Why The Dollar's Reserve Status May Be America's Biggest Liability

Forbes

3 days ago

The dollar is the global reserve currency. This has long been called the 'exorbitant privilege'. It's considered a huge advantage for the U.S. that the dollar holds this status – or so the story goes.
But wait!
This sacred cow might not be such a blessing after all. Perhaps the U.S. dollar's 'exorbitant privilege' is actually an exorbitant curse.
Firstly, with my tongue firmly in cheek – and with a desire to engage U.S. readers and give them at least a chance to agree with what I'm about to propose – let me point out that the term 'exorbitant privilege' is actually French in origin. That alone might suggest it's not such a brilliant idea after all.
Second, consider this: in dollar terms, there are now twice as many Chinese yuan (using M2 as the measure) as there are U.S. dollars. One could say that China has twice the money of the U.S. – which translates to twice the money for four times the people, or half the money per capita compared to Americans. Still, you might wonder: if they have all that liquidity, why don't they want to be the global reserve currency?
Let's examine this 'privilege'. Sure, having the global reserve currency allows you to throw your weight around. And yes, you can always print more 'confetti' if you run into a balance-of-payments problem. Printing reserve currency essentially gives you money for nothing – which is nice.
But…
You also have to export your money to buy stuff. Otherwise, the world must either abandon your currency as the global standard or suffer a liquidity crisis because there's not enough of your money circulating through the system.
Here's the rub: exporting money to buy imports requires a persistent balance-of-payments deficit – the very thing former President Trump tried to reverse.
Back when the U.S. was running the world after 1946, flush with wealth while Europe was busy destroying itself, this deficit wasn't such a big deal. But as time goes on, and more and more dollars flow out while more and more goods come in, the country starts hollowing itself out.
That 'confetti' comes back home in the hands of the folk who sold you stuff, and they use it to buy up your assets. Eventually, all you produce is confetti, and all you own is a printing press. That should sound familiar.
A nation that consistently profits from trade has both assets and liabilities on its balance sheet. But a country that constantly prints confetti to fund imports ends up with nothing but liabilities – and a worn-out printing press.
Let's look at this chart:
It's a 15+ year chart showing how the U.S. dollar has risen 20-25% against the euro and the pound, and nearly doubled against the yen.
This dollar strength isn't due to the U.S. running a balanced economy, a responsible government budget, or following sound financial discipline. No – this strength is a byproduct of the dollar's status as the world's reserve currency.
That reserve status allows the U.S. to run up enormous debt and massive trade deficits, gradually hollowing out its economy from within.
The so-called 'exorbitant privilege' has allowed the U.S. to dissolve into luxury.
But – as people like to say these days – it's not sustainable.
Woe, thrice woe, if the U.S. loses its global reserve status.
So what?
Europe doesn't need it. China doesn't want it. Japan isn't asking for it.
So what are the actual benefits?
So is being the global reserve currency a privilege or a curse? Like all mechanisms, when taken to extremes, what begins as a benefit can become a poison.
Given the scale of the U.S.'s deficits, the patient may already be poisoned.
The policy of maintaining the dollar's global reserve status may persist, may fade, or may be abandoned. But its role as a channel for economic dissipation is nearing its end, as the sustainability of chronic, rolling deficits is now visibly hitting its limits.
Meanwhile, China doesn't want to be the global reserve currency – even though it could be. Their reasoning is simple: they want to keep exporting goods, take your confetti, and turn around and buy up assets in your country. Eventually, they own all the good stuff. If you do this with land, you're called colonial; if you do it with productive assets, you're called rich.
As long as the sacred cow of the dollar's global reserve status roams the earth, the U.S. will continue selling off its family silver so its people can fill their double garages with plastic junk – believing this "exorbitant privilege" is a blessing, when in reality, it may be the curse that undoes them.