US Scholar Article: Trump Policy Or Subversion Of US Dollar Status

- Sep 12, 2018 -

In 1965, then French Finance Minister De Stein made a famous remark about the benefits the United States gained from the dollar's role as the world's major reserve currency, according to Columbia University professor Jeffrey Sachs'article "Trump's policy will overthrow the dollar" published on the World Press Syndicate website September 3. It is "excessive privilege". With the rise of the euro and the renminbi as a reserve currency competing against the US dollar, these benefits are decreasing. Now, President Donald Trump's erroneous trade war and anti-Iranian sanctions will make the dollar lose its status faster.


US dollar is not irreplaceable


The US dollar's influence far exceeds that of the US in the world economy, the article said. At market prices, the United States currently accounts for about 22 per cent of world output and about 15 per cent at purchasing power parity. However, the US dollar accounts for more than half of cross-border goods valuation, reserves, settlement, liquidity and financing. The euro is the main competitor of the US dollar. The renminbi is third in the big gap.


The article says that the United States has gained three important economic benefits from the key currency role of the US dollar. The first is the ability to borrow abroad in dollars. When a government borrows in foreign currency, it may go bankrupt; when it borrows in its own currency, that is not the case. More broadly, the international role of the dollar has enabled the Treasury to borrow with greater liquidity and lower interest rates.


The second advantage lies in the banking sector: by selling banking services to the rest of the world, the United States, or more accurately, Wall Street, has made considerable revenue.


The third advantage is regulatory control: the United States either directly manages or co-manages the world's most important clearing system, which provides an important way to monitor and restrict financial flows related to terrorism, drug trafficking, illicit arms sales, tax evasion and other illegal activities.


However, these benefits depend on the United States providing high quality monetary services to the world. The dollar is widely used because it has always been the most convenient, cheapest, and safest unit of account, medium of exchange, and means of value storage. But it is not irreplaceable. Over the years, the United States has made serious mistakes in monetary management, Trump's improper governance may accelerate the end of the dollar's dominance.


Other countries get rid of US dollar dependence


As early as the late 1960s, the US fiscal and monetary mismanagement led to the collapse of the US dollar-based peg under the Bretton Woods system in August 1971. Subsequently, the United States and Europe experienced ten years of high inflation. The dollar turmoil was a key factor in pushing Europe on the path to monetary unification in 1993, when the euro was launched in 1999.


Similarly, the US mishandled the Asian financial crisis in 1997, which prompted China to start promoting the internationalization of the RMB. The global financial crisis of 2008 began on Wall Street and spread rapidly around the world as interbank liquidity dried up, once again pushing the world away from the dollar and into other currencies.


The article said that now, Trump's trade war and sanctions policy will almost certainly strengthen this trend. Trump's "U.S. priorities" trade and financial policies will weaken the dollar and New York's position as a global financial centre.


The article said that Trump's withdrawal from the Iranian nuclear agreement reached in 2015 and the re-imposition of sanctions against Iran may also weaken the international role of the dollar. Other countries, led by China and the European Union, will now actively circumvent U.S. sanctions, especially the U.S. dollar payment system.


Despite the soaring budget deficit, the dollar remained strong in the short term because tax cuts stimulated U.S. consumption and raised interest rates, thereby attracting foreign funds, the article said. In a few years, however, Trump's profligate fiscal policies and reckless trade and sanctions will weaken the role of the U.S. economy and the dollar in global finance.

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