Panic at the dollar

Panic at the dollar

Washington Post

By 

Daniel W. Drezner

Daniel W. Drezner is a professor of international politics at the Fletcher School of Law and Diplomacy at Tufts University and a regular contributor to PostEverything.

April 21, 2021 at 8:00 p.m. GMT+9

Some folks are panicking about the decline of the dollar. We’ve seen this film before.

Signage for the digital yuan at a supermarket checkout in Shenzhen, China. (Yan Cong/Bloomberg)

Back in 2018, I expressed some unease with the dollar’s standing in the global economy. This was premised on two worrisome trends. The first was the explosion of U.S. public debt issuances and whether foreign actors would continue to display an appetite for Treasuries.

The second was the executive branch weaponizing the dollar to enable more acts of financial statecraft: “If the United States cannot credibly commit to not abusing the dollar’s exorbitant privilege, eventually other countries in the system will become willing to shoulder the burdens of transitioning away from the dollar.”

Three years later, these concerns turned out to be overblown. Over the past year, the United States has engaged in borrowing that puts 2018 levels to shame. This has had exactly zero effect on foreign demand for U.S. debt. There is a point when the United States will face issues with international debt tolerance, but that date seems further into the future every time someone looks at this concern.

Story continues below advertisement

As for sanctions, my concern arose from the European effort to create INSTEX as a means to trade with Iran while bypassing U.S. control over dollar transactions via SWIFT. But even though INSTEX went live last year, it has not amounted to much. This year Iranian officials lambasted European efforts on INSTEX as insufficient.

So is the dollar’s standing still secure? Not according to a recent rash of stories. This month alone, Newsweek’s Tom O’Connor wrote a story titled “Sanctions Are Destroying U.S. Dollar’s Status As World’s Top Currency,” so you get the drift. The Wall Street Journal’s James Areddy wrote about the People’s Bank of China’s creation of a digital yuan, noting, “Beijing is also positioning the digital yuan for international use and designing it to be untethered to the global financial system, where the U.S. dollar has been king since World War II.”

Areddy is no doubt correct when he writes that, “the chance to weaken the power of American sanctions is central to Beijing’s marketing of the digital yuan and to its efforts to internationalize the yuan more generally.” Economist Ken Rogoff warns, “the greenback’s dominance may well be more fragile than it appears.”

Story continues below advertisement

So, is it time to start panicking again? Not exactly. While China wants to weaken the power of U.S. financial statecraft, that was not the primary reason for the rollout of the digital yuan. As Barry Eichengreen noted recently, what spurred Beijing was the presence of two digital payment platforms, Alipay and WeChat Pay. As Eichengreen explains, “the ubiquity of Alipay and WeChat Pay raises the specter of the Chinese authorities losing control of payment flows through the economy. And because they use information on payments to inform their lending activities, their pervasiveness points to the possibility of the authorities losing control of financial flows and credit allocation more generally.”

This does not sound like a government confidently marching on the dollar so much as one trying to stave off losing its traditional levers of monetary policy. Furthermore, the People’s Bank of China’s digital currency would eliminate anonymity for users. I find it hard to believe that most private-sector asset managers are terribly keen to have their capital movements in full view of authorities from the People’s Republic of China.

Ever since the 2008 financial crisis, folks have claimed the yuan and the euro would rival the dollar, yet 13 year later, both of those currencies seem less viable now.

Story continues below advertisement

So the current concerns seem mostly overstated. That said, the Biden administration has not shied away from sanctions in its first hundred days. One could almost say there’s an irresistible impulse at work:

If the United States continues to use financial sanctions as the policy option of first resort, there will come a reckoning when financial actors ask if Chinese surveillance is really so bad compared to the caprice of the federal government.

That moment is not now. But no American policymaker should want to know when that moment arises.

Original link at https://www.washingtonpost.com/outlook/2021/04/21/panic-dollar/