Are the Days of Dollar Dominance Done?

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Economists are arguing the USS Dollar is sinking (Getty Images)

Time to start loading up on Renminbi. At least that is the growing conclusion of a number of economists. The value of the buck is down. Electronics make it easier to convert currency so you don’t need to have one global standard. And let’s face it the US ain’t what it used to be. China and Brazil and India are where it’s at. The Sterling fell as the world’s currency along with the English empire. So why should the dollar be any different.

At least that’s the basic argument being made by economist and political science professor Barry Eichengreen of Berkeley in his new book Exorbitant Privilege: The Rise and Fall of the Dollar and the Future of the International Monetary System.

I believe that over the next 10 years, we’re going to see a profound shift toward a world in which several currencies compete for dominance.

The impact of such a shift will be equally profound, with implications for, among other things, the stability of exchange rates, the stability of financial markets, the ease with which the U.S. will be able to finance budget and current-account deficits, and whether the Fed can follow a policy of benign neglect toward the dollar.

Eichengreen says there are a lot of bad consequences of this, especially for a country like ours that is in a lot of debt. When fewer people have to hold on to your currency just to be able to trade around the world, you have to pay them more to do so. So Eichengreen argues that US bond yields will have to rise. While that may be true, I’m not sure how much not being the dominate currency will cost us. What’s more, Eichengreen says there might even be some upside to not being the world’s defacto currency. Here’s why:

I don’t doubt Eichengreen that more of the world’s transaction will happen in other currencies. It just makes sense. There’s no reason, as Eichengreen cites as an example, for a South Korean company to be completing a transaction with a Chilean company in dollars. Or more to the point, as more and more companies do business in China and have operations in China they are going to do those transactions and other related ones in Chinese yuan or renminbi.

How much is the question and when. As my co-blogger Schuman points out, right now China still does plenty to undermine the value of its currency and make it tough to hold onto. Other emerging market countries are the same. Those countries grew up on protectionist monetary policies in order to build their exports, as long as the US is a large consumer nation, and we are showing signs that our shopping bug is coming back, I’m not sure that will change. Second, the US dollar may be down, but it’s not like other countries around the world have done a better job instilling faith in their currencies. Central bankers all over are making a race to the bottom to boost exports. So in that sense the US is no worse, and what we are doing now shouldn’t really cause anyone to jump ship.

What’s more, David Leonhardt makes a good point that Eichengreen might be focused on the wrong thing. It may cost us more to finance our debt, but if it does that will be the result of the fact that we have too much debt. And that we have still have an overly costly healthcare system and a tax policy that doesn’t want to pay for all the things our government shells out. Those things will have a much bigger effect on what it will cost us to finance our debt, than whether the world is transacting in dollars. The flip side of that, and the good news, is that those are things we can control. The growth of China’s economy is really out of our control.

Lastly, if the dollar does lose its status as the world’s top dog, Eichengreen sees an upside: Fewer bubbles. One of the reasons the housing bubble happened is because foreign investors had all these dollars they wanted to put to use. Mortgage bonds were yielding slightly more than Treasuries and considered safe. So that’s where they put them. But as long as all these overseas investors are stuck with US dollars they are going to park them in some US investment. Next time it could be farmland or Internet stocks or something else. The tendency for the global pool of money to land in America has clearly not been a good thing. Unless you enjoyed the past three years. Then long live the dollar.