This is part of a series of Bloomberg Opinion columns exploring the risks related to the US’s rapidly expanding debt and budget deficit.
The eclipse of the dollar, and with it the ability of the US to borrow on a scale that would cripple any other country, has been long predicted. For at least half a century, skeptics have counted on something — or someone — coming along to knock American assets from their perch. Don't plan for a requiem just yet.
The greenback has seen off hefty challenges: the shift to floating exchange rates in the 1970s, the birth of the euro, the ascent of Japan and China, as well as sizeable budget and trade shortfalls. The budget deficit is often key to predictions that spending will inevitably become unsustainable and some crash will bring the bond market down, taking the dollar with it. Except it never happens. A high-powered panel convened by Barack Obama to recommend a path to reining in the deficit received some rave reviews, but went nowhere. Warnings by one of the committee’s leaders that the US would suffer a debt crisis like Greece failed to materialize. For good reason: While Greece did endure hard times, a major part of its problem was that Athens couldn't print its own currency — it's part of the euro zone. (Incidentally, Greece is an investor darling these days. The country is on track to repay loans early.)
Might the moment of reckoning have finally come, courtesy of President-elect Donald Trump, who has dissed the dollar as much as defended it, and is pushing an unabashedly expansionist fiscal policy? Interest rates on 10-year US government bonds, the global benchmark, did climb after the election. Yields are, however, still significantly lower than they were for most of the 1990s, the heyday of the so-called Great Moderation, the period after the Cold War characterized by benign inflation, modest fluctuations in business cycles and a consensus that the state should be less, not more, involved in economic life.
So the greenback isn't coming undone anytime soon. Its dominance goes beyond an official desire for a strong dollar, a weak one or something in between. The currency's pivotal role is tightly woven into the fabric of the modern economy. It accounts for the majority of global reserves and is one side of about 90% of foreign-exchange trading. The bulk of cross-border loans are in dollars, as is a disproportionate amount of invoicing. Nothing comes close, despite China's impressive advances in the past four decades. The yuan’s small share of international payments has fallen slightly this year, according to Swift, a financial messaging service. Periodic portfolio shuffling notwithstanding, foreigners hold trillions of dollars of US debt, a lot of it in Treasuries. Asian economies may account for much of global economic growth in the coming years, but they struggle to find a sufficiently large number of safe and liquid assets close to home.
This impressive list of attributes stresses a powerful point. Rather than oxen, bronze or silver, found in many places, US government securities are at the apex of today's financial system. The contemporary era is characterized by the “Treasury Standard,” according to a paper by Joshua Hendrickson, a professor at the University of Mississippi. This setup is the successor to the Bretton Woods system that emerged after World War II. This is more than a nice financing tool; it’s a strategic asset. It enables Washington to raise money on a grand scale for new programs, defense or, as more recently, to combat public-health emergencies.
This is an exorbitant privilege and, critics contend, enables the US to live beyond its means. What's often unspoken, and even wished for in some quarters, is that at some point this ride will end and Americans will confront the same hard choices as other nations. Decades before the euro made its debut, Charles de Gaulle moaned about the greenback's potency. The common currency’s arrival was greeted with fanfare — and ambition. Europe wanted something that locked in economic integration, but that also would allow the continent to stand up to the hegemon. The euro had a decent start, though its promise has been sullied by a series of internal crises.
This underscores an important part of the dollar's appeal: the attraction of US securities, relative to any other option. Right now, no other currency offers such a deep and safe pool of liquid assets. China, often cited as the country most likely to challenge US preeminence, distrusts markets. The yuan is subject to all kinds of meddling, from daily parameters on trading set by the central bank to curbs on what investors can take in and out of the country, and how easily.
This isn't to say a credible greenback rival won't materialize. Nor does it mean Trump's nominee for Treasury secretary, Scott Bessent, can spend to his heart’s content, oblivious to any consequence. “The main benefit of the dollar is there isn't really much of an alternative and that makes a crisis less likely,” Hendrickson told me. “You start thinking what will come next and it’s a world of infinite possibilities and thought experiments, but it's unclear how realistic these exercises are. The subtext is we just kind of stumble along.”
So with these strengths, does it matter whether the occupant of the Oval Office expressly favors a strong dollar, the broad mantra from the Clinton years until Trump was first elected in 2016? While these are statements of intent, they often have an underlying goal or reflect trends in capital flows. Robert Rubin, the Treasury chief who developed the “strong dollar” policy, seldom swerved from his line — and was helped by an economy that was booming. Also remember that Rubin and his successor, Larry Summers, weren’t averse to occasionally selling the dollar. Pragmatism played a big role. Trump's riffs about a too-strong dollar might just reflect a desire to buttress manufacturing, even if his choice of words is jarring. It’s not in his interest for the dollar to collapse.
Nor does it suit rising powers to have the kind of meltdown that would surely accompany a regime change in the currency world. If the dollar ceased to be taken seriously, potential claimants to the throne would also suffer. They have significant USD reserves and borrow in greenbacks. Moreover, while large parts of Asia have grown prosperous and the Chinese and Indian economies have swollen to be big players, their markets are relative minnows. Governments and companies use the dollar because it's in their interest to, not as a favor to the leader of the free world. That's why it was so unnecessary for Trump to threaten the BRICS nations. A currency they might share is years away, if it happens at all. Like it or not, they live in a dollar universe. (China just sold $2 billion worth of dollar bonds in Saudi Arabia.)
Perhaps, the only place that can dethrone the dollar is the US itself and everyone will have a lot to lose. Absent a huge self-inflicted wound, such as overdoing sanctions so much that the search for a serious alternative gathers real momentum, the dollar will muddle along. The world will keep wishing it were otherwise — until it considers the alternative.
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