I am honored that my good friend, US Senator Bill Hagerty (Republican, from Tennessee), has agreed to write an article for my blog. He is an honest and principled person with a business background, and in my opinion, has the uncommon temperament and ability to reach across the aisle in Washington in an effort to find common ground. He is just the type of leader this country needs in these troubled times.
Earned or Taken for Granted? The U.S. Dollar as the Global Reserve Currency
Since World War II, the U.S. dollar has served as the reserve currency of the world. Immediately following the Allied victory, European and Asian economies were in turmoil, and much of the world was still in developing nation status, but the United States emerged as the shining economic juggernaut capable of leading these war-torn nations toward prosperity. In this manner, the U.S. took an active role in making it attractive for struggling nations to avoid the pitfalls of communist influence, which led to the dollar becoming the obvious and preferred currency for development loans, trade, and commerce in the rapidly rebuilding world.
Certain basic economic fundamentals have accompanied the U.S. dollar’s reserve currency status. As more nations seek to hold dollars and dollar-denominated debt instruments, the cost of borrowing is lowered for the government, businesses, and consumers in the United States. This phenomenon has served to anchor the U.S. dollar at the center of the world financial system and provided America with material national security advantages. At the same time, there are associated costs with strong demand for the dollar as higher demand places upward pressure on the greenback’s value, ultimately making American exports more expensive in global markets. The cross-currents of lower borrowing costs for capital intensive industries and higher currency translation for exports that are less capital intensive create tensions for the American economy; however over time, no economy has demonstrated the strength and resilience of America during the decades that have followed WWII.
Yet today, we hear a chorus of nations calling for the de-dollarization of the world economy. Nations that wish for the U.S. to step down from its premier status in the world are seeking to gain an advantage by re-shifting the economic order. China and its yuan are the most credible threat – particularly when coupled with the predatory nature of the CCP’s foreign policy and its “debt trap” diplomacy. Should China obtain reserve currency status or severely weaken the dollar’s percentage of global reserves, it would fall in line with the CCP’s efforts to control vital sea lanes, rare earth minerals, critical antibiotics and the like. These are the chief instruments of global power. Ultimately, the proliferation of the Chinese yuan on the global stage creates enormous opportunities for the CCP to coerce its trading partners—a practice that would not be new for Beijing’s leaders.
While this threat seems obvious, we must take seriously the recent moves by China to utilize the PetroYuan in oil trading in the shadows of the Russian invasion of Ukraine or in LNG trading in France. However, beyond the yuan’s creep into energy markets, global leaders are openly questioning the need to use the dollar as the global settlement and reserve currency. Take, for instance, the recent statements by Brazilian President Lula, who, on his recent trip to China, endorsed the creation of a currency for BRICS to reduce exposure to the greenback. Similarly, the Prime Minister of Malaysia recently spoke with Xi Jinping about forming an Asian Monetary Fund to shift away from the dollar and the International Monetary Fund—ideas that Xi Jinping welcomes. While this is a limited set of examples, each highlights the concerning trend that the U.S. dollar’s reserve status is increasingly under siege from those who seek to displace our leadership on the global stage.
However, despite all this, the greatest threat to dollar dominance comes not from foreign actors but from Washington:
- Reckless federal spending has placed the United States on an unsustainable path, and unless we get our own house in order, global markets may do so for us. And it won’t be pretty.
- Hostile attitudes by U.S. financial regulators are bringing forth proposals to restructure our capital markets, contorting them to implement social policies that could not pass legislative muster. In the long run, such policy-making by regulation undermines the attractiveness of America’s capital markets.
- We must also acknowledge that reliance on sanctions can be a double-edged sword. Sanctions have emerged as a central tool in U.S. statecraft, but such uses must be carefully thought through. Unnecessarily weaponizing the greenback further encourages adversaries like China and Russia to pursue alternatives to the dollar.
It’s time for American leaders to face up to the advantages we derive from our status as the world’s reserve currency. The alternative would result in fundamental changes that would be adverse to the strength of our financial markets, our ability to finance major capital projects, and our ability to protect America and our allies from coercion. Let’s strengthen our own economy by addressing our unsustainable spending path, reign in un-elected bureaucrats’ efforts to weaponize the regulation of financial markets, and deploy sanctions only in a very targeted and effective manner.
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