August 13, 2025 • 23 mins
On this episode of Trumponomics, we explore the impact of President Donald Trump’s economic policies on the standing of the US dollar, and the consequences for the US and global economies if the greenback is no longer the world’s primary reserve currency. As our guests explain, it seems that a reckoning has been in the making for some time.
Barry Eichengreen, professor of economics and political science at the University of California Berkeley, joins along with Bloomberg Washington reporter Saleha Mohsin to discuss how reserve currencies come about, how the US dollar ascended to that role and what happens if it falls back to earth.
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Episode Transcript
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Speaker 1 (00:02):
Bloomberg Audio Studios, podcasts, radio news.
Speaker 2 (00:08):
You haven't heard an expression. Dollar is king.
Speaker 3 (00:10):
The dollar is king.
Speaker 2 (00:11):
We're going to keep it that way.
Speaker 1 (00:13):
Okay.
Speaker 4 (00:23):
I'm Stephanie Flanders, head of Government and Economics at Bloomberg,
and this is Trumpnomics, the podcast that looks at the
economic world of Donald Trump, how he's already shaped the
global economy, and what on earth is going to happen next.
This week, we're asking does the rise of trump Andomics
mark the beginning of the end for the dollar. The
US has faced serious competition on a number of fronts
(00:45):
in recent decades, but its currency has not. Roughly nine
out of ten foreign exchange transactions are conducted in dollars
and almost half of all merchandise trade. The greenback also
makes up nearly sixty percent of the reserves held by
governments around the world, and that unrivaled position for the
dollar as the world's dominant reserve currency has brought some
(01:09):
big advantages to US policymakers and consumers over the years.
We'll get into some of those in this show, and
as President Trump likes to point out, it has also
tended to make US exports a bit less competitive. That
might explain why the administration doesn't seem very bothered by
the nearly ten percent fall in the value of the
(01:29):
dollar in the first six months of this year. That's
the worst decline in the first half of any year
since nineteen seventy three. But if that fall marks not
a market adjustment but the beginning of a much deeper
loss of confidence in the US currency in America's unique
role in the global order, then potentially this administration, future administrations,
(01:52):
and Americans more broadly, well they might start to care
quite a lot. So how did the greenback become and
stay the dominant reserve currency for so long? Have Donald
Trump's policies seriously put it under threat? And what are
the consequences for all of us if the dollar is
no longer global top dog. Well, that's what's on my
(02:16):
list for this episode, and I have investment grade guests
to help me with the assignment. Our own. Seleia mosen Bloomberg,
senior Washington correspondent, an author of the book paper Soldiers,
How the Weaponization of the Dollar Changed the World Order,
and dialing in from California, an academic whose work you
could say is the reserve currency of global debate, on
(02:37):
this topic. Doctor Barry eichen Green, Professor of economics and
political science at the University of California, Berkeley, and doctor
I Confu is also the author of a new book,
Money Beyond Borders. I quite want to go back to basics,
(03:03):
fors eichen Green, you suggested in a column for Vox
eu that an understanding of Roman mythology can shed light
on the way the world decides on a go to
reserve currency. Explain to us how Roman gods Mars and
Mercury can help explain how reserve currencies get to be
reserve currencies, and how the dollar has been so dominant
(03:25):
for so long.
Speaker 2 (03:26):
So the Mars and Mercury reference is designed to alert
listeners to the fact that there are really two sets
of factors that influence the attractions of a currency globally
the economic importance of an economy. So the dollar rose
to prominence after World War Two, when the US became
(03:47):
the largest economy in the world. The leading crater have
the largest financial markets, but at the same time cure
political factors international relations, alliance politics for the tendency of
central banks and governments to hold and use currencies. So
in the nineteen sixties, the West Chairman government and the
(04:10):
Japanese government, which relied on the United States for their defense.
We're willing to support the dollar through tough times. If
you look today, you find that the central banks of
South Korea and Japan hold more dollars as reserves than
their trade relations and financial relations with the United States
(04:32):
would lead you to expect. So there are worries about
the fact that the US share in the global economy
has been declining gradually over time. But now there are
also worries about fraying US alliances, whether Donald Trump will
turn his back on NATO, whether he's making friends or
enemies abroad, and how that will affect the attractions of
(04:54):
the dollar.
Speaker 4 (04:55):
I guess some people listening will still be curious about
where Miles and Mercury come.
Speaker 2 (04:59):
In, Beyon, The reference came from my classically trained co.
Speaker 4 (05:03):
Authors, but it's Mercury is the.
Speaker 2 (05:06):
God of commerce and Mars the god of war.
Speaker 4 (05:10):
Indeed, you did some estimates which I think you kind
of referred us back to more recently, because it seems
even more relevant than when you first wrote the paper
a few years back, to the impact on things like
the cost of borrowing for the US government and holdings
of reserves. If you think those two roles of the
US economy are somewhat ebbing.
Speaker 2 (05:31):
Our back of the envelope estimates, or that the cost
of borrowing for the US Treasury would go up by
fifty sixty seventy basis points a bit less than one
percentage point from its present what four percent on the
ten year treasury? Were these alliance incentives to disappear?
Speaker 4 (05:50):
And that's the security that's just from the fact that
these allies are not sort of over investing in dollars,
if you like, because they are receiving this sort of
other support from the US.
Speaker 2 (06:01):
Exactly, and that this would have an impact on the
dollar exchange rate as well.
Speaker 4 (06:06):
And Celia, I guess you should sort of updates briefly.
I mean I mentioned some of the headline numbers at
the start, but what have we seen in foreign exchange
markets since the start of the year and what do
you think might be driving it?
Speaker 1 (06:16):
Well, there's hard data that is a drop in the
dollar compared to the global basket of currencies that we
look at Bloomberg.
Speaker 3 (06:25):
There's also the narrative.
Speaker 1 (06:26):
There's a narrative of a sell America trend that has
picked up and is almost taken a hold as the
market tries to adjust and then readjust to shifting tariff policies.
We're seeing for the first time in a long time
the sell in America narrative coming while there's concerns about
America's ability to manage its public finances. So the US
(06:50):
debt trajectory fiscal outlook is really really bad with no
fix on the horizon. It doesn't seem that there is
any party in Washington that actually cares about doing anything
and making the difficult trade offs that would be required,
and that in turn starts as vortex of Okay, people
are selling out of American assets. That means American power
(07:10):
to sort of outsource its geopolitical objectives by imposing economic
sanctions that's going to be less potent. And if nations
and companies in multinational corporations are using fewer dollars, then
American policymakers have less visibility into how the global financial
system is being used for malign activities.
Speaker 2 (07:29):
And after what Saliah said, I think global investors are
watching very carefully what's happening in terms of federal reserve independence.
That is a very important factor in how they regard
the dollar, and.
Speaker 4 (07:42):
I guess we could also add the integrity of US
economic statistics insofar as that's also had a few shadows
potentially cast over the last few weeks with the firing
of the head of the Bureau of Labor Statistics. I
mean today, I know you've talked to these senior policymakers
a lot off the record, but we tended to have
pretty mixed messages on this, haven't we. I saw that
(08:03):
the President recently said he wanted a strong dollar, but
he also didn't like that that made it harder to
sell exports that kind of inflated the value of the dollar.
So how much do you feel the administration cares about
this global role for the dollar.
Speaker 3 (08:17):
I think they do care.
Speaker 1 (08:19):
I think Trump really does like the idea of the
dollar being a strong man kind of like him, that
can survive a lot. They're really putting it to the test.
But like any politician, the Trump team wants the benefits
of a strong dollar and then the benefits of a
week dollar all to happen at the same time, which
is kind of not possible. And they're also sending mixed
(08:39):
messages around the key pillars of what makes the dollar
the reserve asset and so trusted by foreign investors. As
very alluded to, that is the rule of law, the
free and fair elections, that we have, the strong democracy,
that we have independent agencies, and an independent central bank.
Each of these pillars, every tenant is now being a.
Speaker 4 (09:00):
We touched on this a little bit in an earlier
episode this year when we were talking about the potential
for a so called Mara Lago accord. You know, Stephen Myron,
who's now a senior economic advisor to the administration, had
sort of sketched out a potential sort of deal that
could be done between the US and its trading partners
where somehow the rest of the world would pay for
(09:21):
more of the burden of having this global reserve currency.
Whether or not we think there's anything in that, or
whether there's going to ultimately be any negotiations along those lines,
I mean, Barry Eckingreen, you could argue that it's been
a public good for the world to have a global
reserve currency. In most times in global history we haven't
had one, and maybe it's not unreasonable for the US
(09:46):
to want countries to kind of pay in one way
or another to continue to have a global reserve currency.
Speaker 2 (09:53):
I think it's important to recognize also that the United
States derives very significant benefits from the dollars international role.
So people in the Trump administration would say there are costs.
US exporters find it a little bit more difficult to
do international business because the dollar is stronger than otherwise.
(10:14):
Although I would put the value of the dollar way
down on the list of determinants of US export competitiveness,
below the skills and training of American workers, the up
to datedness of our technology and our capital stock, and
so forth, and then whether the dollar is a few
percentage points higher or lower enters the list. On the
(10:35):
other side of the balance sheet, US banks and firms
have the convenience of being able to do cross border
business in their own currency. They don't have to pay
to purchase insurance hedges if you will, The Treasury can
borrow at a lower cost than otherwise. We discussed that earlier,
and the US gets another form of insurance from the
(10:56):
dollars international role. The dollar is a safe haven some
when a bad thing happens, everybody rushes into dollars and
into US financial markets, and that's what has been different
it appears about the spring of twenty twenty five that
when this reciprocal care of upheaval occurred, people rushed out
(11:18):
of dollars.
Speaker 3 (11:18):
Not in yes, so Lea.
Speaker 4 (11:20):
I mean that's something I think you mentioned in the
piece that you wrote. There has always been that very
striking safe haven quality to US markets and the dollar
in particular, where you can have, in the extreme example,
you can have a shock involving the possibility of the
US defaulting. You know, when there's been a sort of
standoff over the debt ceiling in Washington and investors are
(11:43):
worried about, you, the US defaulting. Well, that's a scary
thing happening. So then people go into US treasuries even
though the US treasuries are the asset that might be
defaulted on. That is clearly something has changed this year
when it comes to things like that.
Speaker 3 (11:56):
Oh it has.
Speaker 1 (11:57):
I mean global financial crisis is clear example of when
everyone should have been pouring out of American assets because
the US created and caused the subprime mortgage collapse that
led to the global financial crisis. But everybody piled in
just to as proof that the dollar is so resilient,
and it wasn't. The case in April. But one thing
(12:17):
to note is just the benefits that Barry pointed out
to the US for being the owner of the reserve asset.
It hits every single American consumer because if there is
just a few percentage point increase to the tenure and
what are borrowing costs are going to be, that is
going to affect credit card debt, mortgage rates, auto loans,
(12:40):
student loans, everything. That tiny number is not actually tiny
when it comes to the household accounts. And that's actually
the essence of Trumpanomics. It's economic populism. Trump does not
want that number to go up, and he talks about it.
He talks about borrowing costs going up and that the
Federal Reserve should do something about it. Again, cognitive dissonance,
(13:01):
not realizing that the fix that you're proposing is actually
going to damage it. And that goes with their views
of the dollar as well.
Speaker 4 (13:07):
You mentioned the financial crisis, and I noticed that the
other time that we'd had a big fall in the
dollar was in I think twenty ten, when the Federal
Reserve was cutting interest rates, and that was possibly also
adjusting from the rise that you were just referenced. In
the middle of the crisis. Currencies can swing ten percent
either direction, even the world's reserve currency, and it doesn't
(13:28):
necessarily mean it's a paradigm shift in reserve currencies, which
obviously a subject to much more kind of long term trends.
Are we just kind of overreading this movement of the
last six months, I guess, Barrychngreen first.
Speaker 2 (13:45):
It's possible. I'm reminded of the nineteen seventies when the
Bretton Woods system ended, the dollar was devalued, it began
to fall on the for and exchange market. In nineteen
seventy six, Charles Kindelberger, one of the most eminent monetary
and economic historians a stay said the dollar is quote
(14:06):
finished as an international currency, which obviously did not turn
out to be the case. When there is an incumbent
international currency, it takes a big, persistent shock to displace it,
and there has to be an alternative, and it's not
clear that those conditions are present.
Speaker 4 (14:26):
Well, actually, I was just going to follow up on that,
and I know that Selio will to say something on
this as well, But I mean that has been always
been the answer that people have given, and goodness knows,
these discussions have been held over the decades, and I
suspect that Professor I agree, it has been involved in
a great many of them. But the answer that's always
given is, you know, these things take a really long time.
The UK sterling was the dominant globe reserve currency for
(14:50):
a long time, long after the US overtook the UK
in terms of its economy. There was something like seventy
years before the US dollar actually became the global reserve currency.
Those kind of shifts just take a really long time.
And crucially, if you're going to move out of the dollar,
you need an alternative, and it isn't clear yet that
(15:12):
there is an alternative to the dollar out there.
Speaker 2 (15:14):
It isn't clear because there aren't enough safe and liquid
euro denominated reserve assets available to the rest of the world,
and it's not clear that the European Union is in
a position to create them. China is moving as fast
as it can to promote international use of its currency,
but it is starting out way behind the dollar. So
(15:37):
even if use of its currency continues for cross border payments,
for example, continues to increase the double digit rates, it
will take a decade or longer before the Chinese renman
bee comes within haaling distance of the dollar. So you know,
these kind of events occur slowly until they occur quickly.
Speaker 4 (16:00):
I mean, I guess the other alternatives. We talk a
lot about crypto these days. I mean, there's bitcoin, many
might say was a potential alternative, and also people talk
about stable coins, although I know that they have a
slightly different implication for the dollar. But are either of
those sort of likely alternatives.
Speaker 1 (16:17):
I actually think the most likely alternative is going to
be a multi currency era rather than one currency taking over.
We may face decades where the dollar is still dominant,
but not quite as dominant.
Speaker 3 (16:29):
Maybe it was never designed to or meant to, or
doesn't need.
Speaker 1 (16:32):
To be quite as powerful as it is in today's
financial system, and we might see that the Euro rises
a little bit more, the yen, maybe the yuon, and
maybe some of these other currencies or other assets like
stable coins and maybe even bitcoin. But I think when
I think about alternatives, I don't think of one. I
think of many. And that's a shock. It feels incremental,
(16:53):
but it will be a shock to the system because
then you might have things like runs on currencies with
investors trying to figure out where is the safest place
to go.
Speaker 4 (17:01):
Possibly, we don't care so much about a gradual decline
of a dollar, or at least if one is just
thinking about the sort of stability of global system, we'd
be much less worried about that than we would a
sudden questioning of the US government's credit worthiness and a
dash for the exits from the dollar. I mean, I
can green, how much do you think the probability of
(17:24):
that kind of dollar route has gone up in the
last year or so.
Speaker 2 (17:30):
It has certainly gone up. If you're asking me for
a number, not provide. But I would have been dismissive
of those stories of a route until this year. I
would have agreed with Salia that the most likely scenario
is a gradual transition to a more multipolar system. But
I think we now need to entertain the possibility of
(17:52):
a route as well, simply because of the level of
noise and chaos in terms of US policy. And I
do worry that if there is a sudden big move
in the value of the dollar, because foreign official and
private investors row significantly more reluctant to hold and use it,
(18:14):
that could destabilize the US treasury market. That could destabilize
important financial institutions that hold dollar denominated assets that are
suddenly losing value on the foreign exchange market. That could
have quite dire consequences were to occur.
Speaker 4 (18:30):
We don't want to put numbers on the probability, but
when does a decline become a route what kind of
numbers would be talking I mean, we've seen a ten
percent decline, We've seen that investors have more and more
reason potentially to put their sort of marginal dollar in
other countries. But when would you start worrying about a
sort of self fueling spiral? Is does it need to
(18:51):
be another ten percent when you're modeling these things, what
kind of numbers are you thinking?
Speaker 2 (18:55):
Well, I think you have to worry both about how
much the currency moves and what the timeframe for the
movement is. So another ten or twenty percent over the
next couple of years would wo not be hard for
the markets to accommodate. Another twenty percent over the next
couple of months, on the other hand, would be a
big deal.
Speaker 4 (19:14):
It's in the tradition of this podcast that probably we
would have had another ten percent before it even comes out,
because we've got about a week at least a week
or so's delay after recording it. I guess, Celia, if
we saw that kind of decline, we've already seen the
administration sort of parry and declare truces and delays when
there's a lot of pressure, for example, on the bond market.
(19:36):
If you saw a big fall in the dollar, potentially
associated with other market moves, how do you think this
president reacts to that.
Speaker 1 (19:47):
I would imagine that the current Treasure Secretary, Scott Bessant,
would either himself or advise the President to make some
kind of statement to stabilize the dollar. Traditionally it's been
the Treasure secretary. But also you have to think about
what and who would markets trust because investors are smart.
They want to see that the policy is backing the
(20:09):
words and the rhetoric. And in the past we've seen
Treasury work with the Federal Reserve. I've spoken to former
fedificial Don Cone about his time at the FED when
they had to come out with a one two punch
around the global financial crisis, working with Treasury hand in
hand to stabilize Marcus. And that's how airtight the case
(20:29):
needs to be made to persuade investors to believe them.
It cannot just be a truth social post by the president,
or it cannot just be a comment by the treasure
secretary on airwaves.
Speaker 4 (20:38):
I'm just thinking if we look at the revealed preference,
as we might say, for this president is just to
beat up on trading partners with the greatest stick. And
he has said, for example, that he's going to do
one hundred percent tariff. So I can't remember very high
tariffs on anybody in the bricks group that tries to
develop an alternative reserve currency. I mean, you could imagine
(21:00):
him wanting to come out with sort of big numbers
that people who are going to invest in dollars. Maybe
it's forcing pressuring central banks to buy lots of dollars
for their reserves to prop up the currency. Barry Eichengreen,
is there any scope for that kind of I mean,
you just tend to think that's the kind of thing
that the president will be reaching for. But is that
(21:20):
possible in an enormous global currency market.
Speaker 2 (21:23):
I do not think so so. Stephanie, you talked before
about the idea of Amara Lago a court where the
president threatens tear ups if other countries don't let their
currency strengthen in the dollar weaken and now you're kind
of suggesting the opposite. The fact of the matter is,
as Salaya alluded to, the only branch of government that
(21:45):
can affect what happens to the dollar ultimately is the FED.
And the FED could strengthen the dollar, where to weaken
significantly buy wait for it, raise an interest rates? How
would that be received in the quarters the pressury, and
the Oval Office.
Speaker 1 (22:01):
And really that's the path untrodden, right, We've never seen
the US have to bully the world into turning to
the dollar has always been a charm tactic.
Speaker 4 (22:12):
Well, we will leave that question hanging in the air,
that unanswered question of how the president would respond to
having to raise interest rates in order to defend the dollar.
But Professor Barry I. Kingreen, Sleia Mosen, thank you.
Speaker 3 (22:24):
So much, Thank you, thanks for having us, Thanks.
Speaker 4 (22:32):
For listening to Trumponomics from Bloomberg. It was hosted by
me Stephanie flanders I was joined by Selaiya Mosen and
Dr Barry Chenreen. Trumponomics is produced by Moses and dam
and Samasadi with help from Amy Keen and special thanks
to Rachel Lewis Chrisky and John Ring. Sage. Bowman is
the head of Bloomberg Podcast, and please, we'd love you
to help others to find Trumpanomics by rating it and
(22:55):
reviewing it highly wherever you listen to
Speaker 1 (22:57):
It at two Pastors and two Priests and Strange State
and three p
Bloomberg Audio Studios, podcasts, radio news.
Speaker 2 (00:08):
You haven't heard an expression. Dollar is king.
Speaker 3 (00:10):
The dollar is king.
Speaker 2 (00:11):
We're going to keep it that way.
Speaker 1 (00:13):
Okay.
Speaker 4 (00:23):
I'm Stephanie Flanders, head of Government and Economics at Bloomberg,
and this is Trumpnomics, the podcast that looks at the
economic world of Donald Trump, how he's already shaped the
global economy, and what on earth is going to happen next.
This week, we're asking does the rise of trump Andomics
mark the beginning of the end for the dollar. The
US has faced serious competition on a number of fronts
(00:45):
in recent decades, but its currency has not. Roughly nine
out of ten foreign exchange transactions are conducted in dollars
and almost half of all merchandise trade. The greenback also
makes up nearly sixty percent of the reserves held by
governments around the world, and that unrivaled position for the
dollar as the world's dominant reserve currency has brought some
(01:09):
big advantages to US policymakers and consumers over the years.
We'll get into some of those in this show, and
as President Trump likes to point out, it has also
tended to make US exports a bit less competitive. That
might explain why the administration doesn't seem very bothered by
the nearly ten percent fall in the value of the
(01:29):
dollar in the first six months of this year. That's
the worst decline in the first half of any year
since nineteen seventy three. But if that fall marks not
a market adjustment but the beginning of a much deeper
loss of confidence in the US currency in America's unique
role in the global order, then potentially this administration, future administrations,
(01:52):
and Americans more broadly, well they might start to care
quite a lot. So how did the greenback become and
stay the dominant reserve currency for so long? Have Donald
Trump's policies seriously put it under threat? And what are
the consequences for all of us if the dollar is
no longer global top dog. Well, that's what's on my
(02:16):
list for this episode, and I have investment grade guests
to help me with the assignment. Our own. Seleia mosen Bloomberg,
senior Washington correspondent, an author of the book paper Soldiers,
How the Weaponization of the Dollar Changed the World Order,
and dialing in from California, an academic whose work you
could say is the reserve currency of global debate, on
(02:37):
this topic. Doctor Barry eichen Green, Professor of economics and
political science at the University of California, Berkeley, and doctor
I Confu is also the author of a new book,
Money Beyond Borders. I quite want to go back to basics,
(03:03):
fors eichen Green, you suggested in a column for Vox
eu that an understanding of Roman mythology can shed light
on the way the world decides on a go to
reserve currency. Explain to us how Roman gods Mars and
Mercury can help explain how reserve currencies get to be
reserve currencies, and how the dollar has been so dominant
(03:25):
for so long.
Speaker 2 (03:26):
So the Mars and Mercury reference is designed to alert
listeners to the fact that there are really two sets
of factors that influence the attractions of a currency globally
the economic importance of an economy. So the dollar rose
to prominence after World War Two, when the US became
(03:47):
the largest economy in the world. The leading crater have
the largest financial markets, but at the same time cure
political factors international relations, alliance politics for the tendency of
central banks and governments to hold and use currencies. So
in the nineteen sixties, the West Chairman government and the
(04:10):
Japanese government, which relied on the United States for their defense.
We're willing to support the dollar through tough times. If
you look today, you find that the central banks of
South Korea and Japan hold more dollars as reserves than
their trade relations and financial relations with the United States
(04:32):
would lead you to expect. So there are worries about
the fact that the US share in the global economy
has been declining gradually over time. But now there are
also worries about fraying US alliances, whether Donald Trump will
turn his back on NATO, whether he's making friends or
enemies abroad, and how that will affect the attractions of
(04:54):
the dollar.
Speaker 4 (04:55):
I guess some people listening will still be curious about
where Miles and Mercury come.
Speaker 2 (04:59):
In, Beyon, The reference came from my classically trained co.
Speaker 4 (05:03):
Authors, but it's Mercury is the.
Speaker 2 (05:06):
God of commerce and Mars the god of war.
Speaker 4 (05:10):
Indeed, you did some estimates which I think you kind
of referred us back to more recently, because it seems
even more relevant than when you first wrote the paper
a few years back, to the impact on things like
the cost of borrowing for the US government and holdings
of reserves. If you think those two roles of the
US economy are somewhat ebbing.
Speaker 2 (05:31):
Our back of the envelope estimates, or that the cost
of borrowing for the US Treasury would go up by
fifty sixty seventy basis points a bit less than one
percentage point from its present what four percent on the
ten year treasury? Were these alliance incentives to disappear?
Speaker 4 (05:50):
And that's the security that's just from the fact that
these allies are not sort of over investing in dollars,
if you like, because they are receiving this sort of
other support from the US.
Speaker 2 (06:01):
Exactly, and that this would have an impact on the
dollar exchange rate as well.
Speaker 4 (06:06):
And Celia, I guess you should sort of updates briefly.
I mean I mentioned some of the headline numbers at
the start, but what have we seen in foreign exchange
markets since the start of the year and what do
you think might be driving it?
Speaker 1 (06:16):
Well, there's hard data that is a drop in the
dollar compared to the global basket of currencies that we
look at Bloomberg.
Speaker 3 (06:25):
There's also the narrative.
Speaker 1 (06:26):
There's a narrative of a sell America trend that has
picked up and is almost taken a hold as the
market tries to adjust and then readjust to shifting tariff policies.
We're seeing for the first time in a long time
the sell in America narrative coming while there's concerns about
America's ability to manage its public finances. So the US
(06:50):
debt trajectory fiscal outlook is really really bad with no
fix on the horizon. It doesn't seem that there is
any party in Washington that actually cares about doing anything
and making the difficult trade offs that would be required,
and that in turn starts as vortex of Okay, people
are selling out of American assets. That means American power
(07:10):
to sort of outsource its geopolitical objectives by imposing economic
sanctions that's going to be less potent. And if nations
and companies in multinational corporations are using fewer dollars, then
American policymakers have less visibility into how the global financial
system is being used for malign activities.
Speaker 2 (07:29):
And after what Saliah said, I think global investors are
watching very carefully what's happening in terms of federal reserve independence.
That is a very important factor in how they regard
the dollar, and.
Speaker 4 (07:42):
I guess we could also add the integrity of US
economic statistics insofar as that's also had a few shadows
potentially cast over the last few weeks with the firing
of the head of the Bureau of Labor Statistics. I
mean today, I know you've talked to these senior policymakers
a lot off the record, but we tended to have
pretty mixed messages on this, haven't we. I saw that
(08:03):
the President recently said he wanted a strong dollar, but
he also didn't like that that made it harder to
sell exports that kind of inflated the value of the dollar.
So how much do you feel the administration cares about
this global role for the dollar.
Speaker 3 (08:17):
I think they do care.
Speaker 1 (08:19):
I think Trump really does like the idea of the
dollar being a strong man kind of like him, that
can survive a lot. They're really putting it to the test.
But like any politician, the Trump team wants the benefits
of a strong dollar and then the benefits of a
week dollar all to happen at the same time, which
is kind of not possible. And they're also sending mixed
(08:39):
messages around the key pillars of what makes the dollar
the reserve asset and so trusted by foreign investors. As
very alluded to, that is the rule of law, the
free and fair elections, that we have, the strong democracy,
that we have independent agencies, and an independent central bank.
Each of these pillars, every tenant is now being a.
Speaker 4 (09:00):
We touched on this a little bit in an earlier
episode this year when we were talking about the potential
for a so called Mara Lago accord. You know, Stephen Myron,
who's now a senior economic advisor to the administration, had
sort of sketched out a potential sort of deal that
could be done between the US and its trading partners
where somehow the rest of the world would pay for
(09:21):
more of the burden of having this global reserve currency.
Whether or not we think there's anything in that, or
whether there's going to ultimately be any negotiations along those lines,
I mean, Barry Eckingreen, you could argue that it's been
a public good for the world to have a global
reserve currency. In most times in global history we haven't
had one, and maybe it's not unreasonable for the US
(09:46):
to want countries to kind of pay in one way
or another to continue to have a global reserve currency.
Speaker 2 (09:53):
I think it's important to recognize also that the United
States derives very significant benefits from the dollars international role.
So people in the Trump administration would say there are costs.
US exporters find it a little bit more difficult to
do international business because the dollar is stronger than otherwise.
(10:14):
Although I would put the value of the dollar way
down on the list of determinants of US export competitiveness,
below the skills and training of American workers, the up
to datedness of our technology and our capital stock, and
so forth, and then whether the dollar is a few
percentage points higher or lower enters the list. On the
(10:35):
other side of the balance sheet, US banks and firms
have the convenience of being able to do cross border
business in their own currency. They don't have to pay
to purchase insurance hedges if you will, The Treasury can
borrow at a lower cost than otherwise. We discussed that earlier,
and the US gets another form of insurance from the
(10:56):
dollars international role. The dollar is a safe haven some
when a bad thing happens, everybody rushes into dollars and
into US financial markets, and that's what has been different
it appears about the spring of twenty twenty five that
when this reciprocal care of upheaval occurred, people rushed out
(11:18):
of dollars.
Speaker 3 (11:18):
Not in yes, so Lea.
Speaker 4 (11:20):
I mean that's something I think you mentioned in the
piece that you wrote. There has always been that very
striking safe haven quality to US markets and the dollar
in particular, where you can have, in the extreme example,
you can have a shock involving the possibility of the
US defaulting. You know, when there's been a sort of
standoff over the debt ceiling in Washington and investors are
(11:43):
worried about, you, the US defaulting. Well, that's a scary
thing happening. So then people go into US treasuries even
though the US treasuries are the asset that might be
defaulted on. That is clearly something has changed this year
when it comes to things like that.
Speaker 3 (11:56):
Oh it has.
Speaker 1 (11:57):
I mean global financial crisis is clear example of when
everyone should have been pouring out of American assets because
the US created and caused the subprime mortgage collapse that
led to the global financial crisis. But everybody piled in
just to as proof that the dollar is so resilient,
and it wasn't. The case in April. But one thing
(12:17):
to note is just the benefits that Barry pointed out
to the US for being the owner of the reserve asset.
It hits every single American consumer because if there is
just a few percentage point increase to the tenure and
what are borrowing costs are going to be, that is
going to affect credit card debt, mortgage rates, auto loans,
(12:40):
student loans, everything. That tiny number is not actually tiny
when it comes to the household accounts. And that's actually
the essence of Trumpanomics. It's economic populism. Trump does not
want that number to go up, and he talks about it.
He talks about borrowing costs going up and that the
Federal Reserve should do something about it. Again, cognitive dissonance,
(13:01):
not realizing that the fix that you're proposing is actually
going to damage it. And that goes with their views
of the dollar as well.
Speaker 4 (13:07):
You mentioned the financial crisis, and I noticed that the
other time that we'd had a big fall in the
dollar was in I think twenty ten, when the Federal
Reserve was cutting interest rates, and that was possibly also
adjusting from the rise that you were just referenced. In
the middle of the crisis. Currencies can swing ten percent
either direction, even the world's reserve currency, and it doesn't
(13:28):
necessarily mean it's a paradigm shift in reserve currencies, which
obviously a subject to much more kind of long term trends.
Are we just kind of overreading this movement of the
last six months, I guess, Barrychngreen first.
Speaker 2 (13:45):
It's possible. I'm reminded of the nineteen seventies when the
Bretton Woods system ended, the dollar was devalued, it began
to fall on the for and exchange market. In nineteen
seventy six, Charles Kindelberger, one of the most eminent monetary
and economic historians a stay said the dollar is quote
(14:06):
finished as an international currency, which obviously did not turn
out to be the case. When there is an incumbent
international currency, it takes a big, persistent shock to displace it,
and there has to be an alternative, and it's not
clear that those conditions are present.
Speaker 4 (14:26):
Well, actually, I was just going to follow up on that,
and I know that Selio will to say something on
this as well, But I mean that has been always
been the answer that people have given, and goodness knows,
these discussions have been held over the decades, and I
suspect that Professor I agree, it has been involved in
a great many of them. But the answer that's always
given is, you know, these things take a really long time.
The UK sterling was the dominant globe reserve currency for
(14:50):
a long time, long after the US overtook the UK
in terms of its economy. There was something like seventy
years before the US dollar actually became the global reserve currency.
Those kind of shifts just take a really long time.
And crucially, if you're going to move out of the dollar,
you need an alternative, and it isn't clear yet that
(15:12):
there is an alternative to the dollar out there.
Speaker 2 (15:14):
It isn't clear because there aren't enough safe and liquid
euro denominated reserve assets available to the rest of the world,
and it's not clear that the European Union is in
a position to create them. China is moving as fast
as it can to promote international use of its currency,
but it is starting out way behind the dollar. So
(15:37):
even if use of its currency continues for cross border payments,
for example, continues to increase the double digit rates, it
will take a decade or longer before the Chinese renman
bee comes within haaling distance of the dollar. So you know,
these kind of events occur slowly until they occur quickly.
Speaker 4 (16:00):
I mean, I guess the other alternatives. We talk a
lot about crypto these days. I mean, there's bitcoin, many
might say was a potential alternative, and also people talk
about stable coins, although I know that they have a
slightly different implication for the dollar. But are either of
those sort of likely alternatives.
Speaker 1 (16:17):
I actually think the most likely alternative is going to
be a multi currency era rather than one currency taking over.
We may face decades where the dollar is still dominant,
but not quite as dominant.
Speaker 3 (16:29):
Maybe it was never designed to or meant to, or
doesn't need.
Speaker 1 (16:32):
To be quite as powerful as it is in today's
financial system, and we might see that the Euro rises
a little bit more, the yen, maybe the yuon, and
maybe some of these other currencies or other assets like
stable coins and maybe even bitcoin. But I think when
I think about alternatives, I don't think of one. I
think of many. And that's a shock. It feels incremental,
(16:53):
but it will be a shock to the system because
then you might have things like runs on currencies with
investors trying to figure out where is the safest place
to go.
Speaker 4 (17:01):
Possibly, we don't care so much about a gradual decline
of a dollar, or at least if one is just
thinking about the sort of stability of global system, we'd
be much less worried about that than we would a
sudden questioning of the US government's credit worthiness and a
dash for the exits from the dollar. I mean, I
can green, how much do you think the probability of
(17:24):
that kind of dollar route has gone up in the
last year or so.
Speaker 2 (17:30):
It has certainly gone up. If you're asking me for
a number, not provide. But I would have been dismissive
of those stories of a route until this year. I
would have agreed with Salia that the most likely scenario
is a gradual transition to a more multipolar system. But
I think we now need to entertain the possibility of
(17:52):
a route as well, simply because of the level of
noise and chaos in terms of US policy. And I
do worry that if there is a sudden big move
in the value of the dollar, because foreign official and
private investors row significantly more reluctant to hold and use it,
(18:14):
that could destabilize the US treasury market. That could destabilize
important financial institutions that hold dollar denominated assets that are
suddenly losing value on the foreign exchange market. That could
have quite dire consequences were to occur.
Speaker 4 (18:30):
We don't want to put numbers on the probability, but
when does a decline become a route what kind of
numbers would be talking I mean, we've seen a ten
percent decline, We've seen that investors have more and more
reason potentially to put their sort of marginal dollar in
other countries. But when would you start worrying about a
sort of self fueling spiral? Is does it need to
(18:51):
be another ten percent when you're modeling these things, what
kind of numbers are you thinking?
Speaker 2 (18:55):
Well, I think you have to worry both about how
much the currency moves and what the timeframe for the
movement is. So another ten or twenty percent over the
next couple of years would wo not be hard for
the markets to accommodate. Another twenty percent over the next
couple of months, on the other hand, would be a
big deal.
Speaker 4 (19:14):
It's in the tradition of this podcast that probably we
would have had another ten percent before it even comes out,
because we've got about a week at least a week
or so's delay after recording it. I guess, Celia, if
we saw that kind of decline, we've already seen the
administration sort of parry and declare truces and delays when
there's a lot of pressure, for example, on the bond market.
(19:36):
If you saw a big fall in the dollar, potentially
associated with other market moves, how do you think this
president reacts to that.
Speaker 1 (19:47):
I would imagine that the current Treasure Secretary, Scott Bessant,
would either himself or advise the President to make some
kind of statement to stabilize the dollar. Traditionally it's been
the Treasure secretary. But also you have to think about
what and who would markets trust because investors are smart.
They want to see that the policy is backing the
(20:09):
words and the rhetoric. And in the past we've seen
Treasury work with the Federal Reserve. I've spoken to former
fedificial Don Cone about his time at the FED when
they had to come out with a one two punch
around the global financial crisis, working with Treasury hand in
hand to stabilize Marcus. And that's how airtight the case
(20:29):
needs to be made to persuade investors to believe them.
It cannot just be a truth social post by the president,
or it cannot just be a comment by the treasure
secretary on airwaves.
Speaker 4 (20:38):
I'm just thinking if we look at the revealed preference,
as we might say, for this president is just to
beat up on trading partners with the greatest stick. And
he has said, for example, that he's going to do
one hundred percent tariff. So I can't remember very high
tariffs on anybody in the bricks group that tries to
develop an alternative reserve currency. I mean, you could imagine
(21:00):
him wanting to come out with sort of big numbers
that people who are going to invest in dollars. Maybe
it's forcing pressuring central banks to buy lots of dollars
for their reserves to prop up the currency. Barry Eichengreen,
is there any scope for that kind of I mean,
you just tend to think that's the kind of thing
that the president will be reaching for. But is that
(21:20):
possible in an enormous global currency market.
Speaker 2 (21:23):
I do not think so so. Stephanie, you talked before
about the idea of Amara Lago a court where the
president threatens tear ups if other countries don't let their
currency strengthen in the dollar weaken and now you're kind
of suggesting the opposite. The fact of the matter is,
as Salaya alluded to, the only branch of government that
(21:45):
can affect what happens to the dollar ultimately is the FED.
And the FED could strengthen the dollar, where to weaken
significantly buy wait for it, raise an interest rates? How
would that be received in the quarters the pressury, and
the Oval Office.
Speaker 1 (22:01):
And really that's the path untrodden, right, We've never seen
the US have to bully the world into turning to
the dollar has always been a charm tactic.
Speaker 4 (22:12):
Well, we will leave that question hanging in the air,
that unanswered question of how the president would respond to
having to raise interest rates in order to defend the dollar.
But Professor Barry I. Kingreen, Sleia Mosen, thank you.
Speaker 3 (22:24):
So much, Thank you, thanks for having us, Thanks.
Speaker 4 (22:32):
For listening to Trumponomics from Bloomberg. It was hosted by
me Stephanie flanders I was joined by Selaiya Mosen and
Dr Barry Chenreen. Trumponomics is produced by Moses and dam
and Samasadi with help from Amy Keen and special thanks
to Rachel Lewis Chrisky and John Ring. Sage. Bowman is
the head of Bloomberg Podcast, and please, we'd love you
to help others to find Trumpanomics by rating it and
(22:55):
reviewing it highly wherever you listen to
Speaker 1 (22:57):
It at two Pastors and two Priests and Strange State
and three p
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