What drives the catastrophizing of the dollar?

There has been a lot of talk lately aboutde-dollarization”.

For whatever reason, my previous efforts to stop the frenzy didn’t work.

Where does all this come from?

Much of it comes from the usual suspects, like the cryptocurrency cult, people for whom andhe bitcoins is the answer regardless of the question.

Some of it, I believe, comes from supporters of Vladimir Putin, who want us to believe that the United States will be punished for, in their view, “militarizing” the dollar against the invasion of – I mean, the special military operation in – Ukraine.

Elon Musk He is among those who warn that using the dollar as a weapon will destroy its status as a reserve currency, which it obviously is.

But what inspired me to write about it (again) is that lately more sober voices, who should know more, are sounding the alarm.

Experts in international relations such as done zakaria they warn that the dollar is a superpower that we risk losing.

Even economic analysts like Michael Pettis, whom I consider a valuable source of information about China, seem to believe that dollar dominance is the only reason the United States can consistently maintain large trade deficits.

This is all very strange.

Even if one believes that dollar dominance is in imminent danger – which it shouldn’t – a look at what such domination actually entails makes it clear that the importance of controlling the world’s reserve currency is very important. overrated.

What do we mean by the dollar as the dominant currency?

In the first pages of a 2021 document by Gita Gopinathnow a senior official of the International Monetary Fund, and Jeremy Stein there is a good summary.

As they point out, a large part of world trade invoiced and settled in dollars Americans; many banks based outside the US, however, offer dollar-denominated deposits; many non-US companies borrow in dollars; central banks keep most of their reserves in dollar assets; and perhaps (the evidence here is weaker) interest rates are lower, all else being equal, when borrowing in dollars than when borrowing in other currencies.

All of this is impressive.

But to what extent does it benefit the US economy?

Why, exactly, should the United States care whether a contract between Chinese exporters and Brazilian importers is it written in dollars instead of yuan or reais?

Much of what is written on this topic begins with the assertion that the special role of the dollar gives the United States a unique ability to run large balance-of-payments deficits, year after year, presumably because the status of the dollar obliges other countries accept our money.

But even a quick look at the data proves this claim to be false.

Yes, US has signed up persistent deficits, but also other countries.

We’re not even in the lead.

When you look at the current account balance of payments (the balance of trade broadly defined to include services and investment income, such as interest payments, as well as trade in goods) and advanced economies that have their own currencies (i.e., leaving out members of the Eurozone), it turns out that there are multiple nations able to manage persistent deficits, and many have run deficits larger than ours relative to the size of their economies.

Great Britainwhich has the deepest deficits, had a dominant currency worldwide, but the pound stopped playing a major role internationally generations ago.

He Australian dollar and the canadian dollar they have never been widely used outside their countries of origin.

So where does the idea that dollar dominance gives us a special ability to manage deficits come from?

I guess that’s something that sounds like it should be true, which I’ll come back to in a minute.

But first, are there other ways for the US to gain special benefits from dollar dominance?

Well, it is possible that the worldwide use of the dollar creates the perception that the dollar bonds are safe assets, thus the United States can get cheaper loans than other nations.

It’s hard to know, because there are so many factors that influence interest rates – and US borrowing costs are not, in fact, significantly lower than those of other advanced countries.

If there is any effect, however, it must be small.

I won’t go into the arithmetic, but I don’t see how, taking all of this together, the dominance of the dollar is worth more to the United States than a fraction of the 1% of gross domestic product.

Why, then, do people make such a fuss about the possible end of dollar dominance?

The answer, in my opinion, is that world currency issues seem fascinating and mysterious, so people figure they must be important – and yes, some people like to talk about it because they think it makes them sound sophisticated.

But one has to work with the numbers to realize how little is at stake.

Which means I’m almost reluctant to add that even reports of the dollar’s imminent demise are probably grossly exaggerated.

The aforementioned article by Gopinath and Stein offers a detailed analysis of one of the channels through which the dollar maintains its dominance, which adds to a long bibliography which includes, among others, some old articles from my server.

The conclusion of most of these analyzes is that the dollar is heavily used because it is heavily used, that all the functions that the dollar performs create a self-reinforcing network which maintains the supremacy of the dollar.

The point is that if one or two threads of this web are pulled, it is unlikely to come undone.

While some governments express their desire for payments to be made in other currencies, it is far from clear that they can achieve this, as these are mostly private sector decisions.

And even if they achieve partial de-dollarization, all of the dollar’s other advantages as bank and lending currency will endure.

So don’t listen to the dollar doomsayers.

Or better yet, think about what your exaggeration of a minor issue says about your judgment.

c.2023 The New York Times Society