The Dented Dollar

“Trump Will Regret Losing the Almighty Dollar,” reads the headline in the Times. It is over an op-ed by an economist who reckons that our currency “is suffering from a self-inflicted wound” and that “consequences are just starting to be felt.” The fretting follows talk of a “Trump shock.” The Financial Times gripes of a “dented dollar.” Would it be such an all-fired disaster to relieve America of the burden of issuing the world’s reserve currency?The idea isn’t as far-fetched as it might sound. For decades critics have decried how the dollar’s reserve status — the “exorbitant privilege,” as the then finance minister of France, Valéry Giscard d’Estaing, put it in the 1960s — enabled America to consume more than it produces, and run up astronomical debt, with no consequences. The dollar’s reserve status has enabled national profligacy, leading James Grant to call it a “poisoned chalice.”Seen through this lens, it’s no coincidence, in the decades since 1971, when Nixon ended the Bretton Woods era, that the dollar’s sheen has been burnished as the world’s reserve currency even as its real value, as measured by the monetary metal, has plummeted. Prior to Nixon’s demarche, foreign governments could exchange dollars at the rate of a 35th of an ounce. Today the dollar fetches less than a 3,400th of an ounce of gold. Then again, too, there are concerns about how the burdens of maintaining a global reserve currency “affects the American economy,” as economist Michael Pettis of the Carnegie Endowment for International Peace explains. Keeping the dollar as “the dominant ‘safe’ currency,” he reckons, means sacrificing some degree of “national sovereignty” in the interest of “global integration.” Countries that choose to enmesh their economies globally, as America has in order to facilitate the dollar’s wide acceptance, Mr. Pettis notes, “must relinquish control over their domestic economies.” By contrast, nations that “retain domestic control” need to “limit the extent to which their economies are open to trade and capital flows.” It’s no wonder a contrast has emerged between America and, say, Communist China on this head, Mr. Pettis says.While America has “deep, flexible and well-governed financial markets,” its manufacturing sector as a share of its economy has fallen “well below the global average,” Mr. Pettis says. By contrast, China’s “highly controlled” domestic economy, he adds, is part and parcel of its surging manufacturing sector, which is “well above the global average.” The global dollar’s benefits, Mr. Pettis finds, “come at a cost to American manufacturers and farmers.”That is among the reasons why “the White House has repeatedly stated a preference for a weaker dollar,” Rebecca Patterson explains in today’s Times op-ed, “which could boost manufacturing exports by making them relatively less expensive.” She cautions, though, that the way President Trump is executing his policies “is unnerving investors and leaving them less certain about their U.S. assets.” Hence her concern about the future of the “Almighty Dollar.”Ms. Patterson appears to view a “depreciating currency” as a fine thing — just not the way Mr. Trump is going about it. She does caution that a “weaker dollar introduces significant potential costs,” including “more expensive” imports. A more serious consequence of losing the dollar’s status as the global reserve currency would be to make it more expensive for America to borrow, especially in light of the national debt surging toward the $37 trillion mark.Were “King Dollar” — as our Larry Kudlow likes to call it — to be toppled from its throne, Congress would no longer be able to envision financing deficits stretching into the future. Nor would interest payments on the national debt prove as congenial. In short, it would require a return to the budgetary and monetary rigor that prevailed when America had to maintain the gold convertibility of the dollar. What’s so bad about that?____________Correction: Farmers are among those who bear the costs of the global dollar. An earlier version misstated the category.

The Dented Dollar

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