Speaker 1: Hello, and welcome to another episode of the Odd Lots podcast.
Speaker 1: I'm Joe Wisn't Thal And I'm Tracy Halloway. Tracy, We've
Speaker 1: both been covering financial markets and the economy for I
Speaker 1: think roughly the same amount of time. Right, Uh, you
Speaker 1: are four years older than me. I know you forget
Speaker 1: from time to time, but yeah, wait, are you a millennial?
Speaker 1: I'm on the cusp of a millennial. I'm what they
Speaker 1: call an elder millennial Joe, but roughly the same short. So,
Speaker 1: one of the things that I think has been a
Speaker 1: persistent theme for as long as I've been following this
Speaker 1: stuff is people predicting the inevitable demise of the US
Speaker 1: dollar as the global dominant safe asset. Wouldn't you? Would
Speaker 1: you feel the same way? Oh for sure? And there
Speaker 1: are certain, um let's say, conspiratorial leaning websites and commentators
Speaker 1: who love to take up this topic. In fact, I
Speaker 1: still remember my dad emailing me about how the Iraq
Speaker 1: War was caused by Iraq demanding or starting to offer
Speaker 1: crude oil in euros as opposed to the U S dollars.
Speaker 1: So this is something that comes up all the time
Speaker 1: that there's going to be I just had a really
Speaker 1: good idea. Okay, can we have your dad as a
Speaker 1: guest on the show? Sometimes? Oh my god, I'm serious
Speaker 1: because number a number of times now your dad has
Speaker 1: come up in a character as a character, and you're
Speaker 1: thinking whether it's we're talking about precious metals or some
Speaker 1: other conspiracy or something political, and it's like, why don't
Speaker 1: we keep talking about him? Why don't we have him
Speaker 1: as a guest Sometime? I will ask him. You definitely
Speaker 1: ask him about silver if he comes on. Okay, good,
Speaker 1: don't tell him, don't show him any of my writings
Speaker 1: before I talk about how crazy silver people are. Okay,
Speaker 1: I don't want him to dislike me, alright, But anyway,
Speaker 1: you're right. So a lot of like fringe, gold bug,
Speaker 1: zero hedge, silver bug, all that kind of stuff. They've
Speaker 1: been talking about the inevitable demise of the U. S
Speaker 1: Dollar for as long as I think both of us
Speaker 1: can remember. But what's interesting is that, rather than the
Speaker 1: dollar haven't collapsed as many people would have predicted, maybe
Speaker 1: after the financial crisis or beforehand, due to various reasons,
Speaker 1: it's actually gotten stronger and it's uh, it's going nowhere.
Speaker 1: It's still here. Just as strong as ever, and arguably
Speaker 1: it's becoming even more dominant on the global stage over
Speaker 1: the last decade or so. Yeah, and in addition to that,
Speaker 1: you now have quite a bit of academic research that's
Speaker 1: actually pointing out just how dominant the dollar is in
Speaker 1: the financial system and starting to write about how this
Speaker 1: is a problem. So Young Sun Shin from the Bank
Speaker 1: for International Settlements, who was on All Thoughts, is a
Speaker 1: really good example of this. But probably the most recent
Speaker 1: one was Bank of England Governor Mark Carney, who gave
Speaker 1: that speech at Jackson Hole. We mentioned it on last
Speaker 1: week's episode of the podcast and you actually weren't there,
Speaker 1: but he proposed potentially replacing the dollar in the financial
Speaker 1: system with a sort of multipolar digital currency. I think
Speaker 1: he called it a synthetic hegemonic currency. I know, I
Speaker 1: love that expression. It's so sci fi um. But yeah.
Speaker 1: So it's interesting, is like the conversation about the dollar.
Speaker 1: It's not that the dollar's got collapsed as everyone predicted,
Speaker 1: or as a lot of people thought was inevitable. It's
Speaker 1: actually gotten stronger. And now the conversation is, oh my god,
Speaker 1: it's becoming too dominant. And so we do have all
Speaker 1: these sort of elite circles, whether it's Mark Karney or
Speaker 1: the b I s. And they're also talking about the
Speaker 1: post dollar world, but from kind of the opposite perspective
Speaker 1: that we would like to see it recede. And it's
Speaker 1: a stubborn lee refusing too much to the chagrin of
Speaker 1: maybe your dad and other conspiracy theorists. So we're gonna
Speaker 1: be talking about the dollars not so inevitable demise on
Speaker 1: this episode exactly, the dollars refusal to weakend just how
Speaker 1: everyone thinks it should so previous odd lots of guests
Speaker 1: from way back in the day. I think we talked
Speaker 1: to him right in the wake of the Trump election
Speaker 1: about various topics. He's an economist, He's been talking and
Speaker 1: writing about the dollar a lot lately and sort of
Speaker 1: thinking about these issues. Kind of on a similar trajectory.
Speaker 1: Is Mark Kearney. I want to bring in this week's guest,
Speaker 1: David Beckworth. He's a senior research fellow at the Mercadis
Speaker 1: Center at George Mason University, longtime economics researcher and commentator,
Speaker 1: public voice on these issues. David, thank you very much
Speaker 1: for joining us. Well, thank you for having me back
Speaker 1: on the show. Thanks for being back. So you know
Speaker 1: how surprised are you. Let's start by this about how
Speaker 1: prominent the voices are these days. Tracy and I were
Speaker 1: just talking about who are really calling out the sort
Speaker 1: of urgent need or at least semi urgent need to
Speaker 1: get away from the global dollar dominant. It is surprising
Speaker 1: that we are having this conversation and this time in history.
Speaker 1: You're right, you would think by this point that dollar
Speaker 1: would be less consequential, but the rest of the world
Speaker 1: continues to feel its brunt as you mentioned, So it's
Speaker 1: it's not surprising that the rest of the world is
Speaker 1: talking about it. It's just surprising that we're still talking
Speaker 1: at this point in time. John Connolly, Richard Nixon's secretary
Speaker 1: of Treasury, said the dollar is our currency, but it's
Speaker 1: your problem. I think the difference today would be it's
Speaker 1: it's our currency and it's our problem collectively as a world,
Speaker 1: because I think the big difference between now and then
Speaker 1: is it's gotten so far reaching that when it does
Speaker 1: create problems, it affects the world, but it also comes
Speaker 1: back to affect the US economy. So talk to us
Speaker 1: exactly why a strong dollar is a problem for the
Speaker 1: US economy, and could you make sort of put it
Speaker 1: through the lens of Donald Trump. And the reason I
Speaker 1: asked that is because there used to be some confusion
Speaker 1: or it seemed like there is confusion about whether Trump
Speaker 1: wanted a stronger or a weaker dollar. Um. You know,
Speaker 1: a strong dollar intuitively sounds good for someone who likes
Speaker 1: to make things great again, but a week dollar would
Speaker 1: be good for US exports and the manufacturing sector. And
Speaker 1: now it seems like Trump has definitively settled on what
Speaker 1: he wants. He wants a weaker dollar. So why is
Speaker 1: that and why is a strong dollar painful for America? Yeah?
Speaker 1: I think there's there's two reasons, are two ways that
Speaker 1: it affects the US and and the first one is
Speaker 1: the one you're talking about, the Trump's really worried about,
Speaker 1: even if he hasn't correctly figured it out entirely. And
Speaker 1: that's the domestic effects. So the world demands dollars to
Speaker 1: buy our safe assets for like the biggest producer of
Speaker 1: safe assets treasuries, but also some other assets GSCs, even
Speaker 1: some privately produced safe assets. But as a consequence, the
Speaker 1: dollar tends to be overvalued more often than not, which
Speaker 1: in turn means we're gonna run more trade deficits. We're
Speaker 1: also gonna tend to run more budget deficits, and all
Speaker 1: this has distributional consequences that it tends. It tends to,
Speaker 1: you know, support the finance industry. We are great at
Speaker 1: exporting debt and financial securities to the rest of the world.
Speaker 1: It's one of our comparative advantages. But you know, Trump
Speaker 1: sees the flip side of that, he sees the costs,
Speaker 1: and that's certain other industries like manufacturing do get harmed.
Speaker 1: And so there's there's this distributional question and it does
Speaker 1: have a bearing domestically also. In addition, because the world
Speaker 1: once our assets so badly, in general, financing costs are
Speaker 1: lower in the US, which means the US tends to
Speaker 1: be more leverage than it would otherwise be the case.
Speaker 1: So between kind of distributional questions more over leverage, there
Speaker 1: is this domestic angle, and I think that's what Trump
Speaker 1: really is trying to figure out. He blames China, he
Speaker 1: blames others, but it's really the strong dollar that arises
Speaker 1: is from this demand for our assets. But the second
Speaker 1: thing that's I think Carney is getting at as well.
Speaker 1: As there is this global financial cycle, you see the
Speaker 1: FED being more cognizant of it. Now. J Pal can't
Speaker 1: come out and say, hey, we have an international mandate now,
Speaker 1: but he is more mindful of the reverberations that you know,
Speaker 1: their policies can have to go through the global economy
Speaker 1: come back to the US. But in short, there's this
Speaker 1: domestic concern and then there's an international concern. So there
Speaker 1: is a lot to unpack here. Let's start with you
Speaker 1: talked about the insatiable demand or the very high demand
Speaker 1: at a minimum for US produced financial assets and treasuries
Speaker 1: are one of them, but g S E debt is another.
Speaker 1: Maybe uh, certain parts of US real estate are considered
Speaker 1: safe dollar denominated assets by the rest of the world.
Speaker 1: Explain this phenomenon. What is it about US dollar denominated
Speaker 1: assets that people crave all around the world and why
Speaker 1: can't they find the equivalent elsewhere, whether it's in Japan
Speaker 1: or Germany or UK or some other country like that. Well,
Speaker 1: it's a path dependency story, I think you can tell.
Speaker 1: I mean, it starts off with the US being the
Speaker 1: biggest economy in the world. Now we're not so much
Speaker 1: we're you know, we're running neconnect with China. But that's
Speaker 1: the original story here is the U S starts out
Speaker 1: big um, it's it's got a huge tax based lots
Speaker 1: of resources to back it up. But over time what
Speaker 1: happens is the dollar spreads throughout the world and so
Speaker 1: there's these huge network effects like and this path dependency
Speaker 1: story is the more widely used this this currency is,
Speaker 1: the more valuable it is, and it's got it's gotten
Speaker 1: to such an extent there's an incentive to look to
Speaker 1: any kind of dollar denominated asset as the safest asset
Speaker 1: of the world. So even as the US size that
Speaker 1: the U S economy as a percent of world GDP shrinks,
Speaker 1: the reach of the dollar continues to grow. And that's
Speaker 1: one of the discussions that was had at this Jackson
Speaker 1: Whole conferences that it's it's ironic that the dollars reaches
Speaker 1: actually growing when the US economy is shrinking. And again
Speaker 1: the reason is it's just it's more convenient, there's a
Speaker 1: convenience heel to to price things in dollars. Now it's
Speaker 1: it's better to get them from the US. But foreigners
Speaker 1: are also producing these dollar denominated assets. So the b
Speaker 1: i S keeps track of this and they report just
Speaker 1: over eleven trillion and dollar denominated securities have been issued
Speaker 1: outside the United States, so there's an incentive for them
Speaker 1: to issue it as well, just because of the convenience yield.
Speaker 1: So just to press on this point, you're saying that
Speaker 1: everyone wants dollar denominated assets, but because the rest of
Speaker 1: the world economy is growing while the US is sort
Speaker 1: of sluggish or not growing as fast, that at some point,
Speaker 1: maybe now the US becomes unable to basically absorb all
Speaker 1: that demand for dollars denominated assets. Is that it it
Speaker 1: was all. It's been coined the Triffan diluma. The world
Speaker 1: once the reserve currencies assets more than the country that
Speaker 1: produces is willing to either make it or can make it. So, yeah,
Speaker 1: the world wants us to produce more treasuries, more g
Speaker 1: sc s, more financial assets, but that in turn would
Speaker 1: make us the incredibly overleveraged economy, and so somewhere else
Speaker 1: in the world they're trying to meet that demand. I mean,
Speaker 1: we saw this during you know, the early to mid
Speaker 1: two thousand's. There weren't enough treasuries to go around, so
Speaker 1: we turned to wall streets to create synthetic safe assets
Speaker 1: that weren't so safe once you know, everything came clear,
Speaker 1: and I think we're seeing that again and the rest
Speaker 1: of the world. The world's producing some of this wall streets,
Speaker 1: still producing the ears. There are privately labeled assets still
Speaker 1: going out there. But for us to truly meet the
Speaker 1: world's demand for another word, for us to get those
Speaker 1: interest rates around the world back up to what would
Speaker 1: be more normal historical levels, would require a lot more
Speaker 1: debt creation, and I think, you know, we're uncomfortable doing
Speaker 1: that at some level. I want to get to the
Speaker 1: other side of the equation about the downsides of the
Speaker 1: global dollar, but just to walk us there. So we
Speaker 1: have all this demand for dollar denominated assets because of
Speaker 1: these network effects that you describe. That has distributional consequences
Speaker 1: for the US because it perpetually, uh maybe strengthens the
Speaker 1: dollar too much, hurting domestic manufacturers while benefiting the financial industry,
Speaker 1: which essentially is the manufacturer of dollar denominated assets, so
Speaker 1: helping finance, hurting workers. You could see why Trump is
Speaker 1: not crazy about that situation. Let's talk about the global picture.
Speaker 1: So something that obviously Mark Arney talked about Jackson holl
Speaker 1: was It's not just that it hurts us workers the
Speaker 1: strong dollar. There are consequences for the entire world of
Speaker 1: everyone essentially being on the dollar cycle. And I think
Speaker 1: we saw that in eighteen a bit when the Federal
Speaker 1: Reserve hip grades multiple times. Perhaps that was appropriate given
Speaker 1: the growth of the U S economy that year, but
Speaker 1: it hurt other parts of the world that maybe didn't
Speaker 1: want to see rate hikes. Talk to us about the
Speaker 1: effect the dollar dominant has on other countries. Yeah, because
Speaker 1: of all the dollars and nominated assets held abroad, as
Speaker 1: well as the number of countries that either implicitly or
Speaker 1: explicitly linked to the dollar. And there's this number I
Speaker 1: throw and it seems almost too high, but seventy the
Speaker 1: world economy has their currency linked in some from to
Speaker 1: the dollar. And this comes from a rock offf Fine
Speaker 1: Heart and Elezski paper. But because of that, seventy percent
Speaker 1: of the world economy is linked in some form to
Speaker 1: the dollar. That means when the Fed sets monetary policy
Speaker 1: or when it causes the dollar change in value, it's
Speaker 1: really setting monetary policy to some extent for the rest
Speaker 1: of the world. And that's just you know, a bad idea.
Speaker 1: We're not all the same economy, just like the year
Speaker 1: zone has learned one size does not fit all. For
Speaker 1: the ECB, doesn't make sense for the FED to be
Speaker 1: setting Monterrey policy for the world effectively. You know, it
Speaker 1: goes through this the linkage of currencies that link to
Speaker 1: the dollar. But also all this dollars are nominated at
Speaker 1: the eleven trillion dollars. Those are liabilities that foreigners own,
Speaker 1: yet their revenues are earned in their domestic currency. So
Speaker 1: you have currency mismatching balance sheets. You've got the wrong
Speaker 1: monterrey policy coming in. So it does. It creates this
Speaker 1: kind of global financial cycle, and it's really a global
Speaker 1: dollar cycle. I think central bankers policymakers around the world
Speaker 1: are acutely aware of it, more so probably than US policymakers.
Speaker 1: You mentioned two thousand and eighteen, gent remember something similar
Speaker 1: happening when the FED started talking up rate hikes. The
Speaker 1: dollar began to go up while the other central banks
Speaker 1: were easy, and that also created some some you know, pressures,
Speaker 1: kind of a mini recession in the US during that time,
Speaker 1: and that that was a global story. All oil prices collapse,
Speaker 1: the emerging markets slowed, down, there's some panic and giant
Speaker 1: a Yeah, when the U s sneezes or the rest
Speaker 1: of the world gets a cold, the saying. And it's
Speaker 1: even more true with the reach of the dollar today.
Speaker 1: So how does the international aspect of all of this
Speaker 1: actually impact the dollar because you sort of alluded to
Speaker 1: this already, but after two thousand eight, um, we had
Speaker 1: this shortage of safe assets, right, So I'm just curious
Speaker 1: if dollar dominance grows with each financial crisis or with
Speaker 1: even with each about of risk off in the market,
Speaker 1: and that would mean dollar financing costs also decline, which
Speaker 1: would incentivize people to use more dollars. I guess, um,
Speaker 1: how do you break that feedback loop because it feels
Speaker 1: like we're in this sort of endless cycle of ever
Speaker 1: increasing dollar reliance. To be honest, I don't know that
Speaker 1: we can or that it's possible anytime soon. That was
Speaker 1: the hard Mark Karney's proposal, right, is he wants to
Speaker 1: find a rival or a substitute to the dollar. And
Speaker 1: and just to put things in perspective, but you know,
Speaker 1: I threw some numbers together in some of my research
Speaker 1: looking at this, but there's about twenty eight trillion dollars
Speaker 1: of assets out that that foreigner's hole twenty trillion dollars
Speaker 1: anominal assets that either they've issued that love and trilling
Speaker 1: they've issued, and some that they've gotten from us. And
Speaker 1: in order to compete with the dollar, you'd have to
Speaker 1: have some other, you know, rival that can offer assets
Speaker 1: on that level. And I just can't imagine this SHC,
Speaker 1: this wonderfully term synthetic hedgemonic currency suddenly issuing that much
Speaker 1: or close to that much in terms of assets. So
Speaker 1: I don't see an easy way to break that. I mean,
Speaker 1: last time this happened was when we went from the
Speaker 1: pound to the dollar, and that required a World war,
Speaker 1: a major shift. I mean, it also required the US
Speaker 1: becoming a leading industrial powers are passing the UK, so
Speaker 1: network effects are strong. So Tracy, I don't have a
Speaker 1: very optimistic lognosis on that front. It's one thing in
Speaker 1: fury to have a dollar substitute. So let's say the
Speaker 1: I m F for some global entity had some sort
Speaker 1: of synthetic basket, maybe as digital that represented some nice
Speaker 1: GDP weighted um you know, share of different currencies, some
Speaker 1: sort of basket. But as you say, the path dependency
Speaker 1: as such, even if it were to be a nice
Speaker 1: dollar substitute. From a sort of pure economic point of view,
Speaker 1: the path dependency is such as you would still need
Speaker 1: people to switch over to it. You would still need
Speaker 1: to have people get comfortable issuing bills denominated in this unit.
Speaker 1: You would still have to have get people comfortable issuing debt.
Speaker 1: I mean, we see how hard it is just to
Speaker 1: move off of say lie or to some new dead standard.
Speaker 1: It's really hard to move standards, uh, let alone a
Speaker 1: whole currency. And that's a great analogy. It is very
Speaker 1: hard when something is widely used, it's convenient. Why do
Speaker 1: I want to go to the trouble, you know, exchange
Speaker 1: the international currency contracts or priced in dollars, depending how
Speaker 1: you measure to The international trade is invoiced in dollars.
Speaker 1: Why would I want to inconvenience myself by using some
Speaker 1: other currency. There has to be some kind of external push,
Speaker 1: a shock, something that really really makes it worth my while, war,
Speaker 1: you know, something serious happening in the United States. One
Speaker 1: scenario would be eventually China emerges as this country with
Speaker 1: great institutions with great safe stores of values. But that's
Speaker 1: a long long ways off. Maybe the Eurozone comes up
Speaker 1: with their own safe assets that seems to be a
Speaker 1: ways off as well, and so it's best case scenario
Speaker 1: would be a gradual and the absence of some kind
Speaker 1: of major shock, some kind of gradual adjustment that will
Speaker 1: take many years to go through. So let me ask
Speaker 1: the obvious question, which would be why doesn't the US
Speaker 1: just issue more debt to satisfy all this extra demand?
Speaker 1: So you alluded to the fact that in many respects,
Speaker 1: the U s economy is quite overlevered, and we feel
Speaker 1: uncomfortable doing it in many ways. But as we talk
Speaker 1: more and more about the potential for fiscal stimulus to
Speaker 1: lift growth, why don't we see the US just take
Speaker 1: advantage of really low interest rates, lots of appetite for
Speaker 1: dollar denominated debt, and just issue a bunch of bonds.
Speaker 1: That's a great question, I would say, to some degree,
Speaker 1: we already do that, not enough. But thinking like President
Speaker 1: Trump's budget deficits, the only way he got away with
Speaker 1: that is because there's such a strong appetite for our securities.
Speaker 1: I mean this, This appetite lowers the financing costs, makes
Speaker 1: it easier for US to run budget deficits. So Trump
Speaker 1: can run a huge peacetime budget deficits. But I just
Speaker 1: think in general there's a lack of understanding maybe about
Speaker 1: this issue, that the role important role we do play.
Speaker 1: It would take a huge, I don't know, public education
Speaker 1: campaign to say, look, the world needs our securities, we've
Speaker 1: gotta issue more of them, maybe if it was done
Speaker 1: in a thoughtful way as well. It's it's one thing
Speaker 1: to you know, issue a lot more measuries to fund
Speaker 1: maybe infrastructure, something with a good high return in the U.
Speaker 1: S economy, as opposed to funding you know, tax cuts
Speaker 1: or wasteful spending. So it would be a complicated thing
Speaker 1: to do. But that's why people have talked about sovereign
Speaker 1: wealth funds. You know, we're you'ld issue treasuries or some
Speaker 1: kind of mechanism or facility where you would do something
Speaker 1: like that. But that's a long conversation in itself with
Speaker 1: the public and with Congress. Well what about the exact
Speaker 1: opposite proposal? And I think you're not a fan of
Speaker 1: this idea based on your writing, but we have seen
Speaker 1: a couple of senators in the USA, rather than issuing
Speaker 1: extraordinary amounts of debt to satisfy the world's desire to
Speaker 1: hold safe assets. Why don't we just do a clean
Speaker 1: break and forced the world to essentially go elsewhere to
Speaker 1: look for their safe assets or and by that, the
Speaker 1: plan is tax foreign investments. And so you a couple
Speaker 1: of U. S. Senators Josh Holly from Missouri is one
Speaker 1: of them. They're just like, you know what, the strong dollar, Hey,
Speaker 1: it's hurting the world, it's hurting US workers. Let's tax
Speaker 1: foreign purchases of dollar assets. That should weaken the US dollar,
Speaker 1: help workers, and maybe it would be an accelerant for
Speaker 1: the creation of a new safe asset around the world.
Speaker 1: What about that plan? Just uh, tax foreign buyers. It
Speaker 1: is well intentioned, and it's it's thinking creatively and it's
Speaker 1: going in the right direction in terms of, you know
Speaker 1: what we want to do, but I just don't think
Speaker 1: it will work. So intentions aside, what it effectively does
Speaker 1: is it reduces the supply of safe assets, at least
Speaker 1: futures safe assets. It's you know, you tax something, you're
Speaker 1: effectively putting gears in the sand. You're you're making it
Speaker 1: harder to produce. And so we're not gonna be changed.
Speaker 1: We're not gonna be fixing the demand side. Of that equation,
Speaker 1: all we would be doing is squeezing the supply side,
Speaker 1: And so you would even make the problem more pronounced.
Speaker 1: And and the analogy or the comparison I like to
Speaker 1: draw off, what I think it would look like, would
Speaker 1: be two thousand and eight. Because two thousand and eight,
Speaker 1: as I mentioned earlier, we had all these we thought
Speaker 1: what we thought were safe assets. It suddenly disappeared. So
Speaker 1: that there's a case where I think the supply of
Speaker 1: safe assets suddenly shrinking. And what happened. The dollar actually
Speaker 1: got stronger, yields actually fell farther down. And I think
Speaker 1: we would see the same thing if if you thought
Speaker 1: this bill would see the light of day, I think
Speaker 1: you would see the markets begin to realize, oh my goodness,
Speaker 1: the supply of safe assets is going to be less.
Speaker 1: Let's race to the existing ones. And we would see
Speaker 1: the dollar gets stronger and yields go down. You know,
Speaker 1: we see negative rates around the world. I jokingly called
Speaker 1: this bill the the bill to give negative yield curves
Speaker 1: to everyone who has same assets. Um, I think it
Speaker 1: would make the problem worse. In short, this might be
Speaker 1: an odd question, but um, to what extent is Trump's
Speaker 1: trade war with China an attempt to solve this monetary problem.
Speaker 1: So if the US can't target foreign capital surpluses directly
Speaker 1: and stop the flood of money coming into its market,
Speaker 1: then I guess maybe you could sort of target the
Speaker 1: current account and try to shrink the trade deficits so
Speaker 1: that there's less money to then flood into the U
Speaker 1: S system. Do you think the trade war is sort
Speaker 1: of an unconscious or conscious attempt to rectify this problem. Absolutely,
Speaker 1: that's a great question. I do think. I think Trump,
Speaker 1: and I think populism in general across the globe is
Speaker 1: a response to this imbalance. This is part of the
Speaker 1: problem with international monetary system, and we see the distortions
Speaker 1: created by it. And so yeah, I do think President
Speaker 1: Trump he knows something's wrong. Maybe he doesn't have a
Speaker 1: quite figured out correctly, but he's pushing in the right direction.
Speaker 1: He senses something's up and he's pushing back. Is it
Speaker 1: gonna work. I don't think his approach is gonna work.
Speaker 1: I mean, my suggestion maybe partial fixes the one for
Speaker 1: the federal reserved to do level targeting of some kind.
Speaker 1: Now that you guys know, I'm a big fan of
Speaker 1: nomenal GDP level targeting, but it doesn't have to be
Speaker 1: That could be price level targeting, but anything that would
Speaker 1: make up for past mrs. So we know that the
Speaker 1: fed's under shop for the past decade. Imagine if it hadn't,
Speaker 1: that probably would imply a weaker dollar um. Also, there
Speaker 1: has been proposed by some for the FED to extend
Speaker 1: currency swap lines throughout the world to other major trading partners,
Speaker 1: and that would might you know, reassure some of those
Speaker 1: countries and may not need to hold onto dollar assets
Speaker 1: as much, reduced the precautionary demand for dollar assets. Both
Speaker 1: of those moves, of course, would not be easy either.
Speaker 1: They both have costs um But there are things I
Speaker 1: think the FED could do, and I think that their
Speaker 1: decisions that Trump could endorse as well. But back to
Speaker 1: the original question, Yeah, I do think Trump he senses
Speaker 1: something's wrong and this is probably at the core of it.
Speaker 1: I think that's interesting, this idea of the FED uh
Speaker 1: setting up swap lines with central banks around the world.
Speaker 1: Of Course, the book Crashed by Adam Two's, which is
Speaker 1: a big history of the Eurozone crisis, it really spotlighted
Speaker 1: the role of those swap lines in easing the stress,
Speaker 1: allowing the European banks to have access to dollar liquidity.
Speaker 1: And then thinking back to what you said at the
Speaker 1: beginning of our discussion here, that that essentially with seventy
Speaker 1: of the global economy either under the dollar or some
Speaker 1: peg or a soft peg to the U. S Dollar,
Speaker 1: that the world is kind of like one big euro Zone.
Speaker 1: And we see the problem with that in the Euro Area,
Speaker 1: where you have a singular monetary policy that doesn't work
Speaker 1: for all its members. And I see it's like we
Speaker 1: keep coming back to this situation in which the world
Speaker 1: is a single de facto currency union without the currency
Speaker 1: flexibility enjoyed by most of the countries. Yeah, that's a
Speaker 1: great point. I mean, it's it's the irony, right. We
Speaker 1: went off to Britain Woods system, where it was this
Speaker 1: global fixed exchange rate regime linked to the dollar. We
Speaker 1: went off of it in in textbooks say when you
Speaker 1: go to a world of floated exchange rates, exchange it
Speaker 1: should adjust. But what we see in Prack this is
Speaker 1: something much more rigid, something much more akin to Britain
Speaker 1: Wood's too, and the dollar is again at the core
Speaker 1: of that. It's it's the main currency, and you know
Speaker 1: it to kind of flash that analogy. I like you're
Speaker 1: suggesting it would make sense then to have currency swap
Speaker 1: lines in all the major trading partners. One reason this
Speaker 1: would be a hard sell is because it would implicitly
Speaker 1: expand the Fed's balanced also kind of the unspoken liabilities
Speaker 1: that would imply now on paper, it wouldn't necessarily mean that,
Speaker 1: it would just mean the commitment, So that would you know,
Speaker 1: I imagine being pretty controversial for Congress. Yeah, sometimes I
Speaker 1: wonder if there had been more awareness of the uh,
Speaker 1: the swap lines that were put in place around the
Speaker 1: Euro crisis. I mean, we're paying attention to a bunch
Speaker 1: of other stuff, but it feels like the potential for
Speaker 1: very intense political scrutiny about the FED doing deals with
Speaker 1: foreign central banks UH could theoretically be uh problematic if
Speaker 1: the wrong people are the right people start paying attention
Speaker 1: to that. Yeah, I would love to see this next
Speaker 1: presidential campaign, which I'm not holding my breath, to have
Speaker 1: them talk about these issues. Be great if someone got
Speaker 1: up and said, hey, we are the main safe asset
Speaker 1: supplier to the world. These are the implication there's this
Speaker 1: Triffan dilemma. Hey, maybe we should have currency swaplines. We
Speaker 1: have a role to play globally. We want to balance
Speaker 1: that against our domestic concerns. Let's think through the policy options.
Speaker 1: So we've been talking a lot about the downsides of
Speaker 1: a strong dollar, and really the downsides of having the
Speaker 1: dollar as a sort of central figure in the entire
Speaker 1: global financial system. So maybe to finish it off, talk
Speaker 1: to us about why having a strong dollar, having the
Speaker 1: dollar as the world's reserve currency is actually a good
Speaker 1: thing for America. Yeah, I'm glad you've said that, because
Speaker 1: I want on a positive note as well, the dollar
Speaker 1: is a global medium of exchange, and you know, one
Speaker 1: could argue in its absence, or in the absence of
Speaker 1: a global medium of exchange, globalization itself could not have
Speaker 1: taken off as it has or the ask few decades.
Speaker 1: And we know globalization has brought with it the freeing
Speaker 1: of many people stuck in poverty. So that you know,
Speaker 1: the billion or so people who are in poverty who
Speaker 1: are now not in poverty because of international trade, because
Speaker 1: of globalization, you could make the argument that they're there
Speaker 1: because there was the dollar. So I think one could
Speaker 1: make a reasonable case that while there are all these
Speaker 1: costs to the dollar. The net benefit to the world
Speaker 1: has been positive in terms of liberating the poor from
Speaker 1: the shackles of of a closed system. This is an
Speaker 1: absolutely fascinating topic, and you provided a really sort of
Speaker 1: clear explanation of this phenomenon and why people are talking
Speaker 1: so much about the problems of the persistently strong dollar.
Speaker 1: Really appreciate you joining us. Thank you for having me
Speaker 1: on the show. Thanks so much, David. That was great. Yeah, Tracy,
Speaker 1: I love that conversation. I think this is just such
Speaker 1: a rich load to mind, such a fascinating topic because
Speaker 1: the problem is fairly clear, I think, and yet the
Speaker 1: solution seems almost intractable. It's almost impossible to imagine what
Speaker 1: is anywhere close to being in position to take the
Speaker 1: dollars place on the world stage. Yeah, you can't fight
Speaker 1: those network effects, I guess. I find it really interesting
Speaker 1: as well, because it touches on a number of topics
Speaker 1: that we've talked about at one point or another on
Speaker 1: the show, things like safe assets, things like the trade war,
Speaker 1: like big capital surpluses in other parts of the world
Speaker 1: that then kind of move into the US market and
Speaker 1: end up impacting it. But it does seem to be
Speaker 1: an intractable problem, and you kind of wonder, you know,
Speaker 1: David touched on this towards the end where he was
Speaker 1: came about how the dollar as reserve currency has basically
Speaker 1: enabled and also grown in tandem with globalization, and you
Speaker 1: do wonder if you're going to get a solution that
Speaker 1: basically looks like deglobalization, right, you could basically get ring
Speaker 1: fenced financial systems where China relies on the u N
Speaker 1: for all its currency dealings, in the US relies on
Speaker 1: the dollar, and the Euro relies on the Euro, and
Speaker 1: that whole sort of network of financial inter dependence starts
Speaker 1: to get unpicked. You know what's really interesting is um
Speaker 1: David's term and Mark Arney used it to and you
Speaker 1: just mentioned it network effects and the network effects of
Speaker 1: the dollar being so strong. And it's funny that Facebook
Speaker 1: is launching its own or you know, its own currency, Libra,
Speaker 1: because there are probably a lot of analogies between the
Speaker 1: dollar and Facebook itself, namely that everyone seems to hate
Speaker 1: Facebook and complains about it all the time. It thinks
Speaker 1: there's all kinds of issues with it, and it drives
Speaker 1: people crazy. And yet the prospect of actually leaving Facebook
Speaker 1: is really difficult. And so even if you hate Facebook
Speaker 1: and you don't like their surveillance practices, and you don't
Speaker 1: like all kinds of manipulations that they do, it's pretty
Speaker 1: difficult to leave. Just like the dollar. You can identify
Speaker 1: problems with being in the dollar social trading network, but
Speaker 1: where else are you gonna go. It's a really difficult problem.
Speaker 1: So kind of the way, Uh, they're more than Libra itself.
Speaker 1: They are already a lot of analogies between our Facebook
Speaker 1: and the dollar, right, not to mention slightly monopolistic tendencies
Speaker 1: as some commentators say, Yeah, I like that analogy. Uh.
Speaker 1: In any case, it'll be really interesting to see how
Speaker 1: this debate evolves in the future. Like you said at
Speaker 1: the beginning of the discussion, we've already come a long
Speaker 1: way from pre two thousand eight. You know, the dollar
Speaker 1: is going to be replaced by the euro or the
Speaker 1: renman b or something like that. It's going to be
Speaker 1: really interesting to see how it changes in the next
Speaker 1: few years, whether we do get that synthetic hegemonic currency
Speaker 1: you know who might actually have some good ideas for
Speaker 1: what could replace the dollar. Go on your dad, So no,
Speaker 1: I'm serious, I'm really looking forward to that episode. Now,
Speaker 1: all right, I'll try to make it happen. Okay, good, okay.
Speaker 1: This has been another episode of the All Thoughts Podcast.
Speaker 1: I'm Tracy Allaway. You can follow me on Twitter at
Speaker 1: Tracy Alloway, and I'm Joe wisn'tal. You can follow me
Speaker 1: on Twitter at the Stalwart. And you should follow David
Speaker 1: on Twitter. He's great. He's at David Beckworth. And be
Speaker 1: sure to follow our producer Laura Carlson. She's at Laura M. Carlson.
Speaker 1: And check out the new home of Bloomberg Podcasts at Podcasts.
Speaker 1: Thanks for listening Tear to