According to Robert Kyosaki, author of “Rich Dad, Poor Dad,” the dollar is soon to become “toilet paper.” “Get rid of your US dollars immediately,” urges investor and economic expert Peter Schiff. They are not alone: I’ve been seeing a lot of stuff like this in my mailbox recently.
Some of this is coming from “Weimarists,” those who always anticipate hyperinflation. Schiff, for example, maintained in 2009 that the Obama administration’s policies would lead to uncontrolled inflation. (For the record, they did not.) Yet, as stated on investment prospectuses, historical performance is no guarantee of future results: people who have regularly been wrong in the past may be correct in the future.
And today’s Weimarists have a fresh argument. Lately, a number of nations, worried or maybe simply frustrated by what they regard as the weaponization of the dollar against President Putin, have taken at least symbolic actions to decrease the dollar’s importance in the global economy. For example, China has encouraged oil companies to accept yuan payments instead of dollars.
Even reasonably serious analysts like Fareed Zakaria have warned that the dollar’s role as the world’s reserve currency is under threat. Many individuals believe that losing reserve-currency status would be an economic disaster for America.
What if the dollar’s worldwide standing deteriorates?
Let aside for the time the question of whether the dollar’s supremacy is truly threatened. (Simple answer: no. But I’ll get to it.) Instead, consider if losing reserve currency status would truly be disastrous.
Now let me begin with what should be obvious: most of the world’s currencies are not extensively utilized outside of their issuing countries. Several of these non-international currencies, however, continue to perform the conventional tasks of money: medium of exchange, store of value, and unit of account.
The Canadian dollar, the Australian dollar, the New Zealand dollar, and the Swedish krona, for example, have never been reserve currencies. A few decades ago, Japanese policymakers hoped to make the yen a worldwide currency, but that never happened. Yet, Australians, Swedes, and Japanese continue to conduct domestic business in their respective currencies, with no sign of hyperinflation.
The British pound is a much more intriguing example, because it was once a major international currency, comparable to the dollar. Phileas Fogg set out on his “Around the Globe in Eighty Days” journey with a carpetbag full of pound notes because he felt British cash would be accepted everywhere.
Nevertheless, the pound’s international influence decreased dramatically following WWII, eventually vanishing entirely by 1970. Surprisingly, the British economy is still based on pounds. The death of the pound sterling as an international currency did not prevent London from increasing its position as a worldwide financial center.
What might a change look like?
Yet, how would the changeover go? Foreigners are likely to retain more than a trillion dollars in American cash, mostly in the form of $100 notes. What would happen if all of the foreign holders wanted to withdraw their funds?
The solution is that the Federal Reserve would pay them off, pulling the money from circulation, which it could readily afford by selling off part of its $5 trillion holdings of Treasury debt or $2.5 trillion in mortgage-backed securities. If you believe that massive foreign holdings of dollars are the sole thing keeping our currency, let alone our economy, you have not done your homework.
To summarize, there is no cause to be concerned about the effects of the dollar losing its unique international standing. But, it is difficult to envisage that happening in the first place.
Indeed, with China’s growth, there are now two legitimate economic superpowers. (There would be three if the eurozone were less fractured.) As a result, it may appear that the yuan may represent a challenge to the dollar.
Is the dollar truly stronger than it appears?
But, the dollar has three major benefits. One is incumbency: Because everyone is currently using dollars, it would take extraordinary circumstances to convince them to convert. Another difference is that American financial markets are open: unlike China, we do not impose limits on persons attempting to move money into or out of the nation. The third is the rule of law. Unless you are a tyrant preparing big war crimes, you should not be concerned that the US government would seize your money; in China, your assets may be at danger if you say something that the strongman in control does not like.
So, why all the concern about the dollar? So, I studied under Charles Kindleberger, and one of the things he warned his students was that “anyone who spends too much time thinking about foreign money tends to go insane.” The dollar’s worldwide position sounds big and mysterious, making it a suitable topic for conspiracy theories and apocalyptic thinking.
In actuality, though, the dollar’s status appears to be rather safe – with one important condition. I have no clue what will happen if, as seems all too likely, we wind up defaulting on debt obligations because a Republican House refuses to extend the debt ceiling. Yet it is unlikely to be positive. Who will believe the currency of a country that looks to be politically insane?
Yet if that happens, the danger to the dollar’s reserve currency position would be the least of our worries.
