April 11, 2023

Hard Times for the U.S. Dollar

The world’s reserve currency isn’t as powerful and prestigious as it once was, but where else is the rest of the world going to go?

We’ve come a long way from Bretton Woods. A long way and, lately, the wrong way.

The U.S. dollar has been the reserve currency of the world since 1945. That’s because a year earlier, with World War II still raging, delegates from 44 allied nations convened at Bretton Woods, New Hampshire, to establish a post-war monetary policy for the world. The result of that conference was to make the U.S. dollar the world’s reserve currency.

And here we are. Even as U.S. prestige has taken a big hit around the globe under the Biden administration, our currency is still, well, as sound as a dollar.

Or maybe not. Breitbart economics editor John Carney recently warned that the dollar’s enfeebled state is a threat to our nation’s influence around the globe. Money talks, after all.

“We went through three stages … after World War II,” Carney said. “The U.S. was the biggest economy in the world. In the 1970s, global banking became basically dollar central. With the fall of the Soviet Union, the entire world, more or less, came under the domination of the U.S dollar. … That is now drifting away. China and Russia are starting to build an alternative block of currency.”

Writing in City Journal, economist Stephen Miran went further, arguing that the U.S. dollar must one day lose its status as the world’s reserve currency. He says it’s inevitable. Here’s why:

As the American economy has shrunk from almost 40 percent of global GDP in the 1960s to about 24 percent today, the borrowing necessary to supply reserve assets to the globe has become larger as a share of domestic GDP. As the U.S. economy gets smaller relative to everyone else, it will grow increasingly indebted, and run ever-larger trade deficits, to keep supplying reserve assets. That process will drive instability in the U.S. economy — and cause the dollar to lose its attractiveness.

Indeed, over the last two decades, according to Fox Business, the dollar has lost 12% of its market share, falling from 71% to 59% per the International Monetary Fund. Still, relatively speaking, the dollar has value, and it has stability — two crucial components of a desirable reserve currency.

“Losing reserve status would be double-edged for the U.S.,” Miran writes. “The most commonly ascribed benefit of having the reserve currency is what French politician Valéry Giscard d'Estaing famously called the ‘exorbitant privilege’ of running persistent international deficits without risking crises in currency or bond markets.”

On the other hand, Miran argues, there’s an exorbitant burden that’s borne by the reserve currency of a growing world economy. He writes: “The reserve demand for dollars results in a currency persistently too strong for domestic industry to remain internationally competitive [and] it has clearly traded at levels far too high to balance international trade. The result: a domestic manufacturing sector that is a shadow of its former self and socioeconomic blight across former manufacturing hubs.”

Why is it important to have a world reserve currency? Because it improves the conditions for international trade. Think about it: If Germany sells its steel to, say, Ethiopia, would the Germans prefer to be paid in U.S. dollars or in Ethiopian birrs? The relative strength, stability, liquidity, and ubiquity of the one currency over the other makes the answer obvious. Germany can readily shop for goods around the world with U.S. dollars. Not so with Ethiopian birrs.

And why is international trade important? The great 19th-century French economist Frédéric Bastiat may have said it best: “When goods do not cross borders, soldiers will.” What he meant was that no nation can achieve full self-sufficiency and acquire all it wants without trade. And if it can’t trade for goods, it tends to want to take them by force. “Thus,” as Patrick Barron writes at the Mises Institute, “a near-universally-accepted currency can be as vital to world peace as it is to world prosperity.”

There’s been a lot of talk lately about China’s monetary ambitions, but the U.S. dollar is currently associated with 90% of international transactions. The euro is second, the Japanese yen is third, and the Chinese yuan is behind them. Furthermore, the yuan is heavily regulated by the ChiComs, heavily manipulated, and — commies being control freaks — they’re unlikely to cede this control to the ebbs and flows of the global marketplace. And that makes it less reliable and less attractive to the rest of the world — at least as a reserve currency.

If, as Miran predicts, the U.S. one day loses its global reserve status, the real impact would be felt geopolitically: “The U.S. would no longer have the ability to project power globally via the financial system. In the last two decades, the nation’s security apparatus has pursued increasingly extraterritorial financial policy via primary and secondary sanctions, restrictions on SWIFT payment-processing access, demands for financial records from other nations, and asset seizures. … One might worry that the more the U.S. uses these tools, the more it undermines the dollar’s reserve status: consider that Russia and China are increasingly motivated to find ways around the dollar.”

Asked about the biggest factor in the weakening of the U.S. dollar, former Reagan economist and Fox Business analyst Larry Kudlow says it’s our domestic monetary policies.

And on the greatest threat to the dollar, he says, “I have met the enemy, and he is us.”

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