Dollar dominance is not over...
This article was originally published on 10/13/2020 for my informal email list. I’m re-posting some of my earlier newsletters here as a gradual process to shift to Substack.
One of my friends sent me this FT article last week. The author is Stephen Roach, former Morgan Stanley Chief Economist and Asia Chairman. We’re having him on the show to discuss this column soon. Basically, he’s arguing that dollar dominance is gradually waning and might soon be over.
I think this is an extremely interesting debate whether current events like Covid-19 (combined with other factors) are essentially dragging down (or up) the status of dollar. To me, you can really go both ways. For example, did Covid make people want dollar more badly because of its safe heaven attribute, or did Covid make people want it less because American economy was hit hard?…. Or for example, many are now saying that Biden’s election would boost dollar status because the markets will be more stable without Trump’s tweets. Others say Trump is more pro-market and pro-capital, so dollar will be stronger under Trump…
Well, going back to the more fundamental question of where dollar is at in the grand scheme of history – my first thought to Roach’s idea of waning dollar dominance was to disagree. Here are 4 pro-dollar reasons on my mind right now after talking to some people:
Dollar’s incumbent advantage: Just because the preconditions don’t exist anymore, doesn’t mean it will collapse. Look at London – it used to be the global financial center of the world. British empire has been in decline since WWI and Brexit delivered another fatal blow, but London still is extremely relevant. To take London out of Europe’s picture will take many more years.
No good alternative: Dollar dominance might wane slowly, but it will still be the reserve currency for a long time because there is no good alternative out there. The size of the dollar pools are massive. In many sense, EUR is Just a derivative of the USD. The EUR is plagued by an even weaker economy than the US, even lower interest rates, its political susceptibility to China/Russia/Turkey etc. There are lots of factors you can poke into the soft underbelly of EU. And Chinese Yuan? Hmmm. Not even people in China want Chinese Yuan (look at the capital flight from rich people), how can it become a dominant reserve currency?
Convertibility: Political theorists have long argued that the domination of dollar is hard to be replaced. The convertibility and universality make it just irreplaceable. You can have very elaborate financial instruments but when things go down (like Covid-19 hit), everyone eventually needs to cash in and go for the dollar – the ultimate form of liquid asset. To a certain degree, not even gold has such attraction. Check out our interview released today with Katharina Pistor on this issue – her book The Code of Capital is fascinating.
Nominal value preservation: The dollar is nice because the US government will preserve its nominal value no matter what. They won’t guarantee the real value because of inflation, but they will make sure one dollar still means one dollar in some very tangible and secure sense. Well, unless Roach is saying that the nominal value of dollar won’t even be preserved down the road, then it’s hard to imagine a future without dollar being absolutely dominant.
Everyone says “this time is different,” but is it? Well, if the dollar goes down in a couple years, you may take this email and say “I disagreed with Tiger back in 2020 and now look I’m right…”