XPost: alt.politics.usa

"This time really is different for the dollar
Kenneth Rogoff

To paraphrase a common saying: it ain’t what you don’t know that kills
you. It’s what you think you know that ain’t so. Nothing could better describe the numb-skulled thinking behind the havoc that President
Donald Trump and his trade Rasputin, Peter Navarro, have wrought on the
global economy. Among the likely casualties will be the supreme status
of the dollar. Although the greenback will almost certainly remain the world’s dominant currency for at least a couple more decades, it will probably fall several notches. Expect the yuan and the euro to encroach
on the dollar in the legal economy. Cryptocurrencies will do the same in
the underground economy, which is roughly a fifth of global GDP. Reduced
market share will mean higher interest rates on long-term dollar debt,
and a weakening of the effectiveness of American financial sanctions,
among other problems.

Even before Mr Trump, dollar dominance had been in slow decline. There
are many measures of the dollar’s footprint on the global economy,
including central-bank reserve holdings, the currency used in trade
invoicing and the denomination of international borrowing. A
particularly useful one is what currency central banks focus on as their exchange-rate anchor or reference currency. Given that national central
banks have intricate knowledge of their economies’ inner workings and
how exchange-rate movements affect them, anchor or reference currency
choices may be thought of as a portmanteau measure of dominance.

By this measure, dollar dominance peaked around 2015, after which China gradually began to make its currency more flexible. This was a change
long in the making, since a large economy like China’s can experience
very different business cycles than America’s, and there is no reason to
make its central bank dance to the Federal Reserve’s tune. American
sanctions on Russia, including the freezing of over $300bn-worth of central-bank reserves, have also put a fire under China’s efforts to decouple, given the likelihood of an eventual reckoning over Taiwan.

As China’s exchange-rate regime has evolved, so too have those of its neighbours, given that China is at least as important a trading partner
as America for most. With Asia constituting roughly half of the dollar bloc—ie, economies that focus on the dollar when managing their own currency’s exchange rates—a gradual splintering was already under way. Europe, too, chafes at the tentacles of control that dollar dominance
gives America; the European Central Bank’s moves to establish a
central-bank digital currency should be viewed in part as an effort to
compete more effectively with the dollar.

The biggest challenges to dollar dominance come from within, including America’s unsustainable debt trajectory. It is already under strain from
the inevitable ending of a period of very low long-term real interest
rates. If Mr Trump’s chaos keeps undermining the dollar’s “exorbitant privilege”—the borrowing discount America’s government enjoys thanks to the greenback’s dominance—rates will rise even more.
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