John Taskinsoy 2022 SSRN Periphery Addiction To Dollars March

Elongated Addiction of Peripheries to Dollar: A Weapon of Mass Economic Destruction
Dr. John Taskinsoy a
ABSTRACT
Capital flows from external sources in the form of portfolio or direct investment are crucial for both
developing and emerging economies where capital inflows are treated as a gateway to leap into a
higher level 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 developing and emerging economies; while
capital inflows are usually used to finance fiscal deficits and infrastructure projects in these countries
during benign economic periods, nevertheless a sudden reversal (outflow of capital) followed by
repeated speculative attacks can cause devaluations of national currencies, and this is exactly what
happened in Latin America in the 1980s and in Asia in the late 1990s. The U.S. dollar, metaphorically
speaking, is a poison ivy, both are toxic and found in abundance in the continental United States. An
elongated addiction to the dollar or upon contact with poison ivy can be quite harmful; neither one
kills, but either one can result in agonizingly unpleasant experiences, and frequent cases of each could
leave permanent scars, i.e. deeply entrenched cracks in the financial system. Over a century of reaping
the benefits of exorbitant privilege, the U.S. dollar with the fear of losing competitiveness has become
increasingly disruptive and damaging. Since the 2008 global financial crisis, the U.S. abuse of sanction
power as a foreign policy and its weaponization of dollar (the Trump administration in particular)
have forced countries like China, Russia, Venezuela, Iran, and Turkey to become overly cautious about
participating in dollar regimes; Iran began to use gold and Bitcoin to bypass heavy US sanctions and
the ongoing disruptive U.S. – China trade war prompted China to launch its own digital yuan. Collapse
of the Bretton Woods system of fixed exchange rates and President Nixon’s decision in 1971 to delink
dollar and gold enabled the Fed to pursue unlimited printing of dollars (credit expansion through
accommodative policies or quantitative easing), which is argued to have contributed to the last six
high magnitude financial crises with farfetched implications; savings and loans S&L crisis (1980s), US
stock market crash of 1987, Asian crisis of 1997-98, dot.com crisis of 2001-02, subprime mortgage
debacle of 2006, and global financial crisis of 2008 (and sovereign debt crisis of 2009-12)
Keywords: Addiction to Dollar; Periphery; Latin America; Capital Flow; Dollar Hegemony
JEL classification: E42, E52, F34, F36, F40, G21
 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.
1
1.0 Introduction
The global market and most of the world’s scarce resources are controlled by core countries (imperial
powers1 before the 16th century, succeeded by European powers up to the 20th century and later the
industrial capitalists) that enjoy the benefits, consisting the United States, Canada, most of Western
Europe, Japan, Australia and New Zealand. On the other hand, periphery and semi-periphery states
(larger part of the world) for their shares of the resources are at the mercy of the core countries (e.g.
Abernethy, 2000; Cell, 1997). Two Great Wars (WWI and WWII) culminated Europe’s hegemony,
which was decimated by the end of WWI and the United States emerged as a major power. The defeat
of Nazi Germany in WWII caused another power shuffle in Europe, this time 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 the 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 starting in 1947 till the USSR’s collapse in 1991 (see Marples, 2004; Shannon, 1996).
Table 1: List of periphery countries
Bangladesh Benin Bolivia Burkina Faso Burundi
C. African Republic Chad Chile China Congo
Gambia Ghana Guinea-Bissau Haiti Honduras
India Indonesia Kenya Lesotho Madagascar
Malawi Mauritania Nepal Niger Nigeria
Papua New Guinea Philippines Rwanda Senegal Sierra Leone
Solomon Islands Sri Lanka Sudan Togo Zambia
Source: Babones (2005), https://en.wikipedia.org/wiki/Periphery_countries
Table 2: List of semi-periphery countries
Algeria Argentina Brazil China Egypt Finland Greece
India Indonesia Israel Iran Italy Malaysia Mexico
Norway Poland Portugal S. Arabia Singapore S. Korea Spain
Nigeria Taiwan Turkey Venezuela Zaire
Source: Wallerstein (1976), https://en.wikipedia.org/wiki/Semi-periphery_countries
1 Pre-13th century: Persian, Indian, and Roman empires, the Muslim Caliphates, the Chinese and Egyptian dynasties;
Mongol
Empire (13th – 15th century), Ottoman Empire (13th – 16th century), and European hegemony (18th – 20th century).
2
The birth of American imperialism and the inauguration of dollar’s hegemony were interlinked. In
fact, imperialism was in America’s DNA even before birth as a nation. When European settlers arrived
in the new world after 1492, they immediately began killing American Indians to gain land (i.e. Indian
massacre); right then, the seeds of an imperial nation were sowed and flourished with more blood
(i.e. territorial expansion between 1812 and 1860). The United States is often accused by many and
advocated by even its own presidents (Thomas Jefferson and Benjamin Franklin) of hegemony and
imperialism (Lens & Howard, 2003; Field, 1978; LaFeber, 1993; Sexton, 2011). The Monroe Doctrine2
of 1821 with manifest destiny3 were used as a mechanism for territorial expansion with the objective
of keeping the European colonial powers away from the Americas (see Dunning, 2001; Brown, 1980;
Fresonke, 2003; McDonough, 2011; Sampson, 2003). At the conclusion of the Mexican-American War
of 1846, the 1848 Treaty of Guadalupe Hidalgo gave the U.S. the states of California and New Mexico;
other claimed territories included Utah, Nevada, Arizona, Wyoming, and Colorado (see Adams, 2008;
Bailey, 1937; Field, 1978; Miller, 2006; Hudson, 1972; Williams, 1980).4
US expansionism through intervention and annexation became a tradition with the Spanish-American
War in 1898. After the war ended (August 12, 1898), the treaty of Paris (Dec. 10, 1898) culminated
the Spanish colonial rule in Americas and resulted in the U.S. acquisition of new territories in western
Pacific and Latin America such as Puerto Rico, Philippines, and Guam (Corbin & Levitsky, 2003). The
taste of an imperial power made her crave more; the next milestone was winning insular possessions
in the Caribbean and Hawaii and playing a leading role in restructuring the power mix in Europe (i.e.
previously, power was shared by Germany, France, and the UK which were also each other’s chief
enemy). Although the United States was initially created from European settlers and from immigrants
later, patently Europe and America diverged in many aspects; while the EU has moved towards
“perpetual peace”, the U.S. conversely has turned into an anarchic Hobbesian that was enabled by its
naval power, strong economy, technological power, and military might. The Divergence between
Europeans and Americans can be best explained by the metaphor “men are from Mars (Americans)
and women are from Venus (Europeans), i.e. Kagan (2003).
Interestingly, when the U.S. declared independence from the Great Britain on 4 July 1776, it did not
even have its own currency (i.e. the newly independent US government extended legal tender to a few
foreign coins including British pound and Spanish peso for an indefinite period of time). First U.S.
2 The Monroe Doctrine and manifest destiny played a critically important role in the annexation of Oregon and Washington
(i.e. Treaty of 1846), Texas (which declared independence from Mexico in March 1836, and admitted to the Union in 1845).
3 This term was coined by the newspaper editor John O'Sullivan in 1845, which inferred that Americans settlers were
entitled to conquer and control North America.

4
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).
3
President George Washington enacted the Coinage Act of 1792 into law, making the dollar as a unit of
account and “$” as its symbol (Bogart, 1930; Friedman & Schwartz, 1963; Bensel, 2000). While the
Revolution War (1775-83) was in full swing, the Continental Congress authorized the issuance of
paper notes called “continental” in 1775 (IOUs5) to finance the war. However, due to a lack of trust
and hyperinflation, continental paper money was redeemed at a significant discount). By 1778, it was
worth 1/7 of the original face value; after another devaluation (at 1/40) in 1780, continentals were
out of circulation permanently in 1781 (Bogart, 1930; Friedman & Schwartz, 1963; Bensel, 2000).
Central banks, the alchemists of the modern financial system, appeared in Europe 250 years before
the creation of the Federal Reserve system” the Fed” in the U.S.. The Swedish Riksbank, established in
1668 as a joint stock, is the first known central bank, and the Bank of England (also established as a
joint stock in 1694) was the most important central bank of the era (Bordo, 2007). Only towards the
end of 18th century (1794), the Coinage Act of 1792 created the United States’ first Mint in
Philadelphia. The U.S. began minting coins in 1794, but lasted only three years due to silver
shortage; consequently, the U.S. government in 1797 extended legal tender to Spanish silver
dollar for an indefinite period of time. Even though the first two US national banks6 were
modeled after the Bank of England, each bank survived only two decades (1791-1811 and
1816-36 respectively) and their licenses were not renewed after expiration. However, for the
sake of the future of the US dollar, the Congress passed the Coinage Act of 1857 to end legal
tender to all foreign coins (Bernanke, 2004; Eichengreen, 2009; Hudson, 1972; Zinn, 2014).
At the end of the 19th century, U.S. succeeded Britain as the dominant economic power; by the onset
of the 20th century, dollar and pound were only two reserve currencies. However, before WWII was
over, the Bretton Woods system of fixed exchange rates solidified dollar’s ascendency to the throne
(Aizenman & Lee, 2005; Eichengreen, 2009; Ikenberry, 2001). Britain’s decision to leave gold in 1931
coupled with fear of bank runs and the onset of the Great Depression, dollar was devalued in 1934 as
a defense by President Roosevelt to turn the economic tide, the value of dollar to gold changed from
$20.67/oz to $35/0z. The second run on gold due to speculative attacks in 1971 drained the US gold
stock (i.e. the dollar was again devalued to $42.22/oz). To defend the American economy, President
Nixon was prompted to cut dollar’s link to gold, this was commonly referred to as the “Nixon shock”
(Bordo et al., 2017; Dooley et al., 2004; Garber, 1993; Kirshner, 2008; Hazlitt, 1984).
5 IOU stands for “I owe you”.

6 Commonly referred to as the First Bank of the United States; it was established in 1791 and chartered for a term of 20
years. The bank’s charter was not renewed when it expired in 1811. Five years later (1816), it was succeeded by the
Second Bank of the United States, this too was chartered for a 20-year term (1816-36)
4
The new post-WWII monetary order was created at the 1944 Bretton Woods Conference with only
American view in mind, and the watchdog institutions agreed by the allies (44 founding members)
were designed to support American supremacy and dollar’s hegemony. The IMF and the World Bank
were established in 1944 (began operations in 1945), 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. In addition to these institutions
that implicitly support both American imperialism and dollar’s hegemony, most commodities (gold
and oil) are also priced in dollars; moreover, the 1945 agreement between the U.S. and Saudi Arabia
created the petrodollar (President Franklin D. Roosevelt initiated the alliance with Saudi King Abd al-
Aziz). To support dollar’s global reserve status, the U.S. has more gold than any nation (Table 3).
Table 3: World gold mine production survey 2018

Gold Mine Gold Mine Gold Total Gold as a
Production Production Reserves Reserves Share of
2016 (tons) 2017 (tons) (tons) (US$ bn) Reserves %
United States 222.0 230.0 8,134 452.8 75.2
Germany ----- ----- 3,374 200.6 70.4
IMF ----- ----- 2,814 ----- -----
Italy ----- ----- 2,452 151.6 67.7
France ----- ----- 2,436 156.8 65.1
Russian Federation 253.6 270.7 1,910 433.1 17.8
China Mainland 453.5 426.1 1,843 3,236.0 2.4
Switzerland ----- ----- 1,040 811.2 5.4
Japan 6.5 6.1 765 1,264.3 2.5
Turkey 26.0 26.1 565 107.8 21.9
Source: Taskinsoy (2019a); GFMS, Thomson Reuters
Although South Africa was the largest gold producer during 1965-80, over the years it has gradually
lost its leader position and currently ranks 8th in the world (Table 4). China is the new leader with its
ambitious production of 426.1 tons in 2017 (GFMS, 2018). While gold production remained fairly
stable in the non-Communist world in post-WWII era, South African gold mining declined drastically
in the 1970s (i.e. its production volume was reduced by one-third). The GFMS survey 2018 published
by Thomson Reuters lists the top gold mining countries in 2017 as; China (426.1), Australia (295.0),
Russia (270.7), United States (230.0), Canada (175.8), Peru (162.3), Indonesia (154.3), South Africa
(139.9), Mexico (130.5), Ghana (101.7); the world’s total gold production was 3,246.5 tons.
The erratic increase in real market prices of gold resulted in contrasting outcomes in the 1930s and
the early 1970s; in the former, the sharp increase in gold price caused a substantial increase in gold
production; whereas in the latter, not only South African gold production fell by one-third, gold sales
by the former Soviet Union dropped by two-thirds. Another key commodity priced in dollars is gold;
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over $3.2 trillion petrodollars are recycled back to America through sovereign wealth funds such as
Norway Government Pension Fund Global--$1.187 trillion; U.A.E. Abu Dhabi Investment Authority--
$697 billion; Kuwait Investment Authority--$534 billion; Saudi Arabia SAMA--$494 billion; and Qatar
Investment Authority--$328 billion (i.e. oil-producer rich countries use petrodollars for imports).
Table 4: Gold mine production of selected countries (In tons)
Country 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
China 292 324 351 371 411 432 478 454 454 426
Australia 215 224 257 259 250 267 274 279 290 295
Russia 186 201 195 204 215 233 248 250 254 271
USA 234 221 230 234 232 230 209 216 222 230
Canada 95 96 104 108 108 134 153 163 165 176
Peru 196 201 185 190 184 188 173 178 169 162
Indonesia 136 205 184 165 131 153 158 176 175 154
S. Africa 234 220 200 191 164 169 159 151 146 140
Mexico 51 62 79 89 103 120 118 141 133 131
Ghana 80 90 92 91 96 107 107 95 94 102
Turkey 11 15 17 24 30 34 31 28 26 26
Regional Total
Europe 211 232 229 247 268 292 305 304 306 327
N. America 379 380 413 430 443 483 479 520 520 536
S. America 454 483 497 515 508 547 558 558 557 541
Asia 634 738 764 765 776 838 912 915 909 861
Africa 486 510 527 573 566 571 582 576 595 614
Oceania 302 310 342 337 322 345 344 350 364 368
World 2,467 2,651 2,771 2,868 2,882 3,076 3,180 3,222 3,251 3,247
Source: GFMS, Thomson Reuters (2017-2018)
Source: IMF, https://www.elibrary.imf.org/view/journals/001/2016/025/article-A001-en.xml

Figure 1: Net capital flows to selected countries, 1923–44
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As the Great Depression culminated and just prior to the breakout of WWII, the U.S. had the largest
capital inflows both in 1939-1940 (Figure 1). In the aftermath of WWII, naturally the war-devastated
European countries (peripheries) had higher dollar reserves than other countries; the emergence of
Latin America in the 1980s and Asia in the 1990s became the new peripheries (Table 5 and 6).
Table 5: Countries with highest dollar reserves
1960 ($ million) 1970 ($ million) 1980 ($ million) 1990 ($ million)
USA 19,198 USA 15,196 USA 158,710 USA 172,133

Germany 7,138 Germany 14,419 Germany 98,512 Germany 103,999
UK 3,523 Italy 5,720 France 70,032 Japan 87,328
Italy 3,578 Switzerland 5,527 Switzerland 60,025 Italy 87,460
France 2,898 France 5,559 Italy 58,205 Taiwan 78,807
Switzerland 2,589 Japan 5,928 Japan 38,639 France 67,731
Canada 2,171 Canada 4,841 Netherlands 34,676 Switzerland 61,088
Netherlands 1,928 Netherlands 3,436 UK 29,361 Spain 58,218
Japan 1,794 UK 3,518 Belgium 25,451 UK 43,523
Belgium 1,690 Belgium 3,024 Saudi Arabia 28,247 Netherland 34,327
Australia 1,131 Austria 1,870 Spain 19,441 China 35,426
Portugal 742 Spain 1,999 Austria 16,643 Singapore 28,234
Austria 791 Australia 1,873 Canada 14,448 Belgium 23,725
India 672 Portugal 1,910 Libya 13,707 Canada 22,685
Total 49,853 Total 74,820 Total 666,097 Total 904,684
Source: IMF; https://www.youtube.com/watch?v=slIyijLSZ2o
Table 6: Countries with highest dollar reserves Author Forecast

2000 ($ billion) 2010 ($ billion) 2020 ($ billion) 2050 ($ billion)
Japan 373.36 China 2,986.9 China 3,091.5 Japan 1,800.0

China 185.80 Japan 1,145.6 Japan 1,368.0 China 1,600.0
USA 128.89 USA 499.3 Switzerland 801.0 India 900.0
Taiwan 114.57 Russia 483.1 Russia 565.2 Taiwan 820.0
Hong Kong 108.61 Saudi Arabia 480.2 India 501.7 Hong Kong 780.0
South Korea 98.18 Taiwan 386.4 Taiwan 484.5 USA 600.0
Germany 85.94 India 300.1 Saudi Arabia 448.2 Brazil 500.0
Singapore 79.78 South Korea 295.3 Hong Kong 442.3 Russia 450.0
France 62.25 Brazil 302.2 USA 412.0 South Korea 400.0
Switzerland 53.02 Hong Kong 273.2 South Korea 407.3 Singapore 350.0
UK 49.92 Switzerland 283.4 Brazil 305.7 Turkey 250.0
Italy 46.91 Singapore 233.9 Singapore 301.8 Malaysia 240.0
India 43.38 Germany 219.9 Germany 245.1 Indonesia 200.0
Total 1,430.6 Total 7,899.5 Total 9,374.3 Total 8,890.0
Source: IMF; https://www.youtube.com/watch?v=slIyijLSZ2o
As illustrated in Table 5, in 1980 there is no Asian country (excluding Japan) in the top list of countries
with highest dollar reserves (mostly G-10 nations); a decade later due to Asia’s gradual integration
into the global trade and financial hubs, Taiwan, China, and Singapore began stashing more dollars in
their foreign reserves. By 2000 onward (Table 6), China by far has the largest amount of dollars.
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2.0 Literature Review
Before the 1960s, the world that existed then was one without integrated financial markets, still
restrictions were put in place to limit cross-border flow of capital, products and services. Large firms
and internationally active banks had a constant propensity to invent loopholes to circumvent national
regulations and banking supervision. This risky behavior fostered the creation of offshore financial
centers and the development of a new bank type called “shadow banking” which were subject to little
or no regulation contrary to heavily regulated traditional banking system (Bloomfield, 1950; Cappie,
2002; Friedman, 1977; Kindleberger, 1978). In the post-WWII period (since the mid-1960s), all things
began to move dramatically fast, i.e. world trade (fast-pace globalization and internationalization of
finance), financial innovations (pension funds, derivatives and securitization of debt to hedge against
pure financial risk) and revolutionary technological advances (see Chou & Chin, 2004; Duffie & Lubke,
2010; Llewellyn, 1992; Nadauld & Sherlund, 2009; Segoviano et al., 2013). Although the insurance
industry fueled growth up to the mid-1960s (Williams & Heins, 1964), going forward, the augmented
complexity of modern finance required the development of more enhanced risk assessment and risk
mitigation tools (Duffie et al., 2010; Kimball, 1997; SSG, 2009; Stulz, 1996, 1998, 2003, 2005, 2010).
Source: CFA Institute Research Foundation (2016)

Figure 2: Relative sizes of world stock markets (January 1, 1900)
By 1900, the world economy was largely based on agrarian societies and labor-intensive agricultural
outputs, therefore credit risk manifested within national borders. Geographic barriers in tandem with
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isolationist (beggar-thy-neighbor7) policies forced banking activities to remain local and were mainly
anchored in 5Cs (capital, collateral, character, conditions and capacity). The United Kingdom, as one
of the early financial centers, had the world’s dominant stock market in 1900 (Figure 2); however in
the subsequent decades, the United States had the top position as the world’s largest and most liquid
stock market; by January 2016 (Figure 3), the market capitalization of US stock markets accounted
for 52.4% of global stock market value, 6-7 times more than that of Japan (8.6%) and UK (7.1%).

Figure 3: Relative sizes of world stock markets (January 1, 2016)
None of the inventions we are so accustomed to using or seeing around today existed at the onset of
1900. The great transformation spanning from the Industrial Revolution (1900s) to the Golden
Decade (1990s) eliminated some industries while giving rise to brand new industries. After the
conclusion of WWII (Figure 4), breakthrough developments in transportation (affordable cars, travel
by ship and airplane, telecommunication, media, internet, etc.) forced businesses and banks to adapt
to the fast-pace transformation; however, transitioning from local to regional, and from that to
national and to global meant that credit risk no longer manifested locally (seeds of systemic risk were
sowed). Geographic barriers gradually disappeared underpinned by the influence of media, increased
labor mobility, more and more women in the workforce, reduced restrictions of capital formation and
capital flow, economic expansion, and increased consumerism. Consequently, existing risk exposures
and the new breed of risks (multidimensional and in systemic nature) caused fractures in the US
7 Countries passed protectionist policies to resolve their own economic problems at the expense of other nations.
9
financial system and those of developing countries and emerging market economies. During the years
between WWII and the mid-1970s, evolving risk management was no longer confined to insurance
policy and Markowitz’s (1952) portfolio theory (diversification of risks) for loss prevention.

Figure 4: Industry weightings in the USA and UK (1900 compared with 2015)
What a shocking difference a century makes; rail business (building and operating railroads) and the
issuance of related stocks dominated US and UK markets at the turn of the 20th century (i.e. railroad
stocks accounted for over 50% of each stock market’s value), but the railroad industry (dinosaur of
the past) faced the same predicament of telegraph and became nearly extinct (less than 1% of stock
market value in the US and the UK). In this millennium, old traditional companies are superseded;
instead, technology has been the locomotive of new industries including but not limited to artificial
intelligence – AI, blockchain, Metaverse, oil and gas, media, and telecommunication.
10
With the conclusion of WWII (September 2, 1945), a series of events and developments took place; as
such, dollar as the global reserve currency (new monetary order) was available; capital mobility was
restricted via exchange controls (the Bretton Woods system of fixed exchange rates); Trade barriers
were reduced under the auspices of the 1947 General Agreement on Tariffs and Trade (GATT); Japan
and Europe spent the next decade for extensive reconstruction efforts; the Communist world (USSR
and its East bloc) was excluded from Western companies due to Cold War (1947-1991); limited trade
liberalization (i.e. restrictions were reduced for the flow of manufacturing goods); European colonial
empires underwent decolonization in the 1960s; in the absence of an international legal regime to
protect property rights, foreign direct investments (FDIs) were still restricted (see Figure 5), however
nonresident convertibility among European countries had a positive impact on FDI growth8; due to
high levels of foreign imports throughout the 1960s, United States experienced balance of payments
deficits; President Nixon’s decision to cut dollar’s link to gold in 1971 and the collapse of the Bretton
Woods system of fixed exchange rates in 1973; floating exchange rates resulted in repeated currency
crises in the 1970s, 1980s, and 1990s (for longer discussions, see Cappie (2002) for capital controls;
Caruna (2011) for capital flows to EMEs; Shin (2013) for liquidity glut; Rey (2013) for dollar dilemma;
and Turner (2014) for financial risks; Triffin (1965) for the international system).
Source: OECD; https://www.cfr.org/backgrounder/foreign-investment-and-us-national-security

Figure 5: Restrictive economies on foreign direct investment (FDI)
8 During the first two decades of the post-WWII era (1945-65), the U.S. accounted for over 80% of all new FDIs; but in the
following two decades (by the 1980s), new FDI flow dropped to 40% of total stock. Interestingly, literally no multinational
investment activity in China or India in the 1980s, Japan had mere 1% or less of world’s total FDI stock.
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Although capital mobility is crucial for both emerging and developing economies to finance various
social programs and infrastructure projects, but excessive international capital flows in the form of
credit expansion without due diligence have been responsible for the Latin American debt crisis in
the 1980s and the Asian crisis in the late 1990s (see Ahmed & Zlate, 2013; Bekaert & Harvey, 1998;
Bernanke, 2011; Calvo, 1998; Eichengreen, 2004; Kaminsky & Reinhart, 2001). Between 1950 and
the early 1970s, advanced economies grew on average of 5%, this halcyon period of economic boom
without a major recession in the U.S. was mainly fueled by low interest/policy rates and quantitative
easing (printing money via accommodative monetary policy). By 1960, 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, but profit margins were squeezed by the
ultra-low interest rates, so banks and pension funds were forced to embark on a search-for-yield
(Figure 6). Initially, emerging and developing economies in Latin America and Asia seemed to have
benefited from the cash glut, but the side effects of the debt hangover resulted in costly crises.
Source: World Bank, https://blogs.worldbank.org/psd/cheap-money-addiction-and-cold-turkey-risks

Figure 6: Search for yield by pension funds and banks in advanced economies
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In the 1960s and 1970s, several Latin American countries (notably Brazil, Argentina, and Mexico)
wanted to borrow huge amounts of capital to finance mega infrastructure programs, and the creditors
(banks) in advanced economies were happy to oblige (this was a bit unusual because traditionally the
IMF and World Bank were the only sources willing to provide loans to developing countries). After a
sequence of events9 in the early 1970s (Yom Kippur War in 1973 and OPEC oil crisis in 1974-78 as a
retaliation against the U.S. aid to Israel), banks (i.e. search for yield) invested the influx of funds from
oil producing countries (mostly in the Middle East) in Latin American sovereign debt. Consequently,
Latin America’s external debt10 more than quadrupled (went from $75 billion in 1975 to over $300
billion in 1983) but the cost of the debt (interest) rose even higher, from $12 billion to over $60 billion
during the same period. The inevitable happened and Latin American countries had no choice but
defaulting on their debt obligations; nevertheless, over $100 billion of debt was paid back to creditors
between 1982 and 1985 (Coes, 1998; Felix, 1990; Masiello, 2001; Sunkel & Jones, 1986).
Source: World Bank, https://www.ceicdata.com/en/indicator/brazil/external-debt

Figure 7: External debt by top players in Latin American debt crisis
Four decades have passed since the Latin American debt crisis, but only little has changed in terms of
countries’ elongated addiction to dollars, the upshot is a massive external debt burden (Figure 7).
9 Yom Kippur (Arab-Israeli) War was a follow-up retaliation by the Egyptian and Syrian forces to win back territory lost to
Israel during the Arab-Israeli war in 1967. Each side claimed victories but in reality the Yom Kippur war was a disaster for
Syria. OPEC sharply raised oil prices during 1973-74 to show its strong disapproval of the U.S. aid to Israel during the war.
By March 1974, the price of oil rose from $3/barrel to $12/barrel. The price of gold rose from $44/ounce in 1972 to $185
in 1975 (see Kindleberger & Alibar, 2005 for the reasons behind the huge spike).
10 https://en.wikipedia.org/wiki/Latin_American_debt_crisis
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Financial, economic, or currency crises continue to strike because various agents of the economy do
not learn from studies examining why financial crises occurred or did not occur (they all had common
aspects). The economic history since the famous first three bubbles (Table 7) has been stained by
man-made financial crises involving speculative activities and bank failures (e.g. Garber 1989, 1990,
2000). The Latin American debt crisis was the most severe financial crisis prior to the famous last
three bubbles (Taskinsoy, 2021d); in spite of repeated crises, higher external debts of Brazil, Mexico,
and Argentina show that no hard lessons have been learned (Table 8 and Figure 8).
Table 7: Selected famous bubbles
Bubble Dates Impetus
Tulip mania 1673 Tulip cultivation

Mississippi bubble 1718-1720 Government refinance
South Sea bubble 1720 Government refinance
British railroads 1840s Railroad technology
US real estate 1923-1926 Postwar housing demand
US stock market 1928-1929 High-Tech innovations
US stock market 1985-1987 High-Tech innovations/disinflation
US real estate 1984-1989 Macroeconomic stabilization
Japanese Nikkei and stock market 1986-1991 Productivity growth
Internet (dot.com) bubble 1998-2000 High-Tech innovations
Subprime real estate 2005-2008 Mortgage finance innovations
Cryptocurrency bubble 2017; 2020-2021 High-Tech innovation/digital revolution
Table 8: External debt of Latin American countries (2020)

External Debt11 External Debt12
Country – Entity Increase (%)
2014 ($ million) 2020 ($ million)
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
11 Wikipedia, https://en.wikipedia.org/wiki/Latin_American_debt_crisis
12 World Bank, https://data.worldbank.org/indicator/DT.DOD.DECT.CD?locations=NI
14
Source: Ramos-Francia et al (2014); World Bank13
Figure 8: External debt (% of GDP)
People in developing and emerging economies do not trust the IMF (perceived to function under the
influence of American view and policies), therefore they approach the topic of the IMF’s role in before
and after financial crises with bitterness and a great deal of skepticism. The IMF’s involvement and
its repeated application of “univariate solutions to multivariate problems” has been criticized more
than praised (Boughton, 2001; Fisher, 1998). Although different financial crises have similar causal
aspects, preventative measures taken to solve them should not be one-size fits all due to country-
specific differences; conversely, the IMF has insisted mishandling financial crises by implementing its
textbook tighter-money and budget deficit reduction policies (Danielsson et al., 2016; Eichengreen &
13 https://www.ceicdata.com/en/indicator/brazil/external-debt--of-nominal-gdp
15
Bordo, 2003; Feldstein, 1998; Devlin & French-Davis, 1995; Reinhart & Rogoff, 2009). Once again in
the case of the Latin American debt crisis in the 1980s, through string-attached financial assistance
(bailout loans), the IMF forced the governments of mainly Brazil, Mexico and Argentina to implement
a strategy tailored towards “free market capitalism” (this neoliberal strategy was highly welcome by
creditors/investors in advanced economies); nevertheless, crisis-affected smaller economies such as
Chile and Costa Rica instead implemented a reformist strategy to fix their financial problems rather
than overhauling the existing financial system. The IMF’s politically influenced ill-advised austerity
plans and programs not only created fractures in the economies of Brazil, Mexico, and Argentina, but
caused both inequality and poverty gap to widen. Four decades later, external borrowing frenzy of
Latin American nations is not showing any sign of losing steam (Table 8 and Figure 8); at this rate (i.e.
six countries more than doubled their debt stocks in less than a decade), another Latin American crisis
reminiscent of the 1980s is on the horizon (see IMF, 2012; Sachs, 1989; Williamson, 1990).
After the lost decade (1980s), history repeated itself; the Asian crisis of 1997-98 (Tables 9 and 10),
forced countries in East Asia (South Korea) and Pacific (Indonesia, Malaysia, Singapore, and Thailand)
to turn to the IMF for bailout loans (Felix, 1990; Fisher, 1998). This time was no different, the IMF
programs aggravated inequalities and poverty conditions, and caused further addiction to dollars
(see Cheetham, 1998; Chinn, 1998; Claessens et al., 1999; Corsetti et al., 1998; IMF, 1999).
Table 9: Impact of Asian crisis on currencies and GDP
Country Exchange rate (per $1 USD) GNP ($ billion)

1997 1998 % 1997 1998 %
Thailand (baht) 24.5 41 -67.3 170 102 -40.0
Indonesia (rupiah) 2,380 14,150 -83.9 205 34 -83.4
Philippines (peso) 26.3 42 -59.7 75 47 -37.3
Malaysia (ringgit) 2.5 4.1 -64.0 90 55 -38.9
S. Korea (won) 850 1,290 -51.7 430 283 -34.2
Source: Taskinsoy (2013b); Cheetham (1998)
Table 10: IMF Financial Support Packages (In $billion)

Countries Thailand Indonesia Korea
Date Approved Aug. 20, 1997 Nov. 5, 1997 Dec. 4, 1997
Total Pledged $17.2 $40.0 $57.0
IMF 3.9 10.1 21.0
USA 0.0 3.0 5.0
World Bank 1.5 4.5 10.0
Asian Dev. Bank 1.2 3.5 4.0
Bank of Japan 4.0 5.0 10.0
Others 6.6 14.0 7.0
Source: IMF (1999); Taskinsoy (2013b)
16
Competition between the U.S. and Europe increased noticeably with the creation of the European
Economic Community14 (EC) in 1957 which became the European Union (EU) in 1993. The notion of
one large common market enticed U.S. companies to invest in Western Europe where countries began
accumulating dollars in foreign reserves (Figure 9). Technology was at the forefront of an accelerated
transformation in the 1950s and 1960s; for instance, first commercial telecommunications satellite
was launched in 1965, fax machines were available in the 1970s, and containerized shipping reduced
the cost of moving goods across the world; as a result, world trade grew exponentially.
Source: Statista, https://www.statista.com/chart/14850/foreign-reserves-by-european-country/

Figure 9: European countries foreign reserves (2016-17, in $billion)
Over four decades, since the collapse of the Bretton Woods system of fixed exchange rates in 1973,
there have been numerous attempts to kill off, deflate, or end the dollar’s prolonged hegemony;
Chinese renminbi is the latest addition in this effort, but only about 2% of global reserves in renminbi
fell short of expectations to replace the dollar. While the shares of both pound and yen are less than
5% each, the creation of the euro has only made a minor dent into the dollar’s primacy. Before euro’s
debut in 1999, the dollar’s share in foreign reserves was circa 70% (70% in 2000 and 71% in 2001).
The U.S. dollar’s hegemonic position is not a fluke; on the contrary, it is backed by the four pillars of
the American supremacy; (1) economic power; (2) military power; (3) technological power; and (4)
geopolitical power. Because the U.S. has the largest and most liquid bond market (over $21 trillion),
central banks stash over $7 trillion of reserves in the U.S. bond market to earn interest (Table 11).
14 The Economic Community was formed by Belgium, France, Italy, Luxembourg, the Netherlands and West Germany.
17
2.1 Addiction to Dollars: A Path to Economic and Financial Crises
Two decades of financial stability (1950s and 1960s) underpinned by steady growth – on average of
6% in advanced nations and the absence of instability-inflicting macroeconomic events prompted
large banks in the U.S. and across Europe to embark on a search-for-yield to make up for the squeezed
profit margins due to low or negative real interest rates. At this background, banks found the solution
in investing the dollar glut (deposits of oil-rich countries) in sovereign debt instruments of the Latin
American countries (Cline, 1984; Delvin & Davis, 1995; Eichengreen et al., 2003; Manasse & Roubini,
2005). The decade of the 1970s began with the “Nixon shock”, i.e. President Nixon cut the dollar’s link
to gold, and the collapse of the Bretton Woods system of fixed exchange rates; the negative impact
was amplified by Yom Kippur (Arab-Israeli) War in 1973; oil shock in 1973-74 as OPEC sharply raised
oil prices as a retaliation for the U.S. aid to Israel during the war; and the forced liquidation of
Germany’s Cologne-based Bankhaus Herstatt15 in 1974 (see Kindleberger & Alibar, 2005).
Table 11: 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)
A confluence of driving and contributing forces played a role in the Latin American debt crisis in the
1980s (i.e. global imbalances, macroeconomic instability, adverse implications of capital mobility and
financial liberalization, domestic policy issues, economic and financial problems), but especially three
actors played a crisis-intensifier role in the debt accumulation process; 1) excessive borrowing by the
debtor countries’ governments (Table 11), and their use of short-term external funds (mainly dollars)
15 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.
18
to finance long-term infrastructure projects (i.e. maturity mismatch) and deficits; 2) without due
diligence (lax, ambitious lending practices), creditor banks invested petrodollars in various sovereign
debt instruments; and 3) multilateral institutions such as the IMF and the World Bank carelessly
pushed the governments of Brazil, Mexico, and Argentina to implement “free market capitalism”
strategy; this neoliberal strategy was highly welcome by creditors and investors in advanced
economies (Bakker & Chapple, 2002; Caballero et al., 2015; Delvin & Davis, 1995; IMF, 2012).
The Latin American debt crisis in the 1980s and the Asian crisis in the late 1990s (déjà vu) are perfect
examples of not understanding the shared roles, responsibilities, and accountability (Abdelal, 2006;
Bhagwati, 1998; Bianchi, 2011); therefore, the history repeated itself and will do so in the future. The
last famous three financial crises (Asian crisis of 1997-98, sub-prime (mortgage) debacle of 2006, and
global financial crisis of 2008) have revealed the naked truth about a severe mismatch (disconnect)
between the supply side (creditor firms, governments – central banks, multilateral organizations such
as the IMF and the World Bank) and the demand side (debtor countries, firms, and domestic financial
authorities). Although theoretically international capital mobility helps integration in the world trade
and contributes to positive economic developments, in reality, capital mobility as part of financial
liberalization (free market capitalism) has been a bitter experience (tears) for Latin America and Asia
(ADB, 1997; Baig, 2001; Baig & Goldfajn, 1999; Bello, 1998; Berg, 1999; Bisignano, 1998; Boughton,
2001; Calvo, 1998; Carr & Kolluri, 2001). Prior to and during both events, greater risk-taking on the
debtor side and predatory lending (lax credit environment) on the creditor side have been at the
epicenter; and in the aftermath, contraction (capital hoarding by banks) due to tight-money policies
and a sharp reversal of capital flows (capital flight to safety) was the case in both crises.
International capital movements did not contribute to long-lasting positive economic developments
in Latin America and in some parts of Asia for the following reasons;
 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); private companies and households borrowed more in
dollars than domestic currencies (i.e. high interest rates and access to foreign borrowing).
 In just less than a decade (between 1975 and 1983), the aggregate long-term foreign debt of the
Latin American countries 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% (i.e. over $330 billion). This massive debt contributed to the build-up of
macroeconomic imbalances across Latin America (Rodrik, 1989, 1998; Wiesner, 1985).
19
 The reasons for external borrowing and the resultant imbalances were varied among the Latin
American nations (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 fiscal expansionary policies (e.g. Sachs, 1989). In four of the
most indebted Latin American countries, explicit government guarantees were a common feature.
Table 12: 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
 Search for yield (better real returns on marginal investment) in 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).
20
 Apart from macroeconomic developments and country-specific factors, borrowing frenzy (craze)
by the large economies in Latin America, 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).
 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.
 After a sudden reversal of capital flows in an acute stress, 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 (low domestic savings) and
fueled by vast consumption was not sustainable in these economies; with credit rationing, the
output in each affected country was disrupted and returns were distorted.
 Prior to the debt crisis of the 1980s, Latin America was among the most dollarized regions of the
world; Reinhart et al. (2003) classified the dollarized economies into four types (Table 13);
Table 13: Varieties of dollarization
Private sector debt accounts for Private sector debt accounts for
ten percent or more of total less than ten percent of total
external debt. external debt.
At least ten percent of broad

money or of domestic public debt
are denominated in or linked to a
Type I Type II
foreign currency.
Less than ten percent of broad

money and of domestic public
debt are denominated in or linked
Type III Type IV
to a foreign currency.
Source: Reinhart et al. (2003)
In the cases of the Latin American countries in the 1980s, dollarization was linked to decisions and
activities of the governments which increasingly issued government debt in foreign currencies
(mainly dollar) to finance their fiscal deficits. Between 1996 and 2001, Reinhart et al. (2003) show
that locally issued government debt in foreign currency by governments increased from about 11
in 1996 (around $30 billion) to 22 as of end-2001 ($230 billion). Domestic dollarization has been
persistently high in the Latin American countries since the early 1980s (Table 14, 15, 16, and 17).
21
Table 14: Varieties and degrees of dollarization, by region: 1980-1985
No. of countries Foreign Share of
Composite Total
currency Private debt
Type Type Dollarization External
Total deposits to in total
III IV Index Debt to GDP
broad money external debt
(Scale 0-30) (percent) (percent) (percent)
Africa 43 5 38 6 0 67 3
Emerging Asia 23 10 13 4 3 53 4
Middle East 13 6 7 5 11 38 8
Transition Economies 0 0 0 0 0 33 0
Western Hemisphere 29 15 14 6 5 60 10
Of which
Caribbean 12 1 11 4 1 75 1
Central America 6 4 2 7 1 54 8
South America 11 10 1 7 10 58 20
Total 108 36 72

Composite Total
Africa 46 7 39 8 2 114 2
Emerging Asia 26 14 12 6 8 88 7
Middle East 14 10 4 8 20 66 11
Of which
Caribbean 12 2 10 6 4 198 1
South America 11 8 3 9 23 61 8
Total 137 58 79

Composite Total
Africa 48 15 33 9 7 126 3
Emerging Asia 26 16 10 7 11 91 13
Middle East 14 12 2 8 21 60 19
Of which
Caribbean 12 5 7 6 11 101 1
South America 11 11 0 14 35 47 27
Total 143 90 53
22
Table 17: 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
 A chorus of economists argue that the Latin American debt crisis was the inevitable outcome of
governments without macroeconomic discipline; furthermore, partial dollarization (or liability
dollarization where locally issuance of government debt in dollars was a widespread practice)
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 dollarization hindering policy decisions (Calvo & Reinhart, 1999; Nicolo´ et al., 2003).
23
From the “lost decade” of the 1980s to the “golden decade” of the 1990s, the salient terminology is
the only thing that has changed; as if the elongated addiction to dollar was not the main ingredient in
the making of the Latin American debt crisis, the period of the 1990s was rattled with its own unique
crises. This time was not different (Reinhart & Rogoff, 2009), addiction to dollar became more intense
and disruptive; only the location (i.e. East Asia and Pacific) and the actors changed (Furman & Stiglitz,
1998; Krugman, 1994, 2009; Nanto, 1998; Page, 1994; Radelet & Sachs, 1998; World Bank, 1992).
 Oops dollars did it again; the financial mayhem caused by the dollar addiction was repeated again
in Asia in the late 1990s. With the transition of main countries in Asia from developing countries
to emerging markets attracted huge capital inflows and investments. Different from Latin America,
capital inflows mainly came from commercial banks, but similar to Latin America, massive capital
flows caused bubbles to form in the equity and housing markets, this in turn spooked inflation.
 As pessimism engulfed the markets, risk-averse foreign investors in a herd mentality began pulling
their money out; the contagious negative sentiment caused a sudden reversal in capital flows, this
caused illiquidity in domestic banking sectors and inability to rollover the short-term bank loans,
the repayments of which were demanded by the foreign creditors. Banks were prompted to freeze
funds (i.e. capital hoarding); moreover, plummeted Asian currencies due to repeated speculative
attacks caused domestic demand to contract sharply, leading to a severe recession (Figure 10).
Source: https://corporatefinanceinstitute.com/resources/knowledge/finance/asian-financial-crisis/
Figure 10: Timeline of the Asian crisis
 Reminiscence of the Latin American debt crisis, the Asian crisis of 1997-98 was also caused by
same triggers; balance-sheet mismatch (banks’ and non-banks’ high equity-to-debt ratios and low
savings); currency mismatch (short-term borrowed foreign funds were lent back to domestic
24
projects in local currency); and maturity mismatch (dollar denominated short-term loans were
lent to long-term projects in local currency). As illustrated in Figures 11, while banks in Indonesia
mainly borrowed from Euro area banks, Korea preferred Asia-Pacific banks (particularly Japanese
banks), Malaysia borrowed from US banks and Thailand from UK banks. As shown in Figure 12,
94% of the claims on emerging Asia16 belonged to banks in four countries (other creditors owned
6%); namely, Japanese banks (42%), Euro-area banks (36%), US banks (10%), and UK banks (7%).
At the breakout of the Asian crisis in 1997, Japanese banks were first to pull out (Figure 13).
Source: BIS, https://www.bis.org/publ/qtrpdf/r_qt1803b.htm

Figure 11: Credit to emerging Asia, a consolidated view

Figure 12: Main creditors and their relative exposures
16 Emerging Asia consists of Indonesia, Korea, Malaysia, Philippines, and Thailand.

25
Figure 13: The common lender channel in the Asian financial crisis
 As soon as the Asian financial crisis broke out in July 1997 triggered by the collapse of Thailand’s
baht on 2 July 1997, followed by the devaluations of Philippines’ peso and Indonesia’s rupiah on
18 July 1997 (the IMF was called for financial assistance and over $19 billion bailout package was
extended to Thailand), foreign creditors in a panic demanded repayment of their short-term loans
in an attempt to pull out of emerging Asia (i.e. Korea and ASEAN-417; China, Vietnam, Myanmar,
and Cambodia were least affected) and re-direct capital flows to non-Asian EMEs18 (Figure 13); as
a consequence of the creditors’ selfish move, domestic banks in crisis-affected countries suffered
a severe illiquidity problem, which intensified the crisis’ farfetched implications and caused a
significant contraction in demand and access to capital (i.e. credit crunch, see Stiglitz, 2002).
 Similar to the antecedent debt crisis a decade earlier, the Asian crisis in the late 1990s in most part
was homegrown crisis because the crisis affected countries on account of considerable structural
weaknesses were not quite ready for a financial liberalization on steroid, i.e. capital flows were
much needed which were perceived as a gateway to leap into higher economic performance, but
at the same time these countries were caught up without prior preparation and understanding of
dangers of capital flows (i.e. double-edged sword). Capital flows are only useful when utilized with
responsibility and accountability, as well as without any explicit or implicit guarantees provided
by public entities; conversely, commercial banks under feeble regulation and supervision engaged
in an external borrowing spree. At this background, overborrowing (mostly dollar-denominated
short-term loans) fostered the formation of bubbles in asset prices, stock and housing markets
(see Fisher, 1998; Karunatilleka, 1999; McKinnon, 1993; Pattillo et al., 2003; Pomerleano, 2009).
17 ASEAN-4: Indonesia, Malaysia, Philippines, and Thailand)

18 Non-Asian EMEs: Emerging economies in Africa, Middle East, Latin America, and Europe.
26
 In the post-WWII era (i.e. there was stability between 1950 and through 1960s), the IMF became
acquainted with the current account crisis during the Latin American debt crisis in the 1980s. This
was a major test, but the IMF flunked and its politically influenced neoliberal strategy (i.e. free
market capitalism) aggravated the crisis and the ensuing financial losses. Even though the IMF’s
one-size-fits-all textbook strategy of tighter-money along with budget deficit reduction policies
played a crisis-intensifier role and 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), the IMF has always defended the appropriateness of its 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.
 The IMF was called again for emergency financial assistance in the late 1990s, but this time was
by countries in East Asia and Pacific (see Table 18). The nature of the crisis was different than that
of the 1980s (i.e. current account crisis – indebtedness by governments in Latin America versus
capital account crisis – foreign loans (capital flows) to commercial banks in Asia), nevertheless the
IMF failed once again as it insisted applying univariate solutions to multivariate problems (IMF,
1999, 2003, 2012; Budina & Tuladhar, 2010; Caramazza et al., 2000; Corsetti et al., 2002).
Table 18: IMF financial support packages

In $billion
Countries Thailand Indonesia Korea

Date Approved Aug. 20, 1997 Nov. 5, 1997 Dec. 4, 1997
Total Pledged $17.2 $40.0 $57.0
IMF 3.9 10.1 21.0
USA 0.0 3.0 5.0
World Bank 1.5 4.5 10.0
Asian Dev. Bank 1.2 3.5 4.0
Bank of Japan 4.0 5.0 10.0
Others 6.6 14.0 7.0
Source: IMF (1999); Taskinsoy (2013b)
 In the aftermath of both the Latin American debt crisis in the 1980s and the Asian crisis in late
1990s, the IMF economists have been brutally criticized for being “too arrogant” and not accepting
their crisis-intensifier role via the implementation of wrong policies. Irrespective of symptoms or
country-specific variances, the IMF stubbornly gave 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 this fact. When an economy is on the verge of a financial
meltdown, solutions should be tailored towards stopping the crisis first, structural reforms later.
27
2.2 Reasons for the Elongated Addiction to Dollar
Various levels of addictions to dollar are linked to instability; whether partially or fully dollarized19,
or liability dollarization20 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.
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-denominated21, 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 – DJIA22
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 index23 ($42.4 trillion), and US bond market24 ($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).
19 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).
20 Excessive borrowing of dollar by the private and public sectors and households.
21 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
22 https://en.wikipedia.org/wiki/Dow_Jones_Industrial_Average
23 https://en.wikipedia.org/wiki/S%26P_500
24 https://www.forbes.com/sites/kevinmcpartland/2018/10/11/understanding-us-bond-market/?sh=1978a31f1caf
28
 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 other than the U.S. is able to do this). According
to COFER25, the US dollar share of global foreign exchange reserves is three times more than euro
(Table 19); nevertheless, dollar accounting for 59.15% of total foreign exchange reserves is a 25-
year low (Figure 14), see Table 20 for quarterly results and Table 21 for a historical perspective.
Table 19: 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
Source: IMF; http://data.imf.org/?sk=E6A5F467-C14B-4AA8-9F6D-5A09EC4E62A4

Figure 14: Currencies percent of total foreign exchange reserves
25 IMF, https://data.imf.org/?sk=E6A5F467-C14B-4AA8-9F6D-5A09EC4E62A4
29
Table 20: 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.
30
Table 21: 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.
31
 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 dollarization26 has been prevalent
in Asia, Latin America and some parts of Europe (i.e. 20% in Greece, 45% in Turkey over $200
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 15).
Source: Research and Rank, https://twitter.com/researchandrank/status/1394935544203726855/photo/1

Figure 15: Dollar reserves of top 9 countries
High levels of dollarization have been a bitter experience virtually in all countries, from developing
to emerging economies and to LICs (Powell & Sturzenegger, 2000; Reinhart et al., 2003; Rennhack
& Nozaki, 2006); the usual and most anticipated side effect of this phenomenon is high inflation
(double digit in LICs). Dollarization at varying degrees may occur in countries where one or more
of the following developments take place (e.g. Duma, 2011); hyperinflation and prone to macro
shocks (i.e. 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); a deeply entrenched trend.
26 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.
32
 Mast commodities are valued in dollars. 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 22). 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 funds27;
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 22: 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
27 https://www.thebalance.com/what-is-a-petrodollar-
3306358#:~:text=The%20dollar%20is%20the%20preeminent,nations%20own%20their%20oil%20industries.
33
 Man-made imperialism. The United States was not a colonial power; quite the opposite, it was
colonized by the European imperial powers (French, British, Spanish, Dutch, etc.); and ironically,
at its birth as a nation, the U.S. did not even have its own national currency when it declared
independence from Great Britain on 4 July 1776 (Figure 16 shows dominant currencies prior to
dollar’s arrival). Prior to the US (Continental) Congress passed the Coinage Act of 1792 to choose
dollar28 as its monetary unit and the “$” symbol as its currency’s sign, Spanish peso (i.e. silver
dollar) and British pound sterling were widely used as a legal tender in Europe and Americas. Two
reserve currencies arrived at the Bretton Woods Conference, but the dollar’s main competition
pound sterling was eliminated when the UK delegation’s leader John Maynard Keynes ridded the
UK of the reserve currency (Eichengreen & Flandreau, 2009) and its imperial grandeur (Aizenman
& Lee, 2005; Eichengreen, 2009; Boughton, 2006; Dooley et al., 2004; Hudson, 1972).
Source: http://bmg-group.com/irreversible-trends-driving-gold-10000/
Figure 16: Global reserve currencies since 1450
 No other currency has the right mix of elements to challenge dollar’s hegemony. Of course, this
has not stopped numerous attempts over the years to kill off, deflate, or end dollar’s primacy; but
each time an event gave rise to the hope (i.e. euro’s s debut), the hopes of wishful folks were
derailed by the sovereign debt crisis. Chinese renminbi (yuan) was the latest attempt (in October
2016, the IMF added yuan in its currency basket called the Special Drawing Rights – SDR), but this
28 The first silver coins under the name of Joachimsthaler (shortened to thaler) were minted in 1515 in Joachimsthal in the
borders of the Czech Republic. During 1600-1850, dollar (English version of the thaler) was used in minted silver coins
both in North America and central Europe including Spanish peso and Portuguese eight-real piece.
34
too was interrupted by a silly trade war between the U.S. and China; moreover, the breakout of the
COVID-19 related health crisis diminished the hopes altogether; besides, China and Japan are the
two largest holders of dollars in order to keep the value of own currencies (Figures 17 and 18).
Source: IMF; https://en.wikipedia.org/wiki/Reserve_currency

Figure 17: Dollar’s share of allocated global official reserves
Source: Statista, https://www.statista.com/chart/14471/china-holds-the-most-foreign-currency-reserves/

Figure 18: China’s foreign exchange reserves (2000 - 2017)
35
 Four pillars of dollar’s power. It is unlikely that a fiat currency can achieve dominance unless
some direct and indirect factors contribute to its hegemony, four pillars are essential; political
power, military power, economic power, and technological power.
Pilar 1: Political Power. The US President and various government branches of the U.S. have a
forceful influence on other countries and their representatives. 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 the new millennium (specifically since the GFC of
2008), America has increasingly weaponized the dollar and has been keen on using it as a warless
economic weapon of mass 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, President Trump has been very aggressive in pushing sanctions as a foreign
policy; as illustrated in Figure 15, he has imposed a total of 1,474 sanctions on entities.
Source: Gibson, Dunn & Crutcher LLP; https://www.gibsondunn.com/

Figure 19: Number of sanctioned countries and entities (annual additions)
Pilar 2: Military Power. The U.S. military might, most powerful and most advanced, ranks number
one in the world (i.e. initially, US Navy was central to the military dominance). According to the
2018 Credit Suisse Report (Table 19), the 2018 U.S. military budget of $601 billion was 7 times
higher than that of Russian military ($84.5 billion). The combined military budget of the top 20
countries in 2018 was $1.31 trillion; European powers’ military spending on average was $38.4
billion; Germany $40.2bn, the UK $60.5bn, France $62.3bn and Italy $34bn (see Table 23).
36
Table 23: Military strength ranking (2017)a
Credit Suisse Report (2018)b

World Power Country Military Total Fighter Combat Naval Budget
Country World Budget
Rank Rating Population Personnel Aircraft Aircraft Tanks Assets* $billion Country
Rank $billion
United States 1 0.0857 323,995,528 2,363,675 13,762 2,296 5,884 415 587.8 United States 1 601.0
Russia 2 0.0929 142,355,415 3,371,027 3,794 806 20,216 352 44.6 Russia 2 84.5
China 3 0.0945 1,373,541,278 3,712,500 2,955 1,271 6,457 714 161.7 China 3 216
India 4 0.1593 1,266,883,598 4,207,250 2,102 676 4,426 295 51.0 Japan 4 41.6
France 5 0.1914 66,836,154 387,635 1,305 296 406 118 35.0 India 5 50.0
United Kingdom 6 0.2131 64,430,428 232,675 856 88 249 76 45.7 France 6 62,3
Japan 7 0.2137 126,702,133 311,875 1,594 288 700 131 43.8 South Korea 7 62.3
Turkey 8 0.2491 80,274,604 743,415 1,018 207 2,445 194 8.2 Italy 8 34.0
Germany 9 0.2609 80,722,792 210,000 698 92 543 81 39.2 United Kingdom 9 60.5
Egypt 10 0.2676 94,666,993 1,329,250 1,132 337 4,110 319 4.4 Turkey 10 18.2
Italy 11 0.2694 62,007,540 267,500 822 79 200 143 34.0 Pakistan 11 7.0
South Korea 12 0.2741 50,924,172 5,829,750 1,477 406 2,654 166 43.8 Egypt 12 4.4
Pakistan 13 0.3287 201,995,540 919,000 951 301 2,924 197 7.0 Taiwan 13 10.7
Indonesia 14 0.3347 258,316,051 975,950 441 39 418 221 6.9 Israel 14 17.0
Israel 15 0.3476 8,174,527 718,250 652 243 2,620 65 15.5 Australia 15 26.1
Vietnam 16 0.3587 95,261,021 5,488,500 278 76 1,545 65 3.4 Thailand 16 5.4
Brazil 17 0.3654 205,823,665 1,987,000 697 43 469 110 24.5 Poland 17 9.4
Taiwan 18 0.3765 23,464,787 1,932,500 850 286 2,005 87 10.7 Germany 18 40.2
Poland 19 0.3831 38,523,261 184,650 465 99 1,065 83 9.4 Indonesia 19 6.9
Thailand 20 0.3892 68,200,824 627,425 555 76 737 81 5.4 Canada 20 15.7
Iran 21 0.3933 82,801,633 934,000 477 137 1,616 398 6.3 ---- ---- ----
Australia 22 0.4072 22,992,654 81,000 465 78 59 47 24.1 ---- ---- ----
North Korea 23 0.4218 25,115,311 6,445,000 944 458 5,025 967 7.5 ---- ---- ----
Saudi Arabia 24 0.4302 28,160,273 256,000 790 177 1,142 55 56.7 ---- ---- ----
Algeria 25 0.4366 40,263,711 792,350 502 89 2,405 85 10.6 ---- ---- ----
Source: https://www.businessinsider.com/most-powerful-militaries-in-the-world-ranked-2018-2
Notes: a Global Firepower’s ranking pays particular attention to the manpower; b The Credit Suisse Report calculates the military strength based on the following weights of
total score: active personnel (5%), tanks (10%), attack helicopters (15%), aircraft (20%), aircraft carriers (25%), and submarines (25%).
* Number of aircraft carriers out of total naval assets; United States (19), Russia (1), China (1), India (3), France (4), United Kingdom (2), Japan (4), Egypt (2).
The United States has more aircraft carriers than all top 24 countries combined; 19 compared to 17. Also the military spending of the 20 countries in the aggregate is $1.32
trillion whereas the United States’ military budget alone is $601 billion which amounts to 45.5$.
37
The U.S. has more aircrafts (i.e. 13,762) than all top 24 countries combined. The U.S. spends nearly
three times more than China’s $216 billion defense budget. The only measurement the U.S. lags
behind China is the manpower of active military personnel, 1,400,000 and 2,333,000 respectively
(Table 14 includes all personnel); however, the U.S. makes up for the manpower gap with a strong
airpower (i.e. 13,892 aircrafts as opposed to China’s 2,860) and a massive carrier fleet (i.e. 19
compared to China’s 1); in fact, the combined aircraft carriers for the top 24 countries is just 17.
Pilar 3: Economic Power. By 1900, the U.S. succeeded Britain as the dominant economic power
and has maintained this position since then. With most valuable nation brands’ market value of
$26 trillion (Table 24), the world’s leading top multi-billion dollar technology companies are US
origin (Table 25). U.S. ranked 1st in the 2018 digital competitive countries ranking (Table 26).
Table 24: The most valuable nation brands

US Dollar, Billion ($bn)
Rank Rank Brand value Change Brand value Brand Brand

Nation Brand
2018 2017 2018 ($bn) % 2017 ($bn) rating 2018 rating 2017
1 1 United States 25,899 23 21,055 AAA AAA-
2 2 China 12,779 25 10,209 AA AA
3 3 Germany 5,147 28 4,021 AAA AAA-
4 5 United Kingdom 3,750 20 3,129 AAA AAA
5 4 Japan 3,598 5 3,439 AAA- AAA-
6 6 France 3,224 9 2,969 AA+ AA+
7 7 Canada 2,224 8 2,056 AAA- AAA-
8 9 Italy 2,214 9 2,034 AA- A+
9 8 India 2,159 5 2,046 AA AA
10 10 South Korea 2,001 8 1,845 AA AA
Source of data: Brand Finance
Table 25: Largest companies by market cap
Company Market Cap (2021) Stock Price (Feb 2021) Country
Apple $2.69T $164.85 United States

Microsoft $2.23T $297.31 United States
Alphabet (Google) $1.78T $2,690.00 United States
Amazon $1.57T $3,076.00 United States
Tesla $837B $809.87 United States
Berkshire Hathaway $714B $479.35 United States
Nvidia $602B $241.57 United States
Meta (Facebook) $602B $210.48 United States
Visa $472B $219.27 United States
United Health $448B $475.75 United States
JPMorgan Chase $437B $147.97 United States
Johnson & Johnson $436B $166.00 United States
Procter & Gamble #379B $158.24 United States
Walmart $378B $136.38 United States
Mastercard $364B $369.09 United States
Bank of America $363B $45.02 United States
Source: Companies Market Cap, https://companiesmarketcap.com/; T: Trillion; B: Billion
38
Table 26: World digital competitiveness ranking 2018
Country Overall Ranking Knowledge Technology Future Readiness

2015 2016 2017 2018 2015 2016 2017 2018 2015 2016 2017 2018 2015 2016 2017 2018
USA 2 2 3 1 6 4 5 4 6 5 6 3 3 1 2 2
Singapore 1 1 1 2 1 1 1 1 1 1 1 1 5 4 6 15
Sweden 5 3 2 3 2 2 2 7 9 4 5 5 9 8 5 5
Denmark 8 8 5 4 9 8 8 8 13 12 10 10 6 6 1 1
Switzerland 7 7 8 5 5 3 4 6 11 9 8 9 10 10 13 10
Norway 11 9 10 6 17 17 15 16 3 3 2 2 14 13 12 6
Finland 3 6 4 7 7 9 9 9 7 7 4 4 4 5 4 8
Canada 4 5 8 8 3 7 3 3 17 14 13 12 2 3 8 9
Netherlands 6 4 6 9 14 13 11 12 15 10 9 8 1 2 3 4
UK 12 12 11 10 12 12 10 10 18 18 16 13 11 11 9 3
Hong Kong SAR 14 11 7 11 8 6 6 5 5 2 3 6 25 27 17 24
Israel 10 13 13 12 4 5 7 2 22 24 27 25 7 9 11 7
Australia 9 14 15 13 11 16 18 15 12 15 15 14 8 7 14 11
Korea Rep. 18 17 19 14 13 15 14 11 16 13 17 17 24 25 24 17
Austria 26 19 16 15 16 12 12 13 29 28 28 26 19 19 15 14
Taiwan 15 16 12 16 19 19 16 19 4 8 7 11 20 22 16 22
UAE 22 25 18 17 38 35 38 36 10 20 14 7 18 17 7 12
Germany 17 15 17 18 10 10 13 14 25 25 21 21 13 14 18 20
New Zealand 13 10 14 19 15 14 20 21 8 6 11 16 16 15 20 18
Ireland 25 20 21 20 26 25 25 22 27 27 25 29 12 12 10 13
Iceland 24 26 23 21 33 32 30 28 20 22 20 18 17 18 21 19
Japan 23 23 27 22 24 23 29 18 21 19 23 23 22 23 25 25
Belgium 19 18 22 23 21 20 22 25 24 21 24 24 15 16 22 23
Luxembourg 16 21 20 24 23 29 27 32 2 11 12 15 23 24 23 21
Estonia 27 27 26 25 30 30 28 29 19 17 19 20 26 26 26 26
France 20 22 25 26 20 21 19 20 23 23 22 19 21 20 28 27
Malaysia 21 24 24 27 25 22 17 17 14 16 18 22 27 28 27 29
Qatar 32 28 28 28 39 37 35 37 38 31 31 27 28 21 19 16
Lithuania 28 29 29 29 18 18 21 23 28 29 29 30 34 33 31 33
China Mainland 33 35 31 30 22 24 23 30 37 39 36 34 39 38 34 28
Spain 30 30 30 31 35 36 33 31 35 32 33 33 29 30 29 30
Portugal 29 31 33 32 29 31 31 27 30 35 37 36 31 31 35 32
Slovenia 39 36 34 34 28 26 26 26 43 40 40 38 41 35 36 35
Latvia 34 33 35 35 32 33 34 34 32 33 32 32 37 39 41 39
Poland 38 38 37 36 31 27 32 33 36 36 39 37 49 51 39 37
Chile 37 37 40 37 53 51 52 47 31 34 34 35 32 32 33 31
Thailand 42 39 41 39 48 42 44 44 33 30 30 28 50 48 45 49
Russia 41 40 42 40 27 28 24 24 44 47 44 43 55 53 52 51
Source: IMD World Digital Competitiveness Ranking 2018
39
Pilar 4: Technological Power. The United States is not only the world’s most dominant military
and economic power (Table 27), but its technological imprint (i.e. the creation of most innovative
and cutting-edge technologies) also spans the world (Table 28).
Table 27: Best countries for power
2021 Power 2020 Power GDP Per Population

Country GDP
Ranking Ranking Capita million
United States 1 1 $21.40T $65,280 328.00

China 2 3 $14.30T $10,217 1,400.00
Russia 3 2 $1.69T $11,498 144.00
Germany 4 4 $3.86T $46,468 83.10
United Kingdom 5 5 $2.83T $42,354 66.80
Japan 6 7 $5.06T $40,113 126.00
France 7 6 $2.72T $40,380 67.20
South Korea 8 9 $1.65T $31,846 51.70
Saudi Arabia 9 10 $793B $23,140 34.30
United Arab Emirates 10 11 $421B $43,103 9.77
Source: U.S. News29, https://www.usnews.com/news/best-countries/power-rankings

T: $trillion; B: $billion
Table 28: Best countries for entrepreneurship
US China Russia Germany UK Japan France
Overall rank 3 9 22 2 4 1 14
Connected to the rest of the world 100.0 87.9 71.3 94.9 97.5 91.7 98.8
Educated population 67.9 33.6 49.5 97.6 98.9 98.8 93.0
Entrepreneurial 100.0 97.6 42.4 76.2 58.5 85.0 31.9
Innovative 84.9 91.6 39.4 78.6 51.2 100.0 36.9
Provides easy access to capital 100.0 46.9 16.7 65.4 68.2 57.2 45.7
Skilled labor force 77.0 90.7 55.6 93.5 77.4 100.0 56.3
Technological expertise 95.2 96.9 75.8 88.0 73.2 100.0 29.1
Transparent business practices 39.1 16.9 8.3 99.8 65.8 74.7 43.9
Well-developed digital infrastructure 97.8 91.3 55.3 87.7 92.5 100.0 68.5
Well-developed infrastructure 97.0 67.6 49.7 98.8 98.4 100.0 96.1
Well-developed legal framework 77.8 13.1 19.0 100.0 98.9 73.0 91.3
Source: U.S. News, https://www.usnews.com/news/best-countries/entrepreneurship-rankings
3.0 Concluding Remarks
Since the world’s first known bank was established in 1590 (Berenberg Bank) and the first central
bank in 1668 (Sveriges Riksbank), banks have been at the epicenter of most financial and economic
crises throughout history, nevertheless there is no perfect substitute for them in capital markets. As
an integral component of the financial system, banks play a crucial role in financial intermediation via
29 The annual Best Countries Report is a joint venture between U.S. News and World Report, the BAV Group, and Wharton
Business College.
40
the allocation of scarce financial resources from savers to investors (i.e. inventors, proprietors, and
businesses) who enter into intertemporal contracts through time and space. As Reinhart and Rogoff
(2009) described, over the “Eight Centuries of Financial Folly” the nature and root causes of crises
have mutated from Ponzi scheme (the 16th century Dutch tulipmania) to speculative mania (the 17th
century Mississippi and South Sea bubbles), and from that to systemic (Asian crisis in the late 1990s),
and finally to irrational exuberance (i.e. the dot.com, the subprime debacle, and the Great Recession
of the 21st century). From the famous first three bubbles to the famous last three bubbles, 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. Unfortunately, not all these high magnitude crises
(shocks) were explainable by the concept of market fundamentals where supply and demand curves
were the actual determinants of high asset prices (i.e. the pattern of price fluctuations).
Capital flows (FPI and FDI30) are necessary and extremely needed for the capital-poor countries (i.e.
underdeveloped, developing and emerging economies) to finance social and economic programs. For
the modernization and globalization efforts to narrow the gap to the advanced nations, a constant as
well as uninterrupted flow of foreign capital is crucial, which increases the ability of governments in
these countries to finance mega infrastructure projects (i.e. building roads, airports, dams, bridges,
railways, etc.). The prolonged addiction to the U.S. dollar is blamed for the contemporaneous crises
(Latin American debt crisis and the Asian financial crisis); true, lax flow of the dollar glut to these
regions caused financial mayhem, but the governments blaming the crises on capital flows was just a
scapegoat to camouflage their inability to administer massive liquidity. The following causal elements
played a pivotal role in the crises since the 1980s; balance-sheet mismatch (excessive leverage, high
debt ratios, inadequate capital both in quantity and quality); currency mismatch (residents and firms
borrowed dollars but earned domestic currency); and maturity mismatch (dollar denominated short-
term loans from foreign creditors were lent to long-term projects in local currency).
The last six financial crises with farfetched implications were either originated in the U.S. or fostered
by both technological developments and financial innovation in the United States and to a degree in
Europe. Consequently, living standards in many countries have deteriorated fast (income and gender
inequality widened); unemployment has skyrocketed (even in advanced economies); societies have
been jolted from their roots with millions of displaced people; the poverty levels in many developing
30 FPI: Foreign portfolio investment (hot or soft money, short-term, in and out frequently); FDI: Foreign direct investment
(hard money, long-term, more preferred and better for the economy).
41
countries have increased substantially, therefore the mood of pessimism has grown as hopes have
nearly 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 the Russia-Ukraine war
made the fear among people reach to never seen before levels.
The U.S. dollar is a poison ivy, both are in abundance in the continental United States; an elongated
addiction to the dollar or upon contact with a poison ivy can be quite harmful, but neither one kills;
however, either one of the two can be an agonizingly painful experience that can leave unforgettable
permanent scars (i.e. deeply entrenched cracks in the financial system). In almost every economy in
the world, there is a degree of dollarization because dollar not only is the main international reserve
currency, but the majority of world trade involves dollar (i.e. oil, gold, and most other commodities
are priced in dollar). Even before the conclusion of WWII, the seeds of the modern financial crises
were sowed with the Breton Woods Agreement in 1944 which solidified the dollar’s ascendancy to
the throne and the watchdog institutions it created (the IMF and the World Bank) have served to
support the dollar’s hegemony. The following developments and events in the United States have
contributed to every financial, economic, or currency crisis in the post-WWII era;
 The U.S. dollar has become increasingly disruptive and damaging ever since the Federal Reserve
System (the Fed) was created on 23 December 1913 and began printing own Fed notes in 1914;
on the contrary to its main objective of alleviating financial crises, the Fed’s policy errors (i.e. tight-
money or expansive – quantitative easing) have made crises prolonged, costly, and systemic.
 The complex problems of a new dollar-centric monetary order agreed by the delegates of 44 Allies
at the 1944 Bretton Woods Conference coupled with its inflationary monetary mechanisms have
made other national currencies become more prone to devaluing from inflation and exchange rate
risks. Also the inherently inflationary institutions set up in 1944 (IMF and World Bank) “not only
permits and encourages but almost compels world inflation” (Hazlitt, 1984). Dooley et al. (2004)
assert that “Bretton Woods system does not evolve; it just occasionally reloads a periphery”.
 The collapse of the Bretton Woods system of fixed exchange rates and President Nixon’s decision
in 1971 to delink dollar and gold enabled the Fed to pursue unlimited printing of dollars through
credit expansion or commonly known as quantitative easing (QE) programs.
 U.S. government policies since 1970 (i.e. deregulation and self-regulation) created a new type of
less regulated banking system called shadow banking (investment banks and hedge funds) that
grew fast to become as important as commercial banks providing credit to the US economy.
 Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDMCA) was enacted by
President Jimmy Carter, which removed some restrictions and broadened banks’ lending powers.
42
 US Congress passed the Alternative Mortgage Transactions Parity Act (AMTPA) in 1982, allowing
non-federally chartered creditors (i.e. investment banks) to write adjustable-rate mortgages.
 U.S. government affordable housing policy initiated by the United States Department of Housing
and Urban Development (HUD) played an important role in causing the crises. For instance, the
government-sponsored entities (GSEs) Fannie Mae and Freddie Mac held $2 trillion worth of sub-
prime loans belonged to 13 million American barrowers.
 The Community Reinvestment Act (CRA) was passed in 1997 which encouraged banks to grant
mortgage loans to families with sub-prime (i.e. higher risk of default) credit scores.
 In 1998 onward, 25% of loans originated by CRA-covered lenders was subprime; for instance, the
CRA loan commitments between 1994 and 1997 were $4.5 trillion.
 The Gramm-Leach-Bliley Act, signed into law in 1999 by then president Bill Clinton, repealed the
Glass-Steagall Act of 1933 which separated commercial banks and investment banks. Six decades
later, the new Act ushered greater risk taking and enabled the investment banks to dominate loan
origination (i.e. in 2007, $1.3 trillion worth of loans were subprime adjustable rate mortgages).
 If we were to blame one person for the famous new bubbles, that person would be then Fed Chair
Alan Greenspan who persistently fought to keep over-the-counter (OTC) market (derivatives, CDS,
and CDO) unregulated (Greenspan advocated self-regulation). By 2008, the debt covered by CDS
contracts reached all time high ($48 trillion) and the notional value of the OTC derivatives rose
close to mindboggling $700 trillion by June 2008.
 Alan Greenspan’s speech on “irrational exuberance” in December 1996 prompted technological
growth. He encouraged investment in the stock market and the investors showed overoptimism
regardless of traditional metrics (i.e. price-earnings ratio) depicting a negative outlook about these
dot.com companies. With news media’s increased coverage of stocks, flocks of people rushed to
get on the bandwagon to trade in the stock market (aka day traders); nearly all dot.com companies
incurred net operating losses due to heavy spending on advertisement and promotions. Cash burn
rate of dot.com companies (a tool to calculate lifespan) in consequence of lavish spending pointed
to a cascade of forced liquidation as their main source of venture capital was no longer available.
The investor confidence took a hard blow from repeated accounting scandals by the prominent
companies (i.e. Enron and WorldCom); finally, Alan Greenspan’s plan to aggressively raise interest
rates sent chills to the stock market and ultimately caused the internet bubble to burst
 The top U.S. banks were allowed to move assets and liabilities off-balance sheet into legal entities
called structured investment vehicles (SIVs); this way, banks improved their capital base, created
more money to invest, and masked their weaknesses to circumvent regulation and supervision.
43
 Debt hangover; in the run up to the mortgage debacle of 2006 and the GFC of 2008, U.S. financial
institutions and households became hugely indebted (overleveraged). Taking advantage of the
housing boom (between 2001 and 2005) Americans had extracted nearly $5 trillion from the built
equity (equity extraction doubled from average $620 billion in 2001 to $1.43 trillion by 2005).
 Lax credit conditions31 coupled with low interest rates and predatory lending (i.e. the Fed reduced
funds rate from 6.5% in 2000 to 1.0% in 2003) encouraged borrowing; as a result, Americans had
become poorer in a period of two decades; household debt as a percentage of annual disposable
income increased from an average 77% in 1991 to over 120% in 2007.
 Financial innovation over the years (especially during 2004-07) has radically shifted from prime
loans to sub-prime loans; subprime mortgages (90% of subprime loans were adjustable-rate)
were bundled into financial products such as mortgage-backed securities (MBS), collateralized
debt obligations (CDO), credit default swaps (CDS). When the CDOs became worthless (over $100
billion in 2007), knock-on-effects resulted in a cascade of bank failures (i.e. Lehman Brothers).
 Defective mortgages; studies show that one out of three mortgages originated during 2006-07 did
not meet minimal lending standards; in fact, more than half of the mortgages Citigroup bought
from other mortgage originators (i.e. brokers) were defective (i.e. “liar loans”).
 Highly leveraged 7 entities, subject to little or no regulation, had $9 trillion in debt or guaranteed
obligations. In 2007, Lehman Brothers, Goldman Sachs, Merrill Lynch, Bear Stearns, and Morgan
Stanley had $4.1 trillion debt and the remaining $5 trillion belonged to the two GSEs - Fannie Mae
and Freddie Mac which were placed into conservatorship by the U.S. government in September
2008; Out of the five, Lehman Brothers went bankrupt, and some were either bailed out.
 Although printing and acceptance of paper money has gained momentum with the emergence of
central banks which are considered to be the alchemists of our modern financial system, cash is
no longer viewed as the “king” in an increasingly digitized world in the 21st century. The launch
of Bitcoin as the first successful cryptocurrency by Satoshi Nakamoto in January 2009 has spurred
central banks worldwide to consider launching own digital coins (CDCs).
 Since the 2008 global financial crisis, the abuse of sanction power as a foreign policy and the use
of dollar as a weapon by the U.S. government (Trump in particular) have forced countries like
China, Russia, Venezuela, Iran, and Turkey to have become overly cautious about participating in
dollar regimes. On that note, Iran began to use gold and Bitcoin to bypass heavy US sanctions and
the ongoing disruptive U.S. – China trade war prompted China to launch its own digital yuan.
31 Credit scores created by Fair Isaac Corporation (FICO) are used by various lenders to accept or decline credit applications
by borrowers. In early 2000, a subprime FICO score of 660 was dropped to 620 to qualify more borrowers for mortgage
loans. A loan type requiring no income, no job, no asset verification (NINJA) became increasingly popular.
44
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Elongated Addiction of Peripheries to Dollar: A Weapon of Mass Economic Destruction

Dr. John Taskinsoy a

Table 1: List of periphery countries

Bangladesh Benin Bolivia Burkina Faso Burundi

C. African Republic Chad Chile China Congo

Gambia Ghana Guinea-Bissau Haiti Honduras

India Indonesia Kenya Lesotho Madagascar

Malawi Mauritania Nepal Niger Nigeria

Papua New Guinea Philippines Rwanda Senegal Sierra Leone

Solomon Islands Sri Lanka Sudan Togo Zambia

Source: Babones (2005), https://en.wikipedia.org/wiki/Periphery_countries

Table 2: List of semi-periphery countries

Algeria Argentina Brazil China Egypt Finland Greece

India Indonesia Israel Iran Italy Malaysia Mexico

Norway Poland Portugal S. Arabia Singapore S. Korea Spain

Nigeria Taiwan Turkey Venezuela Zaire

Source: Wallerstein (1976), https://en.wikipedia.org/wiki/Semi-periphery_countries

entitled to conquer and control North America.

5 IOU stands for “I owe you”.

Table 3: World gold mine production survey 2018

Table 4: Gold mine production of selected countries (In tons)

Source: GFMS, Thomson Reuters (2017-2018)

Source: IMF, https://www.elibrary.imf.org/view/journals/001/2016/025/article-A001-en.xml

Table 5: Countries with highest dollar reserves

1960 ($ million) 1970 ($ million) 1980 ($ million) 1990 ($ million)

USA 19,198 USA 15,196 USA 158,710 USA 172,133

Source: IMF; https://www.youtube.com/watch?v=slIyijLSZ2o

Table 6: Countries with highest dollar reserves Author Forecast

Japan 373.36 China 2,986.9 China 3,091.5 Japan 1,800.0

Source: IMF; https://www.youtube.com/watch?v=slIyijLSZ2o

Source: CFA Institute Research Foundation (2016)

Source: CFA Institute Research Foundation (2016)

Source: CFA Institute Research Foundation (2016)

Source: OECD; https://www.cfr.org/backgrounder/foreign-investment-and-us-national-security

Source: World Bank, https://blogs.worldbank.org/psd/cheap-money-addiction-and-cold-turkey-risks

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

Table 7: Selected famous bubbles

Bubble Dates Impetus

Tulip mania 1673 Tulip cultivation

Source: CFA Institute Research Foundation (2016)

Table 8: External debt of Latin American countries (2020)

Total 1,623.38 2,220.22 86.77%

Source: World Bank; Wikipedia

Table 9: Impact of Asian crisis on currencies and GDP

Country Exchange rate (per $1 USD) GNP ($ billion)

Table 10: IMF Financial Support Packages (In $billion)

Source: Statista, https://www.statista.com/chart/14850/foreign-reserves-by-european-country/

Table 11: Capital flows to 7 largest Latin American economies

External Debt (% of Exports)

Source: Ertürk (2014)

Table 12: Structure of long-term debt

Table 13: Varieties of dollarization

At least ten percent of broad

Less than ten percent of broad

Source: Reinhart et al. (2003)

Table 15: Varieties and degrees of dollarization, by region: 1988-1993

Table 16: Varieties and degrees of dollarization, by region: 1996-2001

Source: Reinhart et al. (2003)

Source: BIS, https://www.bis.org/publ/qtrpdf/r_qt1803b.htm

Source: BIS, https://www.bis.org/publ/qtrpdf/r_qt1803b.htm

16 Emerging Asia consists of Indonesia, Korea, Malaysia, Philippines, and Thailand.

17 ASEAN-4: Indonesia, Malaysia, Philippines, and Thailand)

Table 18: IMF financial support packages