The era of the United States dollar’s unchallenged global hegemony is gradually giving way to a more multipolar financial order, though the greenback is expected to retain its preeminence, albeit on a diminished scale. This evolving dynamic is a central theme explored by Professor Kenneth Rogoff, a distinguished economist at Harvard University and former Chief Economist of the International Monetary Fund (IMF). In his recent work, "Our Dollar, Your Problem," Rogoff dissects the intricate ways in which the dollar influences, and at times destabilizes, the global economy amidst shifting geopolitical power structures. His analysis blends astute economic forecasting with a strategist’s foresight, examining the inherent risks and realities of a financial system still largely anchored by the dollar, yet increasingly challenged by emerging rivals like China’s renminbi, the proliferation of stablecoins, and the internal political polarization within the United States.
The "exorbitant privilege" once afforded to the US by dollar dominance now carries a discernible set of burdens. Rogoff argues that maintaining this status necessitates significant military expenditure, a cost that overshadows many other economic considerations. While some contend that a strong dollar can overvalue the currency and erode manufacturing competitiveness, Rogoff views this as a secondary concern. He posits that the dollar’s strength is primarily a reflection of American prowess in technology, engineering, services, and intellectual property. The decline in manufacturing employment, he contends, is largely attributable to automation rather than currency valuation. In fact, manufacturing’s share of GDP has seen an increase, suggesting that the narrative of hollowed-out manufacturing is more nuanced than often presented. While the dollar’s strength plays a role, it is one among many factors, and labeling it as the dominant cause is an oversimplification.
The most significant threat to the dollar’s long-standing dominance, according to Rogoff, is not a singular event but a gradual erosion of its market share within an increasingly multipolar international financial system. He foresees a future where the euro solidifies its position and the renminbi grows into a significant regional currency, extending its influence across Asia and potentially parts of Africa and Latin America. Historically, the dollar’s share has fluctuated. Its rise in recent decades was partly fueled by the Eurozone crisis and China’s deliberate policy of dollar-centricity. However, since reaching a peak around 2015, the dollar has been on a downward trajectory in terms of reserve holdings and its prevalence in national exchange rate systems, returning to pre-Euro crisis equilibrium levels. Furthermore, the "promiscuous use of sanctions" by the United States has instilled a sense of caution among nations regarding over-reliance on dollar-denominated transactions. The US, by acting as the world’s financial back office, gains unparalleled visibility into global financial flows, a capability that prompts other nations, from China and Russia to European and Latin American countries, to seek alternative financial infrastructures to reduce their dependency on dollar-based systems.
The escalating levels of U.S. public debt present a persistent concern, yet Rogoff is skeptical of a sudden loss of confidence among foreign investors that would trigger a debt crisis. He acknowledges that rising interest rates on U.S. Treasuries will exert pressure on the government to find resources to finance its expenditures, whether for social programs, tax cuts, or defense spending. However, for a large nation that issues and borrows in its own currency, debt crises are unlikely to manifest with the abruptness seen in countries that borrow in foreign currencies. Nevertheless, this does not diminish the problem itself. Drawing on his and Carmen Reinhart’s research, Rogoff highlights a consistent correlation between high levels of government debt and slower economic growth. While initial claims of significant errors in their studies were made, subsequent analyses, including their own revised work, have reinforced the finding that elevated debt levels constrain a nation’s capacity to invest in crucial infrastructure, respond to financial shocks, and ultimately hinder long-term economic expansion. While there isn’t a definitive upper limit on debt that precipitates a crisis, as evidenced by Japan’s high debt-to-GDP ratio coupled with protracted slow growth, the consequences of unchecked borrowing are tangible and detrimental to economic dynamism.
The prospect of the renminbi supplanting the dollar as the preeminent global reserve currency in the immediate future remains unlikely. Rogoff anticipates the renminbi solidifying its role as a significant regional currency within Asia. As China gradually decouples from its dollar peg, its holdings of dollars are expected to decrease. Simultaneously, its Asian trading partners, seeking to stabilize their own currencies against both the renminbi and the dollar, will also likely reduce their dollar exposure. While the renminbi is unlikely to become a common medium of exchange in New York absent a dramatic geopolitical shift, its adoption in markets like Indonesia and India is a plausible outcome, contributing to its growing footprint in a multipolar financial landscape.
The emergence of central bank digital currencies (CBDCs), including China’s digital yuan and the European Union’s initiatives, represents a strategic move to challenge dollar dominance. These digital currencies aim to create alternative financial infrastructures, bypassing the traditional dollar-centric "plumbing" of international settlements. This technological advancement facilitates greater convenience and efficiency in cross-border transactions, potentially diminishing the dollar’s central role. While the United States has explored stablecoins as a countermeasure, Rogoff suggests these may not halt the momentum of CBDCs and could, in fact, accelerate the global transition away from dollar preeminence.
The U.S. approach to digital currencies, particularly under the Trump administration’s embrace of stablecoins and hesitance towards a digital dollar, can be interpreted through multiple lenses. One perspective suggests a pragmatic strategy, leveraging existing strengths in the stablecoin market while lagging in CBDC development. An alternative, more critical view points to potential corruption, with significant campaign donations from the cryptocurrency industry influencing policy decisions. This reliance on industry self-regulation, mirroring past trends in the financial sector, risks creating an underregulated crypto ecosystem that could undermine tax collection, facilitate illicit activities, and ultimately pose a challenge to the Treasury’s fiscal management.
The independence of the Federal Reserve faces growing political pressures, which could have significant repercussions for the dollar. Both major political factions, albeit with different objectives, have shown inclinations to exert influence over the central bank. Such interference, regardless of its origin, risks exacerbating inflationary pressures and increasing volatility in long-term interest rates. While the immediate benefits of populist policies might offer short-term gains, such as temporarily lower interest rates, the long-term consequence is likely to be higher and more volatile inflation, eroding the dollar’s stability and the attractiveness of dollar-denominated assets. This challenge is not unique to the U.S., as Europe faces similar pressures that could undermine the euro’s appeal as a safe haven.
The long-standing advantage of the dollar has been its association with the rule of law and a stable, independent judicial system. However, recent political trends, particularly the challenges to legal norms and institutional norms, risk diminishing this perceived advantage. Foreign investors have historically relied on the U.S. legal framework for certainty and predictability. When the executive branch exerts undue influence over judicial processes, it can create an environment of uncertainty, discouraging foreign investment. This erosion of trust in the legal system, coupled with protectionist trade policies such as escalating tariffs and retaliatory measures, can significantly reduce demand for U.S. assets. The interconnectedness of geopolitical shifts, technological advancements like artificial intelligence, and the potential for more centralized governance models, as perceived by some political actors, may lead to a more fractured global system where the dollar, while still influential, governs a smaller sphere of economic activity.
Europe’s potential to enhance the euro’s competitive standing against the dollar is intricately linked to its geopolitical standing. A stronger military presence for Europe could translate into greater geopolitical influence, enabling it to offer security assurances to friendly nations, thereby fostering greater adoption of the euro. Moreover, enhanced military capabilities can translate into stronger negotiating positions in international financial forums. Historically, U.S. military power has underpinned its influence in shaping international financial institutions like the IMF and payment systems such as SWIFT. Should Europe significantly bolster its defense capabilities, it could find the euro gaining greater traction on the global stage.
The concept of a singular world currency remains an improbable prospect in the foreseeable future. The complexities of coordinating diverse economies, cultures, and political systems are immense, as exemplified by the challenges within the Eurozone itself, which comprises nations with relatively similar economic profiles and values. Establishing a global currency would necessitate an unprecedented level of global governance and likely a significant redistribution of wealth, conditions that are currently far from being met. While proposals like expanding the role of the IMF’s Special Drawing Rights (SDRs) exist, these are essentially forms of international credit rather than a universally accepted currency. The emergence of a dominant global currency would likely require the presence of a singularly dominant nation, a scenario that appears unlikely in the current multipolar world.
