This week I did a piece for Foreign Policy on the current strength of the dollar and what it tells us about how the dollar system operates under stress. You could see it as an updating of a longer essay I did back in early 2021 for Foreign Policy on the history of the dollar as the world’s anchor currency. The illustration was kinda great.
Professor Tooze: First let me say that I have admired your work a great deal. I enjoyed The Deluge so much that I bought copies and gave them to my friends.
One of the few advantages of old age is that you have seen and heard all of these things before. I remember debates about the role of the US$ going back into the 1960s. IIRC, De Gaulle complained bitterly about the role of the US$ in the 1960s. His minister and later successor, Giscard d'Estaing coined the phrase "exorbitant privilege" to describe that role. The French wanted to go back to the gold standard. Nixon closed the gold window and that talk died away.
The idea of replacing the US$ has always foundered on the question of with what? Gold was the first suggestion. In the 1980s some people claimed that the Yen would replace the US$. Most of the articles about the rise of China were first written then to describe Japan. But that bubble burst in the 1990s and took that idea with it.
A lot of Europeans wanted the Euro to replace the US$. But the mission creep of using the ECB to float the weak sisters in the EU's southern tier, and the sclerosis of the German political class have crippled the ECB. The Euro is has declined significantly against the US$ because the ECB won't raise interest rates for fear of political chaos in Italy. And, Germany having been confronted with the total failure of its energy plan and the discovery that Putin is a gangster, does not know whether to defecate or wind its watch.
Which brings us to China. They would very much like to replace the US$. But, to do that their currency must be freely tradable. They experimented with a tradable currency a couple of years ago and about a TUS$ of their reserves disappeared in a few months. That experiment was halted. It won't be repeated. The Chinese people are very nationalistic and fully support their government, but they are also very attached to their savings and know that their property rights exist only at the whim of the regime. Digital Yuan? No sane person who is not already under the thumb of the CCP is going let them have control over his financial affairs.
Crypto? useful mostly to gamblers, hackers, terrorists, and smugglers, crypto is neither a medium of exchange nor a store of value. If it isn't a currency it can't take the place of a currency. If rising interest rates don't kill crypto soon, the Federal Government is going to have to do it deliberately.
"The world is multipolar and so is global trade. Western policy must adjust to that." Intellectuals sure like to say this a lot, but it seems a increasingly delusional to me. China is starting to sputter out and all the other emerging markets are not anywhere close to catching up with the west. Seems to me like we are going to be living in a unipolar world for a while to come.
How much of the 6 T daily transactions are for futures and what could easily be considered as gambling, rather than "risk hedging"?
Also, people don't mind using the USD, they mind the US telling them what they can and cannot do and who can sell and from whom one is not allowed to buy.
Some more tensions with China over Taiwan and then one will see the truth, what is stronger, political and strategic imperatives, or upholding a way of conducting business as guided by London or Wall Street, with USD as always a party to a contract.
A very good commentary and I couldn't find a way to disagree with any of it; however, I might have added a point, which is to say that there are many aspects of competition that work on each other and may contribute to the resilience (if that's the word) of the dollar system as whole. One is the fact that, to challenge the dollar, a currency has to be a credible competitor in terms of reliability and longevity. The Euro isn't there yet; Sterling will never get back to that position; the Yen only makes sense because of the peculiarities of the Japanese political system; the Renmimbi isn't a real international currency (yet? ever?). So, in a pinch, we are stuck with the dollar, despite its many flaws and downsides and the irresponsibility of the US political system. The only currency that could compete with the Dollar in credibility, etc. is the Swiss Franc, but of course that's a huge problem for Switzerland, which suffers from the perpetual overvaluation of its currency and is much too small to support a hegemonic currency. Other points of competition are similar: London vs. New York, for example: both have good financial infrastructure and well-developed financial law and credible courts for dispute adjudication. The institutional inertia of the major law firms keeps them pretty much balanced (and, arguably, they are branches of the same system anyway), which is why, much to the frustration of the French and the Dutch, their financial and legal sectors have never been able to make a lot of headway (maybe Brexit will help in the medium term). Again, Switzerland would be a competitor if it were 20 times larger but the Swiss are smart enough to see themselves as a semi-independent satellite of New York/London and have an interest in keeping it that way. And, BTW, the really unbreakable advantage of New York and London is the English language, even if the Dutch and Hong Kong and even the French now make English available for legal and financial purposes. Maybe Brexit will allow the Commission to put several thumbs on the scale to tip it away from London, but that's as much likely to benefit New York as Paris or Amsterdam. (Thanks as always for great information and discussion.)
Hello Professor Tooze, what determines how people get paid? Doctors and actors getting paid a lot, but nurses and others not so much? How does this fit into a global capitalist order?
unitil it isnt
Highly illuminating, even for those of us are civilians sitting on the sidelines.
The biggest Dollar Store…
Always a pleasure reading your piece, but could you expand a bit more on how corporations that do business overseas will be impacted by the dollar’s strength rising? Couldn’t that be countered by raising the price of products/services they sell in the country so that it matches the value in dollars it did before its strenghtening?