Elizabeth Warren’s “economic patriotism” differs in style and content from Donald Trump’s economic nationalism, but they have found common cause in vows to weaken the dollar. That is a strangely self-defeating agenda for patriots or nationalists of any political fashion.
Trump and Warren argue that China and other emerging rivals weaken their currencies to promote exports and gain jobs, so why shouldn’t America follow a similar policy? Here’s why: Because America is not an emerging country. It’s an unrivalled financial superpower, a position built in large part on hard-won trust in the dollar, which is an enduring source of American power and prosperity.
When the dollar strengthens and weakens in response to buying and selling in the global currency markets, foreign countries don’t protest. Occasionally they have cooperated with the US to stabilise the dollar. But nothing will destroy trust in American financial leadership, and the benefits that go with it, more surely than for the US government to start unilaterally manipulating the dollar for its own competitive advantage.
If Vietnam or South Korea manipulate their currencies in a bid to improve their exports, a few of their trade partners may retaliate; if the financial superpower plays the same game, the whole world will respond because the dollar is the international standard.
A record high 60 per cent of countries now measure, or “anchor”, the value of their own currencies against the dollar. Any campaign to devalue the world’s anchor could set off a destructive wave of competitive devaluations.
After the First World War, when America challenged Britain as the leading global empire, the dollar began gaining on sterling as the currency that most central banks preferred to hold in reserve. Reserve currency status had long been a perk of imperial might — and an economic elixir.
By generating a steady flow of customers who want to hold the currency, often in the form of government bonds, it allows the privileged country to borrow cheaply abroad and fund a lifestyle well beyond its means.
Other countries watched the US assume this role with dismay. In the 1960s, Valery Giscard d’Estaing, then finance minister and later president of France, called the dollar’s powerful status America’s “exorbitant privilege”. And for nearly a century now this privilege has helped to keep US interest rates low, making it possible for Americans to buy cars and homes and, in recent decades, run large government deficits that they could not otherwise afford.
This is the long-term advantage Trump and Warren would put at risk, in exchange for a temporary boost to exports and jobs in fading manufacturing industries.
Advocates of dollar manipulation will argue that America pulled off this trick under the great free-market hero himself, Ronald Reagan, without destroying trust in the country’s financial leadership. In 1985 the Reagan administration pressured Japan and other allies to sign the Plaza Accord, a cooperative effort to weaken the dollar, which was then far more heavily overvalued than it is today.
None of the signatories lost faith in the dollar. At the time central banks held about two-thirds of their foreign reserves in dollars — and that share has barely changed in the following decades. Why should manipulating the dollar undermine its global status today?
The reason is that such manipulation would be a unilateral act that erodes trust in the US at a time when American debts have reached precarious levels. A reserve currency lasts no longer than foreign confidence in its holder’s ability to pay its bills.
In 1985 America owed the rest of the world $104 billion, an amount equal to 2.5 per cent of US gross domestic product, a very manageable burden. Since then, those debts have risen to $9.7 trillion and are approaching 50 per cent of gross domestic product, a threshold that has often pushed nations into crisis.
Only six countries have held the world’s reserve currency going back to the mid-15th century. All were imperial powers, starting with Portugal, then Spain, the Netherlands, France and Britain, before the US took over. On average each lasted 94 years in that role. In 1985, the dollar’s run as a reserve currency still looked relatively young, but now it is 99 years old.
China is eager for the yuan to replace the dollar as a reserve currency, but few investors want to hold a currency governed by strict capital controls. The euro is hobbled by doubts about the European currency union. Even so, America cannot take its reserve currency status for granted, since people are beginning to look for alternative options to the dollar.
Witness the recent rise in the price of gold, the speculation in cryptocurrencies and Facebook’s plan to launch its own “global currency”.
This is a fragile and inopportune moment for an American president to sow dollar doubts among the country’s creditors. Trump has been running up the deficit. Warren is proposing trillions in spending on new health care, education, child care and environmental initiatives that are likely to have the same effect.
And any government that deliberately weakens the dollar will have a harder time finding foreigners willing to invest in US debt.
Trump’s constant effort to talk down the value of the dollar is both highly unusual for an American president and oddly timed, since the dollar is one of the few signs of rising US strength on the global stage.
Though the US accounts for about a quarter of global economic output, roughly the same share as in 1980, its financial clout has continued to grow by many measures. More and more cross-border loans are issued in dollars, even when neither the lender nor the borrower is American. Nearly 90 per cent of bank-financed international transactions are conducted in dollars.
Growing demand for dollars adds sting to Trump’s sanctions and tariff threats against China, Mexico, Europe, Iran and multiple other targets. When he vows to sever access to American financing for anyone doing business with Iran, the world has no choice but to listen since it is nearly impossible to conduct international business without involving an American bank given the dollar’s dominance.
At this critical juncture, any deliberate government campaign to weaken the dollar is likely to backfire against would-be patriots and nationalists by damaging the economy and undermining one of the last thriving symbols of postwar American hegemony.