Kelly Evans
There is something deeply reassuring about the dollar being the default global currency. We've all experienced this firsthand in travels around the globe.
But there are also real problems for the U.S. economy as a result.
President-elect Trump grabbed attention over the weekend with his threat to slap 100% tariffs on the near-dozen "BRICs" nations if they try to "replace the mighty U.S. dollar." Russia in particular has been pushing hard in this direction as it remains saddled with heavy sanctions in the dollar system.
This sparked a number of people to reiterate the dire warning that if the dollar were to lose its reserve currency status, that would be a major threat to the U.S. economy and financial system.
Yet this gets it backwards. The dollar being the global reserve currency is already a major problem for the U.S. economy and financial system. Far from being the exorbitant privilege it's often described as, it's closer to an "exorbitant burden," as the economist Michael Pettis and others have argued.
In essence, the U.S. has massive amounts of capital constantly flowing in from other countries to purchase dollar-denominated assets, mainly U.S. Treasuries. A lot of this is from nations which are buying dollar assets in order to keep their own currencies artificially low. The biggest offender being China.
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That glut of buying creates all sorts of distortions. By choosing to keep their currencies low, they make their products artificially cheap for U.S. buyers. And because we over-consume those goods, we run trade deficits--and they run trade surpluses.
Money Report
And obviously, that makes the U.S. dollar more expensive than it otherwise would be. And that, as much as NAFTA or anything else that's happened in the past thirty years, is a big reason why we've seen a hollowing out of America's manufacturing base. Other countries are making our goods too expensive and uncompetitive.
And finally, this all goes back to the issue of foreign ownership of U.S. debt. This fact has already caused, and even enabled, the explosion in both government and private-sector debt. We over-consume their goods; they over-consume our debt. Remember, a too-strong dollar results in lost manufacturing jobs, which pushes up the unemployment rate. To avoid this outcome, we turn to borrowing (and financing consumption) to keep the economy going.
We don't need, in other words, foreign debt buyers just to keep interest rates down--Pettis might argue we'd have been better off without them. "Countries with balanced trade or trade surpluses tend to enjoy lower interest rates on average than [those running deficits, like the U.S.] which are handicapped by slower growth and higher debt."
"The world accumulates dollars...for one very simple reason. Only the U.S. economy and financial system are large enough, open enough, and flexible enough to accommodate large trade deficits." But that comes at the cost, Pettis warns, of too-high debt levels and potentially slower long-term growth.
So while there might be political advantages to the dollar dominance (like enforcing sanctions, or giving Americans access to extremely cheap overseas products), the biggest weapon we actually have would be pushing back on other countries buying too much of our U.S. debt.
See you at 1 p.m!
Kelly
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