Dollar hegemony will come to an end eventually. This has important implications, but there is a way of stopping the transformation being too painful.

Right now, the US is still the world’s only economic superpower, and will come out of a trade war with its dominance still intact.

But this dominance is only temporary. This century will see first China and then India emerge as the world’s biggest economy. Right now, we are witnessing the very early stages in this transformation, and already we are seeing economic crisis as a result. The US will probably win the currency war everyone is talking about at the moment. But it won’t keep winning these economic wars.

There are, however, two other points. One is optimistic about the global economy, the other optimistic about the US.

Point number one, a currency war may force the world’s economic powers to see some sense. As this column has said many times before, back in 1944 Keynes proposed an idea for solving imbalances. He wanted to see the emergence of an international currency which he called the Bancor, and a system in which surplus countries were virtually forced to buy from deficit countries.

The idea of a new international currency is being discussed with greater frequency. Quite recently France’s finance minister Christine Legarde was talking about the Bancor. China has been talking about using the IMF’s system of special drawing rights to create a new international currency. Others are predicting the return of the gold standard.

But a new gold standard would be a disaster. Any system in which the money supply is fixed by the supply of a precious metal which is unconnected with global productivity, is flawed. The gold standard held back global economic growth for centuries. It took the discovery of the New World and the gold it contained boosting global money supply, before the world could embark on a 200-year economic boom.

But the Keynes plan was a good plan. It was rejected because at the time the US was the world’s greatest creditor and was unwilling to countenance a system which in some way punished creditor and surplus countries. The UK effectively represented the debtor half of the world, and was far too weak to resist the US. Today it is different. The role played by the US in 1944, is now played by China and Germany. The role played by the UK, is now played by the US. The US is in a much stronger position than the UK was in 1944 and could, perhaps after a few skirmishes in the currency war, bring back the Keynes plan, and this time ensure its adoption.

That may provide a far more permanent solution to the problems of global imbalances.

Then there is the second point. This time, the point explains why the US should remain strong for a long time ahead. To find out why, all we need to do is dig into some data released yesterday from the ONS, and to know more, read the next article. See: Productivity, the only economic statistic that matters, spells US victory in currency war.

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