The dollar is about to become “toilet paper”, says Robert Kyosaki, author of “Rich Dad, Poor Dad”. “Get rid of your US dollars now,” says the investor and economic commentator Peter Schiff. They are not alone: I am seeing a lot of stuff like this in my inbox lately.
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Now, some of this is coming from
“Weimarists”, people who are always predicting hyperinflation. Schiff, for
example, insisted back in 2009 that the Obama administration’s policies would
cause runaway inflation. (For the record, they did not.) Still, as it says on
investment prospectuses, past performance is no guarantee of future results:
People who have been consistently wrong in the past could be right in the
future.
And today’s Weimarists have a new argument.
Recently a number of countries, alarmed or maybe just annoyed by what they
perceive as the weaponization of the dollar against Vladimir Putin, have been
taking at least symbolic steps to reduce the dollar’s role in the world
economy. For example, China has asked oil producers to accept payments in yuan
instead of dollars.
The pound’s international role rapidly declined after World War II, essentially disappearing by 1970. Strange to say, however, Britain’s economy still runs on pounds.
This has even relatively sober commentators
like Fareed Zakaria warning that the dollar’s status as the world’s reserve
currency is at risk. And losing reserve-currency status, many people imagine,
would be an economic catastrophe for America.
What if the dollar’s global status
tanks?Put aside for the moment the question of
whether dollar dominance is really at risk. (Short answer: no. But I will get
to that.) Let us ask instead whether losing reserve currency status would
really be a disaster.
So let me start with what should be an
obvious point: Most of the world’s currencies are not widely used outside their
issuing nations. Yet many of these noninternational currencies do just fine at
home, continuing to serve the traditional roles of money: medium of exchange,
store of value, unit of account.
For example, the Canadian dollar, the
Australian dollar, the New Zealand dollar, and the Swedish krona have never
been reserve currencies. A few decades agom Japanese officials had ambitions of
turning the yen into a global currency, but that never went anywhere. Yet
Australians, Swedes and Japanese continue to do domestic business in their own
currencies, with nary a hyperinflation in sight.
The British pound is an even more
interesting example, because once upon a time it was an international currency,
and one as dominant as the dollar later became. When Phileas Fogg set off to go
“Around the World in Eighty Days”, he traveled with a carpetbag full of pound
notes, because he knew that British currency would be accepted anywhere.
If you imagine that vast foreign holdings of dollars are the only thing sustaining our currency, let alone our economy, you just have not done the math.
But the pound’s international role rapidly
declined after World War II, essentially disappearing by 1970. Strange to say,
however, Britain’s economy still runs on pounds. The pound sterling’s demise as
an international currency did not even prevent London from, if anything,
strengthening its role as a global financial hub.
What would a change look like?Still, how would the transition work?
Foreigners probably hold more than a trillion dollars in US currency, mainly in
the form of $100 bills. What would happen if all the foreign holders tried to
cash in all of that money?
The answer is that the Federal Reserve
would pay them off, withdrawing the currency from circulation, something it
could easily afford to do by selling off some of its $5 trillion holdings of
Treasury debt or $2.5 trillion in mortgage-backed securities. If you imagine
that vast foreign holdings of dollars are the only thing sustaining our
currency, let alone our economy, you just have not done the math.
In sum, there is no reason to be terrified
of the consequences if the dollar should lose its special international status.
But that said, it is really hard to see that happening in the first place.
It is true that with the rise of China
there are now two bona fide economic superpowers. (There would be three if the
euro area were less fragmented.) So it may seem plausible that the yuan could
pose a challenge to the dollar.
Is the dollar actually stronger than it
seems?But the dollar has three big advantages.
One is incumbency: Since everyone is already using dollars, it would take
exceptional circumstances to get them to switch. A second is that US financial
markets are open: Unlike China, we do no impose controls on people trying to
move money into or out of the country. The third is the rule of law. Unless you
are a dictator planning to commit major war crimes, you need not fear that the
US government will impound your assets; in China, your assets may be at risk if
you say something that the strongman in charge does not like.
The global role of the dollar sounds important and seems mysterious; that makes it a natural subject for conspiracy theories and catastrophic thinking.
Why, then, all the panicky commentary about
the dollar? Well, I studied with Charles Kindleberger, and one of the things he
told his students was that “anyone who spends too much time thinking about
international money tends to go mad”. The global role of the dollar sounds
important and seems mysterious; that makes it a natural subject for conspiracy
theories and catastrophic thinking.
In reality, however, the dollar’s role
looks pretty secure — with one major caveat. I have no idea what will happen
if, as seems all too possible, we end up defaulting on debt payments because a
Republican House refuses to raise the debt ceiling. But it is not likely to be
good. Who will trust the currency of a nation that appears to have politically
lost its mind?
But if that happens, the threat to the
dollar’s reserve-currency status will be the least of our problems.
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