HELL IS OTHER PEOPLE´S CURRENCIES / THE ECONOMIST

Hell is other people’s currencies

As the Trump administration may soon find out

Could it have been the rouble instead? 

The question is a strange opening gambit for a history of dollar dominance, with Russia’s economy sealed off from the West and its output less than a tenth of America’s. 

The idea of the rouble as a global reserve currency is laughable—and that is why Kenneth Rogoff considers it near the start of his new book, “Our Dollar, Your Problem”. 

What is obvious now was not at all so in the 1960s and 70s, when the rouble bloc’s economy was fast becoming the envy of the world. 

Soviet growth was red-hot. 

Plenty of economists believed parity with America was “not just likely but inevitable”.

In reality, of course, there was nothing inevitable about it: the Soviet Union stagnated and then fell apart. 

Had Mr Rogoff’s book been published a few weeks ago, framing his analysis of the dollar’s global role with this story of imperial collapse might have seemed lurid. 

Now questions over the position of America’s currency at the heart of the global trading and financial systems have become widespread. 

Donald Trump’s erratic protectionism has threatened both with a wrecking ball, denting confidence in America’s policymaking and even shaking investors’ faith in its government debt. 

The central argument of “Our Dollar, Your Problem”—that the greenback’s pre-eminence was never guaranteed and might plausibly be overturned—could hardly be more timely.

It is not the first time that Mr Rogoff, a former chief economist at the IMF and now a professor at Harvard University, has made a provocative case which then suddenly went mainstream. 

He spent much of the 2010s arguing that quiescent inflation and low interest rates were an aberration which would soon disappear. 

Although well outside the consensus at the time, his views began to be vindicated in 2022, as consumer prices and bond yields rose rapidly. 

He was also early to warn about the potential for a Chinese property crisis and consequent economic slowdown, having published a working paper entitled “Peak China Housing” in 2020. 

The next year a default by Evergrande, a Chinese construction giant, sent those concerns global, too.

Today China’s lingering growth problem, which may cause its economy to flatline in relative terms long before it gets as big as America’s, is perhaps the biggest obstacle to the yuan supplanting the dollar. 

(Other barriers, such as controls over capital flows and the exchange rate, could at least in theory be overcome.) 

In the 1980s, notes Mr Rogoff, the Japanese yen looked as if it might rival the dollar, since after years of strong growth and superior manufacturing “Japan’s economy seemed to be bearing down on the entire United States like an express train.” 

This was before the bursting of two enormous bubbles in its equity and property markets, which a soaring exchange rate helped inflate. 

Japan’s economy suffered decades of stagnation; the yen fell by the wayside.

Mr Rogoff is most compelling when discussing the trials the global dollar has caused for smaller economies—unsurprisingly, since at the IMF he had a front-row seat for many of these. 

Some of the worst arose from countries’ attempts to fix their exchange rates against the reserve currency, a system originally mandated by the Bretton Woods agreement of 1944. 

Fixing exchange rates against the dollar seemed desirable because it simplified trade, eased the integration of other countries’ banks into the global financial system and helped maintain faith in their currencies. 

Protecting such pegs, though, entailed a mix of capital controls and mimicking the Federal Reserve’s monetary policy, which could make downturns worse. 

American inflation, meanwhile, wreaked havoc everywhere. 

The system collapsed in the 1970s.

Yet the lure of fixed rates remained, with inflationary and hyperinflationary episodes in places such as Argentina, Mexico, Venezuela and Zimbabwe vividly demonstrating why. 

Before the creation of the euro, Europe’s internal efforts to fix its countries’ exchange rates led to one attack after another by speculators. 

Raids in the early 1990s on Finland, Sweden, Italy, Spain and Britain all forced devaluations. 

Later, the dollar pegs maintained in South-East Asia resulted in enormous capital inflows that then suddenly reversed, sparking the Asian financial crisis of 1997-98. 

The Russian crisis of 1998, also triggered by an unsustainable fixed-rate regime, helped propel Vladimir Putin to power.

These various crises forged the present system, dominated by the dollar, the euro zone’s free-floating single currency and what Mr Rogoff dubs the “Tokyo consensus” in Asia and Latin America. 

This imitation of Japan’s exchange-rate policy has seen many other countries’ central banks amass “war chests” of dollar reserves that can be used to stabilise their currencies amid volatility, while stopping short of pegging them outright. By comparison with previous regimes, the Tokyo consensus has so far been remarkably successful.

All the devils are here

A gradual erosion of the dollar’s role might be bearable. 

Mr Rogoff’s book argues that the yuan is more likely to gnaw away at the dollar bloc than to overthrow the greenback entirely. 

It is already used to price a rising share of China’s trade, encouraging countries across Asia’s supply chain to include it in their exchange-rate regimes. 

In time, innovative use of digital currencies could add to the pressure to de-dollarise. America would have less control of the global financial system than before, but neither its rivals nor its allies would complain about that.

Even writing before this year’s ructions, though, Mr Rogoff worried most about the threats from inside America—whether ballooning government debt or political interference at the Fed. 

A loss of faith among investors that causes the dollar to lose its role not gradually, but suddenly, might seem fanciful. 

Once upon a time, so did the idea that the Soviet Union might fall.