leverage. Despite much improved Basel
III rules, Haldane (2011) argues that Basel III is still open to gaming, therefore it would be unable to
51
prevent systemic shocks and Hoenig (2013) argues that the Basel III capital requirements do not
reflect the reality since they are nothing but an illusion. More than a decade has passed since the GFC
of 2008, and no global-scale financial crisis at this magnitude has occurred, but the COVID-19 related
aggregate cost (i.e. over $30 trillion) to economies worldwide has surpassed that of the GFC. In 2020,
financial markets were hit the hardest and billions of dollars evaporated instantly (Figure 23 and 24).
Source: Standard and Poors, https://www.thebalance.com/stock-market-crash-of-2008-3305535

Figure 23: 10 biggest financial losses in Dow Jones history
Source: Bloomberg; BBC, https://www.bbc.com/news/business-51706225

Figure 24: The impact of COVID-19 on stock markets since January 2020
52
As of 8 April 2022 (over three years after the coronavirus was supposedly leaked from China), the
virus has taken 6,195,731 lives globally (i.e. over one million in the U.S.), and the financial catastrophe
left behind is more severe than all financial crises combined since the 1980s.
All financial crises in the post-WWII era directly or indirectly are attributable to the greedy dollar
virus, which is destined to consume the world’s resources by enslaving the humankind, and in the
process, to bring on the Armageddon (day of reckoning). Since President Nixon’s historic decision in
1971 to cut dollar’s link (convertibility) to gold, the U.S. gradually increased its efforts of weaponizing
dollar as a foreign policy. U.S. presidents and various government branches have a forceful influence
on the governments of other countries. Anytime the U.S. cannot seem to get what she wants, the US-
influenced (extension of its political power) multilateral organizations such as the IMF, UN, NATO,
WTO, World Bank, and a slew of others engage in to increase the international pressure for a desired
outcome. In this millennium (since the GFC of 2008), America has increasingly weaponized the dollar
and has been keen on using it as a warless economic weapon of vast economic annihilation against
countries (even alias) that are not acting in the best interest of the U.S. To preserve the dollar’s power
and not to lose its economic and geopolitical dominance to China, the Trump administration has been
very aggressive in pushing sanctions as a foreign policy. As illustrated in Figure 25, President Trump
has imposed more sanctions than any previous president (i.e. 1,474 sanctions on entities).
Source: Gibson, Dunn & Crutcher LLP; https://www.gibsondunn.com/

Figure 25: Number of sanctioned countries and entities (annual additions)
Thanks to the rampant dollar virus, financial crises since the 1980s with farfetched implications were
either originated in the U.S. or fostered by technological developments and financial innovation in the
53
U.S. Consequently, the living standards in many countries have deteriorated fast (inequalities in every
sense widened); unemployment has skyrocketed (even in advanced economies); societies have been
jolted from their roots with millions of displaced people; poverty levels in many developing countries
have increased substantially; moods of pessimism have grown as hopes have diminished; financial
instability has become the new norm, and the macroeconomic events in the new millennium such as
the US-China trade war, COVID-19 pandemic, and Russia-Ukraine war have rattled markets and
caused the fear among people (and investors) to reach unprecedented levels.
Source: Visual Capitalist, https://www.visualcapitalist.com/2000-years-economic-history-one-chart/

Figure 26: 2,000 years of economic history
United States has all reasons to worry about China’s increasing leadership in the areas that have been
always associated with American supremacy. As shown in Figure 26, around the time when America
was discovered (1492), China was the largest economy in the world (see Maddison, 2007; Federico,
2002). About four centuries later (by 1890), China lost its economic dominance to another fast rising
54
economy (the U.S.). History repeats itself, since China had reasserted the world’s largest economy
status in 2014 by GDP at PPP70 (Table 16), the dollar virus has become more aggressive towards China
whose remarkable rise as a power is neither a coincidence nor a one-time event.
Table 16: GDP at PPP rankings

2014 2030* 2050*
PPP
Country GDP at PPP Country GDP at PPP Country GDP at PPP
Rank
2014 US$bn 2014 US$bn 2014 US$bn
1. China 17,632 China 36,112 China 61,079
2. United States 17,416 United States 25,451 India 42,205
3. India 7,277 India 17,138 United States 41,384
4. Japan 4,788 Japan 6,006 Indonesia 12,210
5. Germany 3,621 Indonesia 5,486 Brazil 9,164
6. Russia 3,559 Brazil 4,996 Mexico 8,014
7. Brazil 3,073 Russia 4,854 Japan 7,914
8. France 2,587 Germany 4,590 Russia 7,575
9. Indonesia 2,554 Mexico 3,985 Nigeria 7,345
10. United Kingdom 2,435 United Kingdom 3,586 Germany 6,338
11. Mexico 2,143 France 3,418 United Kingdom 5,744
12. Italy 2,066 Saudi Arabia 3,212 Saudi Arabia 5,488
13. South Korea 1,790 South Korea 2,818 France 5,207
14. Saudi Arabia 1,652 Turkey 2,714 Turkey 5,102
15. Canada 1,579 Italy 2,591 Pakistan 4,253
16. Spain 1,534 Nigeria 2,566 Egypt 4,239
17. Turkey 1,512 Canada 2,219 South Korea 4,142
18. Iran 1,284 Spain 2,175 Italy 3,617
19. Australia 1,100 Iran 1,914 Canada 3,583
20. Nigeria 1,058 Egypt 1,854 Philippines 3,516
Source: PwC71; * Projected
3.0 Concluding Remarks
Several past developments played a crucial role in the inception, transmission, and weaponization of
the dollar virus. First was the Fed’s unwarranted tight-money policy error in the late 1920s; a chorus
of monetarists (Bernanke, Friedman and Schwartz in particular) postulate that the Fed’s unnecessary
contractionary monetary stance (despite ominous signs of trouble of excessive debt by private and
household sectors, reduced consumer spending, and sluggish economic indicators) with the objective
of curtailing speculation on Wall Street and avoiding a stock market crash led to panicked investors
selling stocks at a rapid pace. The postwar optimism (i.e. Wall Street would continue to rise forever,
and a prosperous life for every American) ended abruptly as pessimists entered the market, heavy
selling on Oct. 24 (Black Thursday, -11%), on Oct. 28 (Black Monday, -12.82%), and on Oct. 29 (Black
Tuesday, -11.73%) led to the crash (the Great Crash of 1929) and the ensuing Great Depression of the
1930s. The Fed gravely failed to promote financial stability and tossed the economy into slump.
70 GDP: Gross domestic product; PPP: Purchasing power parity.

71 The World in 2050 Will the shift in global economic power continue? February 2015, www.pwc.co.uk/economics
55
The dollar virus was born by the creation of the Federal Reserve System (the Fed) on 23 December
1913 and the issuance of its first bank notes in 1915. The next two events forced the dollar virus to
mutate into more dangerous variants. Before the conclusion of WWII, a new post-WWII monetary
order was created at the 1944 Bretton Woods Conference with only American view in mind; delegates
from the 44 wartime allies accepted Harry Dexter White’s U.S. plan which set up the IMF and World
Bank (watchdog institutions72) designed to support American supremacy and dollar’s hegemony. The
defeat of Nazi Germany in WWII resulted in another power shuffle in Europe, this time Great Britain
was sidelined (i.e. John Maynard Keynes, the influential English economist and leader of the British
delegation at the 1944 Bretton Woods Conference, ridded the UK of its imperial grandeur and reserve
currency) and the United States along with the Soviet Union (USSR) became two superpowers, this
also meant a step towards a bipolar world order, i.e. the Western bloc against the Eastern bloc during
the Cold War era that began in 1947 and ended in 1991 with the USSR’s collapse.
The dollar virus gains strength and mutates through expanding (i.e. print of dollars) or contracting
(i.e. unprint of dollars) the aggregate dollar supply, its main nutrition is a constant indebtedness by
infected hosts with dollar addiction such as sovereign states, public/private entities, and households.
The dollar virus’ first mutation into a more powerful variant occurred in the late 1970s and early
1980s (lost decade) in the form of the Latin American debt crisis (i.e. an epidemic), which was directly
or indirectly was contributed by the collapse of the Bretton Woods system of fixed exchange rates
and President Nixon’s decision to delink dollar from gold (1971); the Arab-Israeli conflict – Yom
Kippur War and the subsequent oil crisis (1973); the forced liquidation of Germany’s Cologne-based
Bankhaus Herstatt (1974); the secondary banking crisis & property crash in the UK (1973-75); the
intensified Vietnam War (the US involvement began in 1955, but actual war was between March 1965
and 1973, President Nixon (1969) decided to pull US troops out of Vietnam); the global energy crisis
(1979); the Latin American debt crisis (early 1980s), and the S&L crisis in the U.S. (1986-95).
Against the background of the abovementioned events and developments, the Basel Committee was
prompted to introduce Basel I in July 1988; the primary objective was to converge (or harmonize)
substantially varied capital adequacy measurement and capital standards of banks within G-10. Due
to arbitrary risk categories and simplistic risk weights, Basel I ushered greater risk-taking and faced
immense criticism. Under Basel I, internationally active banks were enabled to move high-risk assets
between on-balance and off-balance sheets via securitization. Furthermore, large banks with constant
propensity to invent loopholes for circumventing regulation engaged in cross-border and shadow
banking activities which fostered economic booms-and-busts across Latin America and Asia.
72 United Nations (UN) in 1945, the General Agreement on Tariffs and Trade (GATT) in 1947 (replaced by the World Trade
Organization – WTO in 1995), and the North Atlantic Treaty Organization (NATO) in 1949.
56
The dollar virus’ second mutation into a lot more severe variant occurred in the late 1990s in the form
of the Asian financial crisis of 1997-98 (i.e. another epidemic).73 The simplistic and risk-insensitive
rules of Basel I aggravated the dollar virus (i.e. amplified instability) which began searching for a new
host (i.e. East Asia and Pacific). Capital inflows have always been crucial for developing and emerging
economies where mostly dollar-denominated loans are seen as a gateway to leap into higher levels of
economic performance in order to narrow the gap to advanced nations. Unfortunately, the danger of
excessive dollar-denominated short-term capital flows (a double-edged sword) is often overlooked
or ignored by shortsighted governments in these countries which are more concerned with using the
foreign loans to finance their fiscal deficits and infrastructure projects; nevertheless, a reversal in
capital flows during malignant economic times followed by repeated speculative attacks could lead
to devaluations of national currencies, this is exactly what happened in Latin America and Asia.
The Basel Committee acknowledged that Basel I played a contributing role in the Asian financial crisis
of 1997-98. Despite Basel II’s increased sensitivity to risks and the hype generated by the Basel
Committee, Basel II still failed to strengthen the global banking resilience; quite the opposite, Basel II
rules raised procyclicality and turned the too-big-to-fail banks into bigger-and harder-to-fail banks.
The biggest damage caused by Basel II was that it made banks overly rely on ratings provided by
external credit assessment institutions (ECAIs) for even operational decisions on dividend payouts,
audit frequency, and deposit rates; consequently, both large and systemically important banks felt
the least urgency to strengthen their existing inadequate risk-management frameworks or develop
far better ones. Economists and industry experts have criticized Basel II for; raising procyclicality;
amplifying cyclical lending;; exacerbating boom-bust cycles; leading to a severe deleveraging process;
causing “cliff effects” in capital requirements which increased the likelihood of capital shortfalls. The
Basel Committee had observed that important risks (securitization, short-term funding, liquidity,
contagion and counterparty default) were not detected and covered sufficiently under Basel II.
The dollar virus has mutated into the severest variant (i.e. pandemic) following the three U.S. origin
financial shocks (i.e. dot.com crisis, sub-prime - mortgage debacle, and global financial crisis). Before
even the ink was dry on the Basel II standard (fully enforced by 2006), the final implementation of
Basel II was halted by the U.S. subprime crisis of 2006 and the subsequent shocks prompted the Basel
Committee to introduce Basel III in December 2010. The recurrence of these high-magnitude financial
crises is a testimony to the fact that both old and new economic theories, regulations, deregulation
73 Other economic and financial crises in the 1990s include; special period in Cuba (1990–1994); recession (early 1990s);
Indian economic crisis (1991); Finnish banking crisis (1991–1993); Swedish banking crisis (1990s); Black Wednesday
(1992); economic crisis in Mexico (1994); Asian financial crisis (1997-98); Russian financial crisis (1998); Ecuador
economic crisis (1998-99); Argentine great depression (1998-02); samba effect in Brazil (1999).
57
and self-regulation, analytical tools, enhanced techniques, and risk assessment/management models
failed to promote financial stability. Not only Basel I and II aggravated the dollar virus and turned it
into a pandemic, but the repeated financial crises since the late 1990s serve a painful reminder that
the influential financial authorities (Fed and ECB in particular), the supervisory community (BCBS,
EBA, BIS, etc.), and the multilateral organizations (IMF, World Bank, IIF, OECD, etc.) have grossly
failed to strengthen and safeguard the global financial system.
Since the Great Recession (the GFC of 2008-09), the world has not yet experienced another GFC-like
financial catastrophe (excluding the massive cost of COVID-19 pandemic on economies worldwide,
over $30 trillion), therefore the next severe financial shock will attest whether Basel III rules, contrary
to the previous frameworks (Basel I and II), have been able to make the global financial system more
resilient to withstand shocks under highly adverse market conditions.
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Basel I & Basel II Have Aggravated the Man-Made Dollar Virus

Dr. John Taskinsoy a

1 NBC News, https://www.nbcnews.com/science/science-news/where-did-new-coronavirus-come-past-outbreaks-

Source: Adapted from Williamson (2013)

Source: The US Bureau of Labor Statistics, created by the author

The Emergence of the Dollar Virus before the Conclusion of WWII

Source: Wikipedia, https://en.wikipedia.org/wiki/American_Civil_War

Source: National Park Services, https://www.nps.gov/civilwar/facts.htm

Table 1: Coronavirus cases

Country Total Cases Total Deaths Total Recovered Serious - Critical

World 473,358,518 6,108,933 409,518,450 60,884

Top 10 Total 245,828,969 3,329,105 244,335,217 29,112

Source: Worldometer, https://www.worldometers.info/coronavirus/

The Dollar Virus is the Armageddon

Source: OXFAM (2021), www.oxfam.org

Source: Green & Wachter (2005)

Table 3: Dollar virus-induced crises

Source: Wikipedia, https://en.wikipedia.org/wiki/List_of_economic_crises

The Dollar Virus Engulfed Latin America in the 1980s

Table 4: Capital flows to 7 largest Latin American economies

External Debt (% of GNI)

External Debt (% of Exports)

Source: Ertürk (2014)

Sources: EIA; World Bank

Sources: World Bank – International Debt Statistics (2013)

Table 5: Structure of long-term debt

Table 6: External debt of Latin American countries (2014 and 2020)

Total 1,623.38 2,220.22 86.77%

Source: World Bank; Wikipedia

Table 7: Degrees of dollarization: composite scores, 1996-2001

Source: Reinhart et al. (2003)

Source: World Bank, https://www.ceicdata.com/en/indicator/brazil/external-debt

Table 8: Currency composition of official foreign exchange reserves (COFER)

Category Q3 2020 Q4 2020 Q1 2021 Q2 2021 Q3 2021

Total Foreign Exchange Reserves 12,250.97 12,705.33 12,583.07 12,813.74 12,827.45

Source: IMF, https://data.imf.org/?sk=E6A5F467-C14B-4AA8-9F6D-5A09EC4E62A4

2.2 The Aggravated Dollar Virus Began to Infect its Own

48 For more details, see Dunstan (2007).

Source: Adapted from Carlson (2006)

Source: Adapted from Carlson (2006)

Source: Wikipedia, https://en.wikipedia.org/wiki/Black_Monday_(1987)#/media/File:Black_Monday_FTSE.svg

Background of the Crash: Possible Causes

Source: IMF; https://en.wikipedia.org/wiki/Reserve_currency

Table 9: Arbitrary risk categories and risk weights under Basel I

Cash claims on OECD governments and loans either collateralized or and

Source: BCBS (1988)

2.2 Basel I: Dollar Virus’ Mutation into More Severe Strain

Table 10: Currency composition of official foreign exchange reserves (COFER)

Category Q3 2020 Q4 2020 Q1 2021 Q2 2021 Q3 2021

Total Foreign Exchange Reserves 12,250.97 12,705.33 12,583.07 12,813.74 12,827.45

Source: IMF, https://data.imf.org/?sk=E6A5F467-C14B-4AA8-9F6D-5A09EC4E62A4

Source: IMF; http://data.imf.org/?sk=E6A5F467-C14B-4AA8-9F6D-5A09EC4E62A4

Source: Research and Rank, https://twitter.com/researchandrank/status/1394935544203726855/photo/1

Table 13: List of traded key commodities

Commodity Contract Size Currency Main Exchange

Source: Wikipedia, https://en.wikipedia.org/wiki/List_of_traded_commodities

The Inherent Flaws and Criticism of Basel I Rules

The Inherent Flaws and Criticism of Basel II Rules

AAA A+ BBB+ BB+ Below

Risk Weight 20% 50% 100% 100% 150% 100%

Option 2: Banks & Corporations

AAA A+ BBB+ BB+ Below

Risk Weight 20% 50% 50% 100% 150% 50%

Corporate 20% 50% 100% 100% 150% 100%