Mark Carney may not have known that he has a reliable friend in the American president. Recently, at the annual Jackson Hole symposium, the Bank of England governor made a speech about the “exorbitant burden" that the dollar is for emerging economies. Some said that his speech was aimed at winning friends and influencing people in the developing world to nominate him as their candidate for the post of managing director of the International Monetary Fund. Maybe. We will never know.

Well before he made this speech, in our book, The Rise Of Finance: Causes, Consequences And Cures, Gulzar Natarajan and I had written extensively on how the global economy, for the most part, operates on a dollar standard even now, nearly five decades after the end of the Bretton Woods system of exchange rates, which was an official dollar standard system.

For all practical purposes, there is one exchange rate (the dollar exchange rate), one monetary policy, one economy and one financial market. Most investors in emerging markets and emerging market borrowers take advantage of lower rates in the US by investing there or borrowing in dollars, respectively. There is pressure on emerging currencies to appreciate. Their central banks cut their domestic policy rates, intervene in the exchange rate market, and sterilize their interventions only partially. Even developed countries cut rates along with the US Federal Reserve to prevent their currencies from appreciating too much. That is what happened between 2001 and 2003, precipitating a global borrowing binge. It has happened again, post 2008.

Conversely, when America raises interest rates, risk appetite falls and dollar liquidity shrinks. Emerging economy borrowers now feel the pain as their currencies depreciate against the dollar. Therefore, their central banks, trying to defend the currencies, sell dollar reserves and raise interest rates. Thus, the world operates as though it is still on a dollar standard and the Fed monetary policy is the de facto monetary policy for others too.

Notwithstanding claims that the share of American gross domestic product is down to 15% of the world’s, the fact is that most exporting economies rely on demand from G-3 regions—the US, eurozone, and Japan—to generate economic growth. Within G-3, America dominates. Thus, the American economic cycle becomes the global economic cycle, and it is no surprise, therefore, that American monetary policy becomes the global monetary policy.

As the liquidity and flow of money is the biggest driver of short-run trends in asset prices, bond and stock market returns around the world are correlated, for the most part, with US stocks and bonds. The correlation is much stronger, tighter and persistent when asset prices decline. In truth, there is no real diversification in global financial markets, when needed. In the second half of 2008, the only two assets that would have saved global investors from losses were the dollar and Japanese yen.

This is not a desirable state of affairs. The world economy should be asynchronous and so should financial markets. Enter Donald J. Trump. He is desperate for re-election. He has been haranguing the Federal Reserve chairperson no end, creating an unprecedented platform for a far bigger showdown next year. Trump is rather sore with Jerome Powell, the current chairperson of the Federal Reserve, for having raised interest rates so much (well, in real terms, it is less than 1% for an economy growing at a real rate of around 2% to 2.5%). He laments the fact that Germany is able to borrow at negative rates and America is not able to. The negative rates in much of Europe are a symbol of all that has gone wrong with the monetary policy of the European Central Bank and the growth potential of the eurozone. Negative rates create far bigger problems for the economy and society than they represent answers for a president seeking re-election.

Not content with that, Trump has compared the Fed chairperson to Xi Jinping, president of China. That is way over the top and breaches all norms of decency. In his desperation for re-election, he may become even more frustrated with the Federal Reserve as 2020 rolls in. China has figured out how and where to hurt him. It slapped tariffs on American imports on Friday. That was unexpected. American stocks fell sharply. Trump will hammer the Federal Reserve more. As this gets worse, there is the real risk of confidence in the dollar getting eroded in 2020.

Usually, when stock markets decline and the global economy slows, the US dollar strengthens. The dollar has elements of a countercyclical currency, strengthening into American recessions. That could happen in 2020 again. However, Trump may change all of that with his mindless criticism of the Federal Reserve. He may end up severely damaging the hegemony of the dollar. That would be the first step to the multipolar world that Carney wants. There are no immediate alternatives to the dollar, and, therefore, uncertainty, chaos and mayhem may step in to fill the void.

These are the author’s personal views

V. Anantha Nageswaran is the dean of IFMR Graduate School of Business, Krea University

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