Former Treasury Secretary Lawrence Summers rejected speculation that the dollar is rapidly losing its dominance in the global economy, and highlighted China’s detractions in providing an alternative reserve currency.
“There has never been a country where there was strong a desire to move as much capital out of the country as we’re seeing in China right now,” though capital controls are restraining the outflow, Summers said on Bloomberg Television’s “Wall Street Week” with David Westin. “Is that really going to be a place where people are going to decide they want to hold reserves on a massive scale?”
Three weeks ago, the International Monetary Fund updated its database on world foreign-exchange holdings to show that the dollar’s share had fallen to 58% by the end of December, the lowest since 1995. Stephen Jen, a longtime global macro analyst who co-founded Eurizon SLJ Capital Ltd., captured attention in recent days with analysis showing that the greenback’s share has fallen dramatically faster when adjusting for changes in exchange rates.
The dollar’s share slid last year at 10 times the average speed of the past two decades, Jen and colleague Joana Freire calculated. They suggested that moves led by the US to freeze Russia’s currency reserves and seize the assets of Russian oligarchs without “due process” of law undermined confidence in the dollar, especially among developing nations that are major holders of reserves.
“Where are they going to move?” queried Summers, a Harvard University professor and paid contributor to Bloomberg TV. As long as the US collaborates in its sanctions with Europe — which it did in the Russia case — euros wouldn’t offer an alternative, he said.
And for “anybody who’s looking for political stability, who’s looking for predictability, who’s looking for the nonpartisan, objective adjudication of their claims — are they really going to hold large quantities of assets in RMB,” asked Summers, referring to the renminbi, the Chinese currency’s official name. “I doubt it.”
He also said highlighting an acceleration in the dollar’s declining share was a “classic ‘how to exaggerate with statistics’ thing.”
“The lesson of history is clear: We might have the dollar lose its status, but if we do, it will be the least of our problems,” Summers said. “If the dollar loses its status, it will be because the United States is no longer respected and strong in the world. It will be because we’ve accumulated a set of untenable debts.”
Summers urged Washington policymakers to focus on shoring up the federal government’s long-term finances and strengthening the US’s appeal compared with China.
The former Treasury chief backed the Biden administration’s approach in rejecting Republican demands to tie spending cuts to an increase in the debt limit.
“It’s not realistic to think that we’re going to produce any kind of meaningful, broad fiscal reform in the context of a hostage-taking, rushed deadline over the debt limit,” Summers said. “There’s a group in the House caucus of Republicans that really has completely unreasonable demands,” he also said. “And until there’s some greater clarity and coherence coming from the Republican Party, I think this is going to be very hard.”
With regard to competing with China, Summers applauded elements of Treasury Secretary Janet Yellen’s speech this week.
Read more: Yellen Says China Security Worries Eclipse Economy Interests
But he also called for greater efforts to demonstrate to Beijing that the US isn’t out to hobble China’s economy in a broad sense.
“The right strategy towards China is to combine deterrence and reassurance,” he said. “We also have to provide reassurance that we are prepared to allow them to grow to take a place in the global economy.”
Summers also criticized the Biden administration’s refusal to use trade policy as a tool in competing with China. Market-access agreements have been politically anathema in Washington since former President Donald Trump pulled the US out of the Asia-Pacific Trans-Pacific Partnership deal in 2017.
“We have renounced new trade agreements as a major tool of strategy. We have declined to reduce tariffs, even where reducing tariffs would improve the competitiveness of our exports,” Summers said. “And we just aren’t providing resources to the world on the scale that the Chinese are.”
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