Why The Dominant U.S. Dollar Refuses To Go Away

call an elder millennial Joe, but roughly the same short. So, one of the things that I think has been a persistent theme for as long as I've been following this stuff is people predicting the inevitable demise of the US dollar as the global dominant safe asset. Wouldn't you? Would you feel the same way? Oh for sure? And there are certain, um let's say, conspiratorial leaning websites and commentators

who love to take up this topic. In fact, I still remember my dad emailing me about how the Iraq War was caused by Iraq demanding or starting to offer crude oil in euros as opposed to the U S dollars. So this is something that comes up all the time that there's going to be I just had a really good idea. Okay, can we have your dad as a

guest on the show? Sometimes? Oh my god, I'm serious because number a number of times now your dad has come up in a character as a character, and you're thinking whether it's we're talking about precious metals or some other conspiracy or something political, and it's like, why don't we keep talking about him? Why don't we have him as a guest Sometime? I will ask him. You definitely ask him about silver if he comes on. Okay, good, don't tell him, don't show him any of my writings

before I talk about how crazy silver people are. Okay, I don't want him to dislike me, alright, But anyway, you're right. So a lot of like fringe, gold bug, zero hedge, silver bug, all that kind of stuff. They've been talking about the inevitable demise of the U. S Dollar for as long as I think both of us

can remember. But what's interesting is that, rather than the dollar haven't collapsed as many people would have predicted, maybe after the financial crisis or beforehand, due to various reasons, it's actually gotten stronger and it's uh, it's going nowhere. It's still here. Just as strong as ever, and arguably it's becoming even more dominant on the global stage over

the last decade or so. Yeah, and in addition to that, you now have quite a bit of academic research that's actually pointing out just how dominant the dollar is in the financial system and starting to write about how this is a problem. So Young Sun Shin from the Bank for International Settlements, who was on All Thoughts, is a really good example of this. But probably the most recent one was Bank of England Governor Mark Carney, who gave

that speech at Jackson Hole. We mentioned it on last week's episode of the podcast and you actually weren't there, but he proposed potentially replacing the dollar in the financial system with a sort of multipolar digital currency. I think he called it a synthetic hegemonic currency. I know, I love that expression. It's so sci fi um. But yeah. So it's interesting, is like the conversation about the dollar. It's not that the dollar's got collapsed as everyone predicted,

or as a lot of people thought was inevitable. It's actually gotten stronger. And now the conversation is, oh my god, it's becoming too dominant. And so we do have all these sort of elite circles, whether it's Mark Karney or the b I s. And they're also talking about the post dollar world, but from kind of the opposite perspective that we would like to see it recede. And it's a stubborn lee refusing too much to the chagrin of

maybe your dad and other conspiracy theorists. So we're gonna be talking about the dollars not so inevitable demise on this episode exactly, the dollars refusal to weakend just how everyone thinks it should so previous odd lots of guests from way back in the day. I think we talked to him right in the wake of the Trump election about various topics. He's an economist, He's been talking and writing about the dollar a lot lately and sort of

thinking about these issues. Kind of on a similar trajectory. Is Mark Kearney. I want to bring in this week's guest, David Beckworth. He's a senior research fellow at the Mercadis Center at George Mason University, longtime economics researcher and commentator, public voice on these issues. David, thank you very much for joining us. Well, thank you for having me back on the show. Thanks for being back. So you know how surprised are you. Let's start by this about how

prominent the voices are these days. Tracy and I were just talking about who are really calling out the sort of urgent need or at least semi urgent need to get away from the global dollar dominant. It is surprising that we are having this conversation and this time in history. You're right, you would think by this point that dollar would be less consequential, but the rest of the world continues to feel its brunt as you mentioned, So it's it's not surprising that the rest of the world is

talking about it. It's just surprising that we're still talking at this point in time. John Connolly, Richard Nixon's secretary of Treasury, said the dollar is our currency, but it's your problem. I think the difference today would be it's it's our currency and it's our problem collectively as a world, because I think the big difference between now and then is it's gotten so far reaching that when it does create problems, it affects the world, but it also comes

back to affect the US economy. So talk to us exactly why a strong dollar is a problem for the US economy, and could you make sort of put it through the lens of Donald Trump. And the reason I asked that is because there used to be some confusion or it seemed like there is confusion about whether Trump wanted a stronger or a weaker dollar. Um. You know, a strong dollar intuitively sounds good for someone who likes to make things great again, but a week dollar would

be good for US exports and the manufacturing sector. And now it seems like Trump has definitively settled on what he wants. He wants a weaker dollar. So why is that and why is a strong dollar painful for America? Yeah? I think there's there's two reasons, are two ways that it affects the US and and the first one is the one you're talking about, the Trump's really worried about, even if he hasn't correctly figured it out entirely. And

that's the domestic effects. So the world demands dollars to buy our safe assets for like the biggest producer of safe assets treasuries, but also some other assets GSCs, even some privately produced safe assets. But as a consequence, the dollar tends to be overvalued more often than not, which in turn means we're gonna run more trade deficits. We're also gonna tend to run more budget deficits, and all this has distributional consequences that it tends. It tends to,

you know, support the finance industry. We are great at exporting debt and financial securities to the rest of the world. It's one of our comparative advantages. But you know, Trump sees the flip side of that, he sees the costs, and that's certain other industries like manufacturing do get harmed. And so there's there's this distributional question and it does

have a bearing domestically also. In addition, because the world once our assets so badly, in general, financing costs are lower in the US, which means the US tends to be more leverage than it would otherwise be the case. So between kind of distributional questions more over leverage, there is this domestic angle, and I think that's what Trump really is trying to figure out. He blames China, he blames others, but it's really the strong dollar that arises

is from this demand for our assets. But the second thing that's I think Carney is getting at as well. As there is this global financial cycle, you see the FED being more cognizant of it. Now. J Pal can't come out and say, hey, we have an international mandate now, but he is more mindful of the reverberations that you know, their policies can have to go through the global economy come back to the US. But in short, there's this domestic concern and then there's an international concern. So there

is a lot to unpack here. Let's start with you talked about the insatiable demand or the very high demand at a minimum for US produced financial assets and treasuries are one of them, but g S E debt is another. Maybe uh, certain parts of US real estate are considered safe dollar denominated assets by the rest of the world.

Explain this phenomenon. What is it about US dollar denominated assets that people crave all around the world and why can't they find the equivalent elsewhere, whether it's in Japan or Germany or UK or some other country like that. Well, it's a path dependency story, I think you can tell. I mean, it starts off with the US being the biggest economy in the world. Now we're not so much

we're you know, we're running neconnect with China. But that's the original story here is the U S starts out big um, it's it's got a huge tax based lots

of resources to back it up. But over time what happens is the dollar spreads throughout the world and so there's these huge network effects like and this path dependency story is the more widely used this this currency is, the more valuable it is, and it's got it's gotten to such an extent there's an incentive to look to any kind of dollar denominated asset as the safest asset of the world. So even as the US size that the U S economy as a percent of world GDP shrinks,

the reach of the dollar continues to grow. And that's one of the discussions that was had at this Jackson Whole conferences that it's it's ironic that the dollars reaches actually growing when the US economy is shrinking. And again the reason is it's just it's more convenient, there's a convenience heel to to price things in dollars. Now it's it's better to get them from the US. But foreigners

are also producing these dollar denominated assets. So the b i S keeps track of this and they report just over eleven trillion and dollar denominated securities have been issued outside the United States, so there's an incentive for them to issue it as well, just because of the convenience yield.

So just to press on this point, you're saying that everyone wants dollar denominated assets, but because the rest of the world economy is growing while the US is sort of sluggish or not growing as fast, that at some point, maybe now the US becomes unable to basically absorb all that demand for dollars denominated assets. Is that it it was all. It's been coined the Triffan diluma. The world once the reserve currencies assets more than the country that

produces is willing to either make it or can make it. So, yeah, the world wants us to produce more treasuries, more g sc s, more financial assets, but that in turn would make us the incredibly overleveraged economy, and so somewhere else in the world they're trying to meet that demand. I mean, we saw this during you know, the early to mid

two thousand's. There weren't enough treasuries to go around, so we turned to wall streets to create synthetic safe assets that weren't so safe once you know, everything came clear, and I think we're seeing that again and the rest of the world. The world's producing some of this wall streets, still producing the ears. There are privately labeled assets still

going out there. But for us to truly meet the world's demand for another word, for us to get those interest rates around the world back up to what would be more normal historical levels, would require a lot more debt creation, and I think, you know, we're uncomfortable doing that at some level. I want to get to the other side of the equation about the downsides of the global dollar, but just to walk us there. So we have all this demand for dollar denominated assets because of

these network effects that you describe. That has distributional consequences for the US because it perpetually, uh maybe strengthens the dollar too much, hurting domestic manufacturers while benefiting the financial industry, which essentially is the manufacturer of dollar denominated assets, so helping finance, hurting workers. You could see why Trump is not crazy about that situation. Let's talk about the global picture.

So something that obviously Mark Arney talked about Jackson holl was It's not just that it hurts us workers the strong dollar. There are consequences for the entire world of everyone essentially being on the dollar cycle. And I think we saw that in eighteen a bit when the Federal Reserve hip grades multiple times. Perhaps that was appropriate given the growth of the U S economy that year, but it hurt other parts of the world that maybe didn't want to see rate hikes. Talk to us about the

effect the dollar dominant has on other countries. Yeah, because of all the dollars and nominated assets held abroad, as well as the number of countries that either implicitly or explicitly linked to the dollar. And there's this number I throw and it seems almost too high, but seventy the world economy has their currency linked in some from to the dollar. And this comes from a rock offf Fine

Heart and Elezski paper. But because of that, seventy percent of the world economy is linked in some form to the dollar. That means when the Fed sets monetary policy or when it causes the dollar change in value, it's really setting monetary policy to some extent for the rest of the world. And that's just you know, a bad idea. We're not all the same economy, just like the year zone has learned one size does not fit all. For the ECB, doesn't make sense for the FED to be

setting Monterrey policy for the world effectively. You know, it goes through this the linkage of currencies that link to the dollar. But also all this dollars are nominated at the eleven trillion dollars. Those are liabilities that foreigners own, yet their revenues are earned in their domestic currency. So you have currency mismatching balance sheets. You've got the wrong monterrey policy coming in. So it does. It creates this kind of global financial cycle, and it's really a global

dollar cycle. I think central bankers policymakers around the world are acutely aware of it, more so probably than US policymakers. You mentioned two thousand and eighteen, gent remember something similar happening when the FED started talking up rate hikes. The dollar began to go up while the other central banks were easy, and that also created some some you know, pressures, kind of a mini recession in the US during that time,

and that that was a global story. All oil prices collapse, the emerging markets slowed, down, there's some panic and giant a Yeah, when the U s sneezes or the rest of the world gets a cold, the saying. And it's even more true with the reach of the dollar today.

So how does the international aspect of all of this actually impact the dollar because you sort of alluded to this already, but after two thousand eight, um, we had this shortage of safe assets, right, So I'm just curious if dollar dominance grows with each financial crisis or with even with each about of risk off in the market, and that would mean dollar financing costs also decline, which

would incentivize people to use more dollars. I guess, um, how do you break that feedback loop because it feels like we're in this sort of endless cycle of ever increasing dollar reliance. To be honest, I don't know that we can or that it's possible anytime soon. That was the hard Mark Karney's proposal, right, is he wants to

find a rival or a substitute to the dollar. And and just to put things in perspective, but you know, I threw some numbers together in some of my research looking at this, but there's about twenty eight trillion dollars of assets out that that foreigner's hole twenty trillion dollars anominal assets that either they've issued that love and trilling

they've issued, and some that they've gotten from us. And in order to compete with the dollar, you'd have to have some other, you know, rival that can offer assets on that level. And I just can't imagine this SHC, this wonderfully term synthetic hedgemonic currency suddenly issuing that much or close to that much in terms of assets. So I don't see an easy way to break that. I mean, last time this happened was when we went from the pound to the dollar, and that required a World war,

a major shift. I mean, it also required the US becoming a leading industrial powers are passing the UK, so network effects are strong. So Tracy, I don't have a very optimistic lognosis on that front. It's one thing in fury to have a dollar substitute. So let's say the I m F for some global entity had some sort of synthetic basket, maybe as digital that represented some nice GDP weighted um you know, share of different currencies, some

sort of basket. But as you say, the path dependency as such, even if it were to be a nice dollar substitute. From a sort of pure economic point of view, the path dependency is such as you would still need people to switch over to it. You would still need to have people get comfortable issuing bills denominated in this unit. You would still have to have get people comfortable issuing debt. I mean, we see how hard it is just to move off of say lie or to some new dead standard.

It's really hard to move standards, uh, let alone a whole currency. And that's a great analogy. It is very hard when something is widely used, it's convenient. Why do I want to go to the trouble, you know, exchange the international currency contracts or priced in dollars, depending how you measure to The international trade is invoiced in dollars. Why would I want to inconvenience myself by using some

other currency. There has to be some kind of external push, a shock, something that really really makes it worth my while, war, you know, something serious happening in the United States. One scenario would be eventually China emerges as this country with great institutions with great safe stores of values. But that's

a long long ways off. Maybe the Eurozone comes up with their own safe assets that seems to be a ways off as well, and so it's best case scenario would be a gradual and the absence of some kind of major shock, some kind of gradual adjustment that will take many years to go through. So let me ask the obvious question, which would be why doesn't the US just issue more debt to satisfy all this extra demand?

So you alluded to the fact that in many respects, the U s economy is quite overlevered, and we feel uncomfortable doing it in many ways. But as we talk more and more about the potential for fiscal stimulus to lift growth, why don't we see the US just take advantage of really low interest rates, lots of appetite for dollar denominated debt, and just issue a bunch of bonds. That's a great question, I would say, to some degree,

we already do that, not enough. But thinking like President Trump's budget deficits, the only way he got away with that is because there's such a strong appetite for our securities. I mean this, This appetite lowers the financing costs, makes it easier for US to run budget deficits. So Trump can run a huge peacetime budget deficits. But I just think in general there's a lack of understanding maybe about this issue, that the role important role we do play.

It would take a huge, I don't know, public education campaign to say, look, the world needs our securities, we've gotta issue more of them, maybe if it was done in a thoughtful way as well. It's it's one thing to you know, issue a lot more measuries to fund maybe infrastructure, something with a good high return in the U. S economy, as opposed to funding you know, tax cuts or wasteful spending. So it would be a complicated thing to do. But that's why people have talked about sovereign

wealth funds. You know, we're you'ld issue treasuries or some kind of mechanism or facility where you would do something like that. But that's a long conversation in itself with the public and with Congress. Well what about the exact opposite proposal? And I think you're not a fan of this idea based on your writing, but we have seen a couple of senators in the USA, rather than issuing extraordinary amounts of debt to satisfy the world's desire to

hold safe assets. Why don't we just do a clean break and forced the world to essentially go elsewhere to look for their safe assets or and by that, the plan is tax foreign investments. And so you a couple of U. S. Senators Josh Holly from Missouri is one of them. They're just like, you know what, the strong dollar, Hey, it's hurting the world, it's hurting US workers. Let's tax

foreign purchases of dollar assets. That should weaken the US dollar, help workers, and maybe it would be an accelerant for the creation of a new safe asset around the world. What about that plan? Just uh, tax foreign buyers. It is well intentioned, and it's it's thinking creatively and it's going in the right direction in terms of, you know what we want to do, but I just don't think it will work. So intentions aside, what it effectively does is it reduces the supply of safe assets, at least

futures safe assets. It's you know, you tax something, you're effectively putting gears in the sand. You're you're making it harder to produce. And so we're not gonna be changed. We're not gonna be fixing the demand side. Of that equation, all we would be doing is squeezing the supply side, And so you would even make the problem more pronounced. And and the analogy or the comparison I like to draw off, what I think it would look like, would

be two thousand and eight. Because two thousand and eight, as I mentioned earlier, we had all these we thought what we thought were safe assets. It suddenly disappeared. So that there's a case where I think the supply of safe assets suddenly shrinking. And what happened. The dollar actually

got stronger, yields actually fell farther down. And I think we would see the same thing if if you thought this bill would see the light of day, I think you would see the markets begin to realize, oh my goodness, the supply of safe assets is going to be less. Let's race to the existing ones. And we would see the dollar gets stronger and yields go down. You know, we see negative rates around the world. I jokingly called this bill the the bill to give negative yield curves

to everyone who has same assets. Um, I think it would make the problem worse. In short, this might be an odd question, but um, to what extent is Trump's trade war with China an attempt to solve this monetary problem. So if the US can't target foreign capital surpluses directly and stop the flood of money coming into its market, then I guess maybe you could sort of target the current account and try to shrink the trade deficits so that there's less money to then flood into the U

S system. Do you think the trade war is sort of an unconscious or conscious attempt to rectify this problem. Absolutely, that's a great question. I do think. I think Trump, and I think populism in general across the globe is a response to this imbalance. This is part of the problem with international monetary system, and we see the distortions created by it. And so yeah, I do think President

Trump he knows something's wrong. Maybe he doesn't have a quite figured out correctly, but he's pushing in the right direction. He senses something's up and he's pushing back. Is it gonna work. I don't think his approach is gonna work. I mean, my suggestion maybe partial fixes the one for the federal reserved to do level targeting of some kind.

Now that you guys know, I'm a big fan of nomenal GDP level targeting, but it doesn't have to be That could be price level targeting, but anything that would make up for past mrs. So we know that the fed's under shop for the past decade. Imagine if it hadn't,

that probably would imply a weaker dollar um. Also, there has been proposed by some for the FED to extend currency swap lines throughout the world to other major trading partners, and that would might you know, reassure some of those countries and may not need to hold onto dollar assets as much, reduced the precautionary demand for dollar assets. Both of those moves, of course, would not be easy either. They both have costs um But there are things I think the FED could do, and I think that their

decisions that Trump could endorse as well. But back to the original question, Yeah, I do think Trump he senses something's wrong and this is probably at the core of it. I think that's interesting, this idea of the FED uh setting up swap lines with central banks around the world.

Of Course, the book Crashed by Adam Two's, which is a big history of the Eurozone crisis, it really spotlighted the role of those swap lines in easing the stress, allowing the European banks to have access to dollar liquidity. And then thinking back to what you said at the beginning of our discussion here, that that essentially with seventy of the global economy either under the dollar or some peg or a soft peg to the U. S Dollar, that the world is kind of like one big euro Zone.

And we see the problem with that in the Euro Area, where you have a singular monetary policy that doesn't work for all its members. And I see it's like we keep coming back to this situation in which the world is a single de facto currency union without the currency flexibility enjoyed by most of the countries. Yeah, that's a great point. I mean, it's it's the irony, right. We went off to Britain Woods system, where it was this

global fixed exchange rate regime linked to the dollar. We went off of it in in textbooks say when you go to a world of floated exchange rates, exchange it should adjust. But what we see in Prack this is something much more rigid, something much more akin to Britain Wood's too, and the dollar is again at the core of that. It's it's the main currency, and you know it to kind of flash that analogy. I like you're suggesting it would make sense then to have currency swap

lines in all the major trading partners. One reason this would be a hard sell is because it would implicitly expand the Fed's balanced also kind of the unspoken liabilities that would imply now on paper, it wouldn't necessarily mean that, it would just mean the commitment, So that would you know, I imagine being pretty controversial for Congress. Yeah, sometimes I wonder if there had been more awareness of the uh, the swap lines that were put in place around the

Euro crisis. I mean, we're paying attention to a bunch of other stuff, but it feels like the potential for very intense political scrutiny about the FED doing deals with foreign central banks UH could theoretically be uh problematic if the wrong people are the right people start paying attention to that. Yeah, I would love to see this next presidential campaign, which I'm not holding my breath, to have

them talk about these issues. Be great if someone got up and said, hey, we are the main safe asset supplier to the world. These are the implication there's this Triffan dilemma. Hey, maybe we should have currency swaplines. We have a role to play globally. We want to balance that against our domestic concerns. Let's think through the policy options.

So we've been talking a lot about the downsides of a strong dollar, and really the downsides of having the dollar as a sort of central figure in the entire global financial system. So maybe to finish it off, talk to us about why having a strong dollar, having the dollar as the world's reserve currency is actually a good

thing for America. Yeah, I'm glad you've said that, because I want on a positive note as well, the dollar is a global medium of exchange, and you know, one could argue in its absence, or in the absence of a global medium of exchange, globalization itself could not have taken off as it has or the ask few decades. And we know globalization has brought with it the freeing

of many people stuck in poverty. So that you know, the billion or so people who are in poverty who are now not in poverty because of international trade, because of globalization, you could make the argument that they're there because there was the dollar. So I think one could make a reasonable case that while there are all these costs to the dollar. The net benefit to the world has been positive in terms of liberating the poor from

the shackles of of a closed system. This is an absolutely fascinating topic, and you provided a really sort of clear explanation of this phenomenon and why people are talking so much about the problems of the persistently strong dollar. Really appreciate you joining us. Thank you for having me on the show. Thanks so much, David. That was great. Yeah, Tracy,

I love that conversation. I think this is just such a rich load to mind, such a fascinating topic because the problem is fairly clear, I think, and yet the solution seems almost intractable. It's almost impossible to imagine what is anywhere close to being in position to take the dollars place on the world stage. Yeah, you can't fight

those network effects, I guess. I find it really interesting as well, because it touches on a number of topics that we've talked about at one point or another on the show, things like safe assets, things like the trade war, like big capital surpluses in other parts of the world that then kind of move into the US market and

end up impacting it. But it does seem to be an intractable problem, and you kind of wonder, you know, David touched on this towards the end where he was came about how the dollar as reserve currency has basically enabled and also grown in tandem with globalization, and you do wonder if you're going to get a solution that basically looks like deglobalization, right, you could basically get ring fenced financial systems where China relies on the u N

for all its currency dealings, in the US relies on the dollar, and the Euro relies on the Euro, and that whole sort of network of financial inter dependence starts to get unpicked. You know what's really interesting is um David's term and Mark Arney used it to and you just mentioned it network effects and the network effects of

the dollar being so strong. And it's funny that Facebook is launching its own or you know, its own currency, Libra, because there are probably a lot of analogies between the dollar and Facebook itself, namely that everyone seems to hate Facebook and complains about it all the time. It thinks there's all kinds of issues with it, and it drives people crazy. And yet the prospect of actually leaving Facebook

is really difficult. And so even if you hate Facebook and you don't like their surveillance practices, and you don't like all kinds of manipulations that they do, it's pretty difficult to leave. Just like the dollar. You can identify problems with being in the dollar social trading network, but where else are you gonna go. It's a really difficult problem. So kind of the way, Uh, they're more than Libra itself.

They are already a lot of analogies between our Facebook and the dollar, right, not to mention slightly monopolistic tendencies as some commentators say, Yeah, I like that analogy. Uh. In any case, it'll be really interesting to see how this debate evolves in the future. Like you said at the beginning of the discussion, we've already come a long way from pre two thousand eight. You know, the dollar is going to be replaced by the euro or the

renman b or something like that. It's going to be really interesting to see how it changes in the next few years, whether we do get that synthetic hegemonic currency you know who might actually have some good ideas for what could replace the dollar. Go on your dad, So no, I'm serious, I'm really looking forward to that episode. Now, all right, I'll try to make it happen. Okay, good, okay. This has been another episode of the All Thoughts Podcast.

I'm Tracy Allaway. You can follow me on Twitter at Tracy Alloway, and I'm Joe wisn'tal. You can follow me on Twitter at the Stalwart. And you should follow David on Twitter. He's great. He's at David Beckworth. And be sure to follow our producer Laura Carlson. She's at Laura M. Carlson. And check out the new home of Bloomberg Podcasts at Podcasts. Thanks for listening Tear to