The dollar is the global reserve currency. This has been called the exorbitant privilege. It’s a huge deal for the US that the dollar holds this privilege, so it is said.
… but wait.
This is a huge sacred cow, but perhaps the US dollar being the “exorbitant privilege” is actually an exorbitant curse.
Firstly, with my tongue firmly in my cheek—and also with a wish to engage US readers and give them at least a slight chance to agree with what I’m about to suggest—I’ll inform them that the reserve currency being “the exorbitant privilege” is actually a French notion. It is, perhaps, not such a great idea afterall.
So secondly, consider this: there is twice as much Chinese yuan, in dollar terms, as there are US dollars (we’re talking M2 here). So you could say the Chinese have twice as much money as the US, which means twice the money for four times the people—or half the money per head compared to Americans—but even so, you might wonder why they don’t want to be the global reserve currency.
So let’s look at the privilege. Sure, you can throw your weight around. And certainly, you can always print more confetti if you have a balance-of-payments problem. When you print your global reserve dollars, you get money for nothing—which is nice.
But…
You also have to export your money to buy stuff, or the world either has to ditch your money as the global currency, or the global economy gets strangled for liquidity, because it doesn’t have enough of your global currency going around the system.
The trouble is, export your money to buy stuff necessitates a balance-of-payments deficit—the very thing Trump is trying to reverse.
If you’re busy ruling the world, like the US has been busy trying to do since 1946, and you’ve won all the money in the world because the idiot European’s were busy wrecking themselves, this export isn’t a big deal. But as the years pass, and more and more of your money goes out the window, and more and more stuff comes in through the door, you’re hollowing yourself out.
That confetti comes home in the hands of the folk who send you stuff, and they buy up your assets. At some point, all you make is confetti and all you own is a printing press. That surely resonates.
If a country is making profit from a trade balance every year, there are assets as well as liabilities on its balance sheet, but if its constantly printing confetti to swap for trade it ends up with nothing but liabilities and a broken printing press.
So let’s look at this chart.
What is this? It’s a 15-year-plus chart of the US dollar and its rise of 20–25% versus the euro and GBP, and nearly double versus the yen.
This strong performance by the dollar is not because the US is running a balance economy or government budget or any kind of financial discipline. This value boost is the consequence of the dollar being the world’s reserve currency.
US reserve status allows the US political system to bankrupt itself with debt, and enables the country to run massive trade deficits that hollows it out.
The exorbitant privilege has allowed the US to become dissolved in luxury.
However, it is, as they like to say these days, not sustainable.
Woe, thrice woe, what if the US loses its global reserve status?
So what? Europe doesn’t need it. China doesn’t want it. Japan doesn’t ask for it.
So the benefits are?
Lower borrowing costs for the government. Japan’s borrowing costs are lower, and they’re running a way bigger debt/gdp deficit.
Trade deficits without currency collapse. The UK has such deficits and survives. But deficits that hollow you out are far more toxic than the ability to run them further.
Seigniorage. Profit from printing confetti. China has printed twice as much and has assets to back theirs. Unbacked confetti must come back and bite.
Global financial system influence. Without global economic power from commerce to back it up, the fallback to maintain influence is force. History shows this is not a long-term proposition.
Crisis resilience and safe-haven flows. Geopolitical and economic strength comes from activity, productivity, sound governance, and assets—not printing vouchers and enforcing their value with might. Just ask the Soviets how that ended.
So is being the global reserve currency a privilege or a curse? Like all mechanisms, nostrums taken to extremes becomes poisons.
Looking at the US with its massive deficits, it would seem the patient is already poisoned.
The policy of maintaining the dollar as the global reserve may continue, end or wither away, but its use as a channel for economic dissipation is running close to conclusion because the sustainability of chronic rolling deficits is now clearly pushing limits.
Meanwhile China doesn’t want to be the global reserve currency, even though it could be, there reason being simple. They want to keep exporting stuff, take confetti, and turn around with it and buy assets in their customers’ countries, eventually ending up owning all the good bits. If you do this with land you are called colonial, if you do it with productive assets you are called rich.
So as long as the sacred cow of the idea of the dollar as global reserve currency wanders the world, the US will continue selling off its family silver so its people can fill their double garages with plastic trash imagining that their exorbitant privilege is a blessing, rather than the curse it has become.