The end of the dollar’s exorbitant privilege

A crash is likely given the collapse in US domestic saving and a gaping current account deficit

Stephen Roach 

© REUTERS


The riddle once posed in the 1960s by former French finance minister (eventually president) Valéry Giscard d’Estaing is about to be solved. Giscard bemoaned a US that took advantage of its privileged position as the world’s dominant reserve currency and drew freely on the rest of the world to support its over-extended standard of living. 

That privilege is about to be withdrawn. A crash in the dollar is likely and it could fall by as much as 35 per cent by the end of 2021.

The reason: a lethal interplay between a collapse in domestic saving and a gaping current account deficit. In the second quarter of 2020, net domestic saving — depreciation-adjusted saving of households, businesses and the government sector — plunged back into negative territory for the first time since the global financial crisis. 

At -1.2 per cent in the second quarter, net domestic saving as a share of national income was fully 4.1 percentage points below the first quarter, the steepest quarterly plunge in records that go back to 1947. 

 Unsurprisingly, the current account deficit followed suit. Lacking in saving and wanting to grow, the US levered its exorbitant privilege to borrow surplus saving from abroad. 

That pushed the current account deficit to -3.5 per cent of gross domestic product in the second quarter — 1.4 percentage points below that in the first period and also the sharpest quarterly erosion on record.



While a Covid-related explosion in the federal government deficit is the immediate source of the problem, this was an accident waiting to happen. 

Going into the pandemic, the net domestic saving rate averaged just 2.9 per cent of gross national income from 2011 to 2019, less than half the 7 per cent average from 1960 to 2005. 

This thin cushion left the US vulnerable to any shock, let alone Covid.

As budget deficits pile up in the years ahead, further downward pressure on domestic saving and the current account will intensify. 

The latest estimates of the Congressional Budget Office put the federal deficit at 16 per cent of gross domestic product in 2020 before receding to “just” 8.6 per cent in 2021. 

Assuming the US Congress eventually agrees to another round of fiscal relief, a much larger deficit for 2021 is likely.



This will take the US net saving rate far deeper into negative territory than during the global crisis That has ominous implications for America’s future. 

After setting aside depreciation required of an ageing capital stock of buildings and infrastructure, the US is, in effect, liquidating the net saving required for the expansion of productive capacity. 

Without borrowing surplus saving from abroad, growth becomes impossible. 

The current account deficit will only deepen as a result.

That’s when the dollar loses its special privilege. With America’s position as the world’s dominant reserve currency slowly eroding since 2000, foreign lenders are likely to demand concessions on the terms for such massive external financing. This normally takes two forms — an interest rate and/or a currency adjustment. 

The Federal Reserve has recently shifted to a strategy that takes into account an average of inflation rather than a specific target, and promised to keep policy rates near zero for several more years. 

That means the interest rate channel has effectively been closed. As a result, more of the current account adjustment will now be forced through a weaker dollar.



The US dollar’s lofty value makes it especially vulnerable. Despite recent falls, a broad index of the dollar’s real effective exchange rate remains some 27 per cent above its July 2011 low. 

That leaves the greenback as the world’s most overvalued major currency, just as the US gets sucked into an unprecedented savings-current account vortex.

Currencies are relative prices. The dollar has always benefited from the seductive charm of TINA — that there is no alternative. Think again. 

The July 21 agreement on a Next Generation EU Fund of €750bn ($858bn) finally establishes a pan-European fiscal policy. That should boost the undervalued euro. The renminbi, gold and cryptocurrencies are also alternatives to the once invincible dollar.

The dollar index fell 33 per cent in real terms both in the 1970s and the mid-1980s, and another 28 per cent from 2002 to 2011. 

During those three periods, the net domestic saving rate averaged 4.9 per cent (versus -1.2 per cent today) and the current account deficit was -2.5 per cent of gross domestic product (versus -3.5 per cent today). 

With the US having squandered its exorbitant privilege, the dollar is now far more vulnerable to a sharp correction. A crash is looming.

Why Biden Is Better Than Trump for the Economy

The presumption that Republicans are better than Democrats at economic stewardship is a longstanding myth that must be debunked. For all Americans who care about their and their children’s future, the right choice this November could not be clearer.

Nouriel Roubini


NEW YORK – Joe Biden has consistently held a wide polling lead over US President Donald Trump ahead of November’s election. But, despite Trump’s botched response to the COVID-19 pandemic – a failure that has left the economy far weaker than it otherwise would have been – he has maintained a marginal edge on the question of which candidate would be better for the US economy. 

Thanks to Trump, a country with just 4% of the world’s population now accounts for more than 20% of total COVID-19 deaths – an utterly shameful outcome, given America’s advanced (albeit expensive) health-care system.

The presumption that Republicans are better than Democrats at economic stewardship is a longstanding myth that must be debunked. In our 1997 book, Political Cycles and the Macroeconomy, the late (and great) Alberto Alesina and I showed that Democratic administrations tend to preside over faster growth, lower unemployment, and stronger stock markets than Republican presidents do.

In fact, US recessions almost always occur under Republican administrations – a pattern that has persisted since our book appeared. The recessions of 1970, 1980-82, 1990, 2001, 2008-09, and, now, 2020 all occurred when a Republican was in the White House (with the exception of the double-dip recession of 1980-82, which started under Jimmy Carter but continued under Ronald Reagan). Likewise, the Great Recession of 2008-09 was triggered by the 2007-08 financial crisis, which also occurred on the GOP’s watch.1

This tendency is not random: loose regulatory policies lead to financial crises and recessions. And, compounding matters, Republicans consistently pursue reckless fiscal policies, spending as much as Democrats do, but refusing to raise taxes to make up for the resulting budget shortfalls.1

Owing to such mismanagement under the George W. Bush presidency, President Barack Obama and Vice President Biden inherited the worst recession since the Great Depression. In early 2009, the US unemployment rate surpassed 10%, growth was in free fall, the budget deficit had already exceeded $1.2 trillion, and the stock market was down almost 60%. Yet, by the end of Obama’s second term in early 2017, all of those indicators had massively improved.1

In fact, even before the COVID-19 recession, US employment and GDP growth, as well as the stock market’s performance, were better under Obama than under Trump. Just as Trump inherited millions from his father, only to squander it on business failures, so he inherited a strong economy from his predecessor, only to wreck it within a single term.

The rally in equity prices this past August coincided with a hardening of Biden’s polling lead, suggesting that markets are not nervous about a Biden presidency, or about the prospects of a Democratic sweep of Congress. The reason is simple: a Biden administration would be unlikely to pursue radical economic policies. 

Biden may be surrounded by progressive advisers, but they are all fully within the political mainstream. Moreover, his vice-presidential pick, US Senator Kamala Harris of California, is a proven moderate, and most of the Democratic senators who would be seated in a new Congress are more centrist than the left wing of their party.

Yes, a Biden administration might raise marginal tax rates on corporations and the top 1% of households, which Trump and congressional Republicans cut merely to give wealthy donors and corporations a $1.5 trillion handout. But a higher tax rate would result in only a modest hit to corporate profits. 

And any costs to the economy would be more than offset by closing the loopholes that allow for tax avoidance and shifting profits and production abroad, and with Biden’s proposed “Made in America” policies to bring more jobs, profits, and production home.1

Moreover, while Trump and his fellow Republicans have not even bothered to formulate a policy platform for this election, Biden has proposed a suite of fiscal policies designed to boost economic growth. If Democrats take control of both houses of Congress and the White House, a Biden administration would pursue a larger fiscal stimulus targeted at households, workers, and small businesses that need it, as well as job-creating infrastructure spending and investments in the green economy. 

They would not invest in tax cuts for billionaires, but rather in education and worker retraining, and in proactive industrial and innovation policies to ensure future competitiveness. Private business would no longer be terrorized by the president in Twitter tantrums.

Democrats also are calling for higher minimum wages to boost labor income and consumption, along with more sensible regulations to reduce carbon dioxide emissions. They would push for policies to restore some bargaining power to workers, and to protect savers from predatory financial institutions. 

And they would have a much more sensible approach to trade, immigration, and foreign policy, repairing US alliances and partnerships and pursuing a policy of “coopetition” rather than lose-lose containment vis-à-vis China. All these measures would be good for jobs, growth, and markets.

Although Trump ran as a populist, he is a wannabe plutocrat – a pluto-populist – and that is how he has governed. His economic policies have been disastrous for US workers and long-term economic competitiveness. Trade and immigration policies that were billed as measures to restore US jobs have had the opposite effect. 

The “deaths of despair” that disproportionately afflict white blue-collar and precariat workers have not fallen under Trump; with more than 70,000 drug overdose deaths in 2019, this American carnage continues. If the US is to fill the high-value jobs of the future, it will need to train its labor force, not embrace self-destructive protectionism and xenophobia.

The choice for US voters who are concerned about America’s economic prospects could not be clearer. Biden, who has long tapped into blue-collar concerns, is the only presidential candidate in recent history without an Ivy League background. 

He has a better chance than anyone of rebuilding the Democratic coalition and winning back the support of disaffected, working-class voters. For all Americans who care about their and their children’s future, the right choice this November could not be clearer.


Nouriel Roubini, Professor of Economics at New York University's Stern School of Business and Chairman of Roubini Macro Associates, was Senior Economist for International Affairs in the White House’s Council of Economic Advisers during the Clinton Administration. He has worked for the International Monetary Fund, the US Federal Reserve, and the World Bank. His website is NourielRoubini.com, and he is the host of NourielToday.com.

Why Low Interest Rates Hurt Retirees

Retirees took another wallop from COVID-19 with the Federal Reserve’s announcement two weeks ago that it expects to hold interest rates near zero at least until 2023 because of the pandemic. 

That spells lower returns for retirement accounts, and it adds to the underfunding of pensions that has worried retirees for many years now.

The implications of lower returns on investments are that retirees may save less, dip into their retirement savings, and start collecting Social Security benefits earlier than planned, according to Olivia S. Mitchell, Wharton professor of business economics and public policy and executive director of the School’s Pension Research Council.

“Low returns from the market are essentially a tax on retirees,” Mitchell said in a recent episode of the Wharton Business Daily show on SiriusXM. (Listen to the podcast above.)

“In the good old days, people used to ladder their bonds, put a little bit of money in the market, and try to live off those returns,” Mitchell noted. (A bond ladder refers to investments in bonds with varying maturities so that a portfolio does not get locked into one type of bond.) 

“This is not feasible any longer. In fact, it’s even worse, because those lower nominal returns are in many cases negative in real, or inflation-corrected, returns.”

Retirees may respond to the prospect of low returns by saving less, Mitchell said: “If you’re not rewarded for deferring your consumption as much, then why do it?” Their savings would fall especially in tax-qualified retirement plans, she predicted. The tax-qualified feature is helpful for those who aim to build an asset base over time with interest and other returns on their investments, while they are in relatively lower tax brackets. 

But now, “those build-ups are simply not happening the way that people had planned,” she said. “If people do save, they’ll probably save less overall, and they will tend to save in other non-tax favored accounts like bank saving and checking accounts, where you’re lucky if you’re earning half a percentage point.”

Desperate Times

Mitchell recalled that the 2008–2009 global financial crisis was “a bath of cold water for retirees, savers, pension funds, insurance companies, and so on.” However, back then, an economic recovery followed, and “the labor market didn’t suffer as badly as it has during the COVID-19 pandemic, and for as long as it has,” she noted. 

Nowadays, people’s perspectives on retirement have changed and they are looking to work a little longer. “But the question is, can you even find a job, especially if you are an older worker?” she asked.

In times of desperation, some people may claim their Social Security benefits sooner than they may have planned — despite the fact that every year of delay could boost their eventual benefit by 7% to 8%, Mitchell said. “People who don’t have any retirement savings may have to go ahead and claim their [Social Security] benefits early, thereby experiencing a lower payout the rest of their lives.”

Others that have lost jobs have drawn down some of their 401(k) savings. Since April, they have been living off the government’s “economic impact payment” of $1,200 per individual (an additional $500 for each child), and the expanded unemployment insurance benefits contained in the $2.2 trillion CARES Act. 

“Those have now tapered off, and Congress has not yet been able to come in with a new COVID financing bill,” Mitchell stated. Some people might consider options like starting their own small business, but “this is a pretty tough environment in which to start a new business,” she added.

The 2020 CARES Act permitted individuals to make early withdrawals up to $100,000 from 401(k) and 403(b) accounts without penalties. That hasn’t caught on so far because the economic stimulus payments provided money to cope with the pandemic in the short term. 

However, it may not be possible to stave off early withdrawals from retirement accounts for too long, said Mitchell.

“Going into the fall and winter, I do worry that [early withdrawals from retirement accounts] will become more of an option if the labor market doesn’t recover,” Mitchell said. “And so, people might end up biting off their nose to spite their face. Yes, they’ll get some cash, but what does it say about their retirement? Not much [that is] good.”

“The first and most important thing that needs to be done by policymakers is to bring Social Security back into solvency.”

A Perfect Storm

Also looming is the possibility that the Social Security Trust Fund could run out of money by 2029, rather than 2032 or 2034 as had been predicted by the Penn Wharton Budget Model after the pandemic struck. This could happen “since people aren’t paying the payroll taxes needed to keep the system afloat and potentially because people are claiming [their benefits] earlier,” said Mitchell. 

“The first and most important thing that needs to be done by policymakers is bring Social Security back into solvency.”

For sure, pension funds and insurance companies have also been suffering from low returns, Mitchell continued. 

“Many of the state and municipal pension plans are probably not going to make it through this COVID crisis with any healthy amount of funding.”

As it happens, pension plans are facing “a perfect storm” now, said Mitchell. 

They faced the 2008–2009 financial crisis without being fully funded, but in later years “continued to invest in risky assets, hoping to make it up in the great capital market lottery.” 

During the pandemic, many pension funds lost 30% to 40% of their value, and the forecasted low returns will make it “very difficult for them to survive,” she added.

In that seemingly hopeless situation, Mitchell saw annuities as a “potentially appealing” option for retirement planning. Annuities are insurance products that pay an income in retirement. 

Even if the insurance investments held by annuity providers don’t make much money, investors who outlive others in their pool will be eligible for survival credits (also known as mortality credits), she noted. 

She suggested that it is a good idea for employers and retirement plan sponsors to include annuities in 401(k) and 403(b) accounts, now permitted by the Secure Act since late 2019.

Forging a Stronger Post-Pandemic ASEAN+3 Economy

The unprecedented challenge that COVID-19 poses to the ASEAN+3 countries further underscores the importance of regional financial cooperation. To that end, recent enhancements to the region's currency-swap arrangement will help to mitigate Asian economies' vulnerability to economic and financial shocks.

Aso Taro, Le Minh Hung


TOKYO/HANOI – The modern international financial system emerged from the devastation of World War II. Since then, it has continued to be shaped by historic slumps – most recently, the 2008 global financial crisis.

Today, the COVID-19 pandemic is putting the global financial system to another stringent test. And the unprecedented challenge facing the ASEAN+3 region – the ten members of the Association of Southeast Asian Nations (Brunei Darussalam, Cambodia, Indonesia, Lao PDR, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam), plus China, Japan, and Korea – further underscores the importance of regional financial cooperation.

Since the 1997 Asian financial crisis, the ASEAN+3 economies have been diligently enhancing their regional financial-safety measures. The annual ASEAN+3 Finance Ministers’ and Central Bank Governors’ Meeting has been the focal point for regional cooperation aimed at strengthening economic and financial resilience.

To this end, the ASEAN+3 countries decided in 2000 to establish the Chiang Mai Initiative, the region’s financial safety net. The CMI was a network of bilateral swap arrangements among the ASEAN+3 countries that aimed to provide US dollar liquidity to members in times of need and supplement financial assistance from the International Monetary Fund.

In March 2010, following the global financial crisis, the CMI evolved into the Chiang Mai Initiative Multilateralization (CMIM) Agreement, under which the participating swap arrangements would henceforth be governed by a single agreement and a centralized decision-making body. The size of the CMIM facility was set at $120 billion.

Since its establishment, the CMIM Agreement has been upgraded twice. The first amendment, in 2014, doubled the size of the arrangement to $240 billion, and increased the “IMF de-linked” portion – the maximum amount members could access without IMF co-financing – from 20% to 30%.

The second amendment, to promote greater flexibility in co-financing with IMF financial assistance, and strengthen coordination with the Fund, entered into force in June.

At their most recent meeting, on September 18, ASEAN+3 finance ministers and central-bank governors exchanged views on the global and regional economic outlook, as well as policy responses to risks and challenges arising from the COVID-19 pandemic. 

Over the past few months, the region’s policymakers have deployed extraordinary pandemic-related measures in the form of targeted fiscal, monetary, and credit support to households and firms, and have afforded regulatory forbearance and liquidity support to the financial system.

Against this backdrop, ASEAN+3 finance ministers and central-bank governors announced a timely and historic agreement to strengthen the CMIM, which will certainly help members to cope better with the heightened risk and uncertainty posed by the pandemic. 

The latest enhancement will allow members to access up to 40% of the CMIM facility without IMF co-financing. Moreover, members agreed to formulate the option of using their own currencies for CMIM crisis financing, in addition to the dollar, on a voluntary and demand-driven basis.

These amendments, which will take effect upon completion of the signing process by all ASEAN+3 members, further strengthen the CMIM as a robust and reliable regional self-help mechanism, and reinforce its importance and relevance in the global financial safety net.

In this regard, the ASEAN+3 Macroeconomic Research Office (AMRO), established in 2011 to conduct regional macroeconomic surveillance and aid the implementation of the CMIM, plays an important role as a “trusted family doctor” to support the group’s members. 

AMRO’s mandate to contribute to regional economic and financial stability is even more critical in today’s environment. 

Under the leadership of Doi Toshinori, AMRO has produced timely analyses and updates on the pandemic’s regional impact to support members’ policymaking.

Since its outbreak, the COVID-19 pandemic has taken a heavy toll on both human life and national economies. Within the ASEAN+3 region, policymakers have implemented necessary containment measures to control the transmission of the coronavirus, which inevitably affected economic activity. 

With the global economy increasingly interconnected, the disruptions to international supply chains and the challenges faced by many industries have demonstrated the importance of mitigating the region’s vulnerability to economic and financial shocks. 

We are encouraged by the progress of the CMIM and AMRO as important tools for strengthening our economies’ resilience.

While growth is projected to fall sharply for many economies this year, we expect the ASEAN+3 economies to rebound in due course – and there are early signs of recovery. 

Given the pandemic’s uncertain trajectory, however, the ASEAN+3 countries will remain vigilant, and we will cautiously plan our exit from pandemic-related measures to safeguard growth and financial stability in the region.

Finally, the ASEAN+3 finance ministers and central-bank governors pledge to remain resolute in our commitment to uphold an open and rules-based multilateral trade and investment system, and to strengthen regional cooperation and integration.


Aso Taro, a former prime minister of Japan (2008-09), is Japan’s Deputy Prime Minister and Minister of Finance.

Le Minh Hung is Governor of the State Bank of Viet Nam.