The Economics Show: Trump is accelerating the dollar’s decline

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This episode features my esteemed colleague Martin Wolf, the FT's chief economics commentator, talking to former IMF chief economist and Harvard professor Ken Rogoff about the U.S.

dollar.

Trump's tariffs have weakened the dollar this year, but as Rogoff says, it was already in decline.

Is that decline terminal?

Will other currencies, even cryptocurrencies, muscle in on the dollar's dominance?

And what would that mean for global markets?

If you like what you hear, you can follow the economics show wherever you get podcasts.

Thanks and enjoy the show.

The US dollar has been the world's dominant currency since the middle of the 20th century.

But that long era of supremacy hasn't been without its shocks.

Now, as President Trump has pressed ahead with a slate of aggressive tariffs, the value of the dollar, so often a safe haven for investors, has slid to multi-year lows.

Is the era of dollar hegemony coming to an end?

Could cryptocurrencies or perhaps China's yuan knock the green back off its perch?

And how would that affect the rest of the world?

This is The Economic Show.

I'm Martin Wolf, the FT's chief economics commentator.

I'm joined today by Ken Rogoff, who I've known personally since 2001.

Ken is a professor of economics at Harvard University and former chief economist at the International Monetary Fund.

But long before his career as an economist, he was a grandmaster at chess.

Ken is an immensely influential thinker on international monetary and financial economics.

Together with Carmen Reinhardt, he wrote This Time is Different, Eight Centuries of Financial Folly, a seminal book which was published in September 2009.

His latest book is Our Dollar, Your Problem, and it is on the history of the dollar and what might come next for the currency.

Ken, welcome to the show.

Well, thank you, Martin.

What a privilege to be here.

We are in the age of Donald Trump.

How concerned should we be about the future of the dollar's role as a global currency?

And how much of our concern should really be about already established vulnerabilities, high U.S.

deficits and debts, over-reliance on financial sanctions as a tool of U.S.

foreign policy, and so forth?

And how much should our concern be about Trump himself?

Well, I think the dollar was in gentle decline.

I would say it actually peaked around 2015, but gentle decline.

We're talking decades of this going on.

And declining in the sense that when you lose market share, it does affect your interest rates.

You still have an exorbitant privilege, but it's less exorbitant.

You still have the ability to impose sanctions, to spy on everyone, but much less, especially as that changes.

But Donald Trump is an accelerant.

He's a catalyst.

And the time when the Euro and the Renimbi come up much closer to the dollar, which people thought was going to happen 15 years ago, I think that's going to happen a lot sooner now, believe it or not.

So if we look at what's been going on here, the

US

has clearly been exploiting its exorbitant privilege in the sense that its financial sector is the dominant financial sector.

Transactions go overwhelmingly through New York.

That gives the United States tremendous leverage over other countries and other economies.

And people have been very frustrated about this for a long time, including Europeans.

Is that a significant factor in what you see as the erosion of the US position, that people are just fed up with, as it were, the abuse of power from their perspective.

Aaron Powell, Jr.: Well, absolutely.

The Chinese feel that way.

And I think one of the reasons everyone thought some time ago that the dollar would shrink in its footprint was Asia's half-the-dollar block.

Why would China have a fixed exchange rate to the dollar?

It makes no sense.

The technocrats in China wanted to change that.

So that changed already in 2015 when China started to have problems fixing exchange rate.

But it got accelerated mightily when the Chinese saw what we did to Russia.

We seized some 300 to 350 billion in the Russian central bank assets, and we're not calling it a default, but of course it is.

I mean, we consider it an honorable default, but it's a default.

China has, by my estimates, $2 trillion in dollars, a trillion directly the Treasury sees and another trillion through various intermediaries where they hide it.

And they are thinking hard about it.

But even countries like India, Brazil, Korea, everybody is a little more hesitant about how safe are their dollars.

When you look at this long history, you mentioned that 2015 was your peak.

What are the measures that indicate to you that the dollar is past its peak?

What can we look at concretely apart from reserve holdings?

Aaron Powell, Jr.: So, I mean, there are a number of measures that economists look at, and they each are siloed.

There's studies of how much trade is in dollars,

denominated in dollars, which is smaller than you might think.

Although if you took Europe out of the picture, intra-European trade, it gets larger.

There's what percent of when countries borrow abroad, particularly their corporates, but also countries, how much of that's in dollars, how much is in Euro.

A measure I like, because it's a portmanteau measure that encompasses a lot of things, is

how do foreign central banks manage their exchange rates?

Are they trying to stabilize against the Euro?

Are they trying to stabilize against the dollar?

And I'm not talking about fixing it like Saudi Arabia does or Hong Kong does, but almost every country, even when they say they're inflation targeting, they're inflation targeting with a heavy eye on the exchange rate.

And if you look by that measure, the dollar's dominance in 2015 was blinding.

The Euro is a regional currency.

The RenIMBI's barely there.

The yen is barely there.

The dollar is dominant.

And that has moved since 2015.

It's weakened.

And I think that's going to continue.

So there are a lot of different measures.

But I think by that one, it's decreased.

I think over time, we're going to see it in others.

Aaron Trevor.

Now, one of the things that Mr.

Trump clearly intends to do is reduce U.S.

trade.

The logical consequence, if he continues with the sort of protectionist policies we've seen, is the ratio of trade to GDP will shrink.

That itself would reduce the attractions of pegging your currency against the dollar, because one of the reasons people pegged their currency against the dollar was to preserve their competitiveness in U.S.

markets.

Now, if U.S.

markets are going to be closed relative to other markets, that gives a pretty powerful reason for not pecking your currency against the dollar, doesn't it?

Is the Trump administration, into your view, aware of this linkage?

Because they often talk as if, well, we want to close our market, but we also want everybody to continue to use the dollar.

Do they understand this connection?

Well, let me try to put it in the simplest terms, which I'm not sure Donald Trump will accept.

He might understand.

We have big current account trade balance deficits.

He particularly cares about goods, but our trade balance deficits are pretty big.

But the mirror image of that is the other countries are getting savings against us that they're investing in the United States.

It's creating jobs.

It's bidding up the price of housing.

If you reduce our trade surpluses, you're reducing that inflow.

And a more subtle point is that when you throw sand in the wheels of trade, it also throws sands in the wheels of international finance.

A simple example, just to make the point, if everybody puts up 100% tariffs, it doesn't pay to invest in other countries because you can't get your money out.

That principle also holds on 10% tariffs.

It shrinks the financial sector.

Well, the United States is the winner of all winners on financial sector integration.

So his policies will absolutely shrink the global financial sector.

We lose.

I would describe his policies as sell America first, sell your stock, sell your bonds, sell everything.

And it's incredibly counterproductive.

Do they understand that?

Some of the economists certainly understand that.

Does that get to Donald Trump?

I don't know.

They might actually think they can retain the current account balances, though he doesn't think that way, just with a lower ratio of trade to GDP.

So the trade becomes less important.

You then end up with a larger current account deficit relative to trade, but you could actually continue with a large deficit and high tariffs logically.

By the way, that's not, of course, how they put it, but you could think analytically.

It could be separate.

It seems a very strange way to go about it.

That's pretty obvious.

We could run bigger government deficits.

I mean, if you wanted to shrink the current account or government budget deficits three times the current account deficit, that's sort of an obvious place to start.

And I think would be a pretty good idea anyway.

But if you don't want to shrink the current account and you want to shrink what the private sector borrowing or, you know, make it loan more, run a bigger deficit.

Maybe that is what he wants to do.

I look for words to describe the policies.

And it's just very hard not to think of crude words,

describing them as dumb in various different ways.

Politically, I don't know, but he seems to believe that the economics are brilliant, and I just don't get it.

There is a discussion, I don't know whether you thought about this, and I've tried very hard to make sense of it, of something called a Mare-El-Largo Accord.

And the idea seems to be that it will be sort of an equivalent of what the Reagan administration reached with the G5, as it was called, the other major developed countries,

Japan, Germany, France, the UK, on exchange rates, that was particularly with Japan and Germany.

And the Plaza Accord was designed in, if I remember it, in 1985, to lower the value of the dollar.

The dollar had exploded as a result of the Volcker Reagan combination of huge fiscal deficits and tight monetary policy, forced out the dollar, created huge current account deficits, which they didn't like.

So one of the things they wanted to do was to get these currencies to revalue against the dollar.

And then two years later, they decided gone far enough and they reached the Louvre accord as a sort of new settlement.

They talk about this Mar-a-Lago as though it is going to be more an exchange rate adjustment triggered by these protectionist policies.

Based on this model, I think.

Does that make any sense to you?

And this seems to be coming more from economists like Stephen Miran and Scott Besson.

Does that sign make any sense to you, that parallel?

Can you see it at all?

The thing is, if you actually look at the Plaza Accord,

and Jean-Claude Trochet once showed me the paper, you know, in which they wrote down the numbers, the yen was supposed to appreciate by 10%.

That was the plan.

And I...

I got to talk to James Baker, who was the Treasury Secretary back then.

And he said, yeah, that was the plan.

They went home.

They said 10%.

They'll have it to 10% in two weeks.

And he said, what do you know?

10% two weeks later.

But then, and he laughed when he was telling me.

And four weeks later, it was up 25%.

And they couldn't

explosive.

They deregulated their financial markets to achieve that.

That's really what happened.

And I think

it eventually blew up Japan.

And I think at one time, I thought,

that's not really fair.

There are other things that blew up Japan.

It took quite a while till the bust happened.

And I came around to the view, you know, I don't know when, but certainly in writing the book, that was wrong.

And

what we did was we made them deregulate when they weren't ready.

And had they done it in their own sweet time, I don't think they would have had nearly the crisis that they had.

We absolutely, absolutely catalyzed this.

And, you know,

I've come to realize that that was a huge mistake on Japan's part.

They got bullied into doing something.

They should have stood up to the U.S.

Now, the Mar-a-Lago Accord has a lot of bells and whistles, but one in particular is that they tell all these foreign central banks, you've got your $2 trillion in treasuries.

We're going to take them and we're going to give you 100-year bonds.

Oh, by the way, you can't trade them, but don't worry about that.

I guess we pick the interest rate.

It's a default.

We're going to default on our debt.

And I think the dollar was going to fall of its own accord.

I actually think we don't need anything to make the dollar fall.

When the dollar is way out of line, it tends to fall back in.

That's happened in 85, 2002.

And I think it would have happened under Harris.

The dollar would have fallen.

Completely different policies.

I still think it would have happened.

So now it's time for a break.

And after that, we're going to start talking about the future of the dollar.

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So returning to this big subject, what's going to happen to the dollar, the other parallel which might be closer is the 70s.

and the Nixon shock and the complete recasting of the Bretton Woods Accord, the dollar going off gold and all the rest of it.

Because it does really look as though the U.S.

wants to change the monetary system in a profound way.

Is this a bit like the 70s?

Is this the Nixon shock in a modern guise?

Well, it's certainly the biggest shock since the Nixon shock, and maybe in some ways worse.

I think...

Trump's more unstable than Nixon.

I'm sorry, maybe that's not fair of me to judge from afar.

The policies, at least, seem unstable.

I think that's fair.

So

this feels worse in some ways, but I think the end game is very likely to be similar.

I think we won't solve our budget problem.

He'll declare it's solved, but the market will look at it and say, you're crazy, and the bond yields will go up.

And I don't know what reaction he'll do.

I wouldn't be surprised if we see price controls and things like that in the Trump era.

Hard to know, financial repression repression may come where he forces people to have savings at low interest rates.

I mean, clearly, this is not a person who's a small government conservative.

I mean, he's an emperor of government.

You've described him as a king, I guess.

Maybe a mad king is what you said.

But I think we're looking at a very unstable period.

I thought we were anyway, whoever got elected.

But, you know, this is the same thing on steroids.

And the tariff thing, well, in my wildest imagination, I didn't think it would be so bonkers as what we're doing.

Aaron Powell, Jr.: So that then leads to the crucial question.

How does this affect the dollar and its role in the world in this instability?

Now, historically, people have tended to think the dollar always survives because it's just no plausible alternative.

The Chinese don't really want to internationalize their capital markets.

It's a closed walled garden.

The Eurozone, which is another plausible alternative, it's not really united.

It doesn't have an integrated public debt market.

There are debt markets for German, French, and Italian debt.

They're all different.

It's not an independent sovereign military power either.

And the cryptocurrency, well, it's not.

really a currency, is it?

So in the end, the dollar remains triumphant and dominant because there isn't really a plausible alternative.

Do you disagree with that view?

Do you think that view is no longer really right?

No, I I think it's no longer really right.

Let's step back 15 years when very leading economists, Barry Eichengreen at Berkeley, Jeff Frankl at Harvard, many others were writing papers saying we're moving to a tripolar system with the renembi, the euro, the dollar being much more equal.

A lot of people were saying that's where it's going.

And that got derailed partly because China went off in a very eccentric direction politically.

Europe had the Euro crisis, which was not very good for building confidence.

And the Fed did a pretty good job overall, which inspired confidence in the dollar.

And we, instead of falling, reached a new height.

But I think some of those forces are in place.

You say the Chinese want a wall.

They're expanding that wall to include a number of countries in Latin America and Africa.

And you may say, well, why trust the Chinese?

They don't trust us.

They don't trust the United States.

And lots of other people trust the U.S.

less.

And lots of Europe.

Oh, absolutely.

And I think the Europeans were never entirely comfortable with the situation of the power that it gave the United States.

Part of the reason they created the Euro.

Part of the reason they created the Euro, and it fell short in many ways of where it was going.

But there, you know.

Trump may come along as the best thing that ever happened to the Euro project.

I mean, if he doesn't, you know, put a fire under their energy about being more of a geopolitical power, I don't know what will.

So I certainly see a world where the dollar is

on top, but less, much less than it was.

But also, you know, this is going to lead to fiscal problems at the end of this with Trump.

I mean, he's shrinking growth.

He's undermining our academic institutions that create innovation.

He's stopping the brilliant foreigners who come in from working.

You can't get a visa.

This is not good for growth.

You don't need a PhD in economics.

And he's going to bust spending and tax cuts.

We all know that.

So

this isn't going to end well.

It's not the end of the world.

It wasn't the end of the world in the 70s.

But I think in the next,

I say in the book, five to seven years, and maybe need to make that a little shorter, we're going to get another big burst of inflation.

We're going to get financial repression, which they already do a lot in Europe and Japan in a big way, stuffing debt into the insurance companies, pension funds, the banks.

That's terrible for growth because it reduces the funds flowing into the private sector.

I think this ends in a more chaotic situation.

And

who's going to have the first financial crisis?

I don't know.

Believe me, it's coming.

I mean, if you have a situation with all this volatility, rising real interest rates, which we haven't talked about, and everything going on, something's going to blow up.

And we're going to say, of course, it blew up when it happened.

It's a very volatile period.

The 70s were not a great period in the United States.

And it's certainly looking like not just the next four years, but longer than that, because he's doing things

where you can't unring the bell that he's done, the loss of trust.

So I think, again,

blaming him for everything, if Americans do that, they're kidding themselves.

There were deep-seated problems.

He's certainly a catalyst, an accelerant in many ways.

Well, the one thing that was working, as you said, was the dynamism of the economy.

And if he damages that, that damages a lot of American power and influence in the world.

You never know.

He could adjust.

But I think the damage done already is profound.

Let's take tariffs.

Say he says, okay, 10% on everybody.

We made a deal.

You made concessions.

We did that with Canada and Mexico just four years ago in his presidency.

How do I know he's going to not roll out of bed and change his mind?

The rest of the world is going to reroute trade, reroute finance, and try to depend less on the dollar.

And by the way, crypto is more important than most people realize because there's a global underground economy.

My estimates, 20% of global GDP.

Crypto is growing and growing.

They're claiming market share from the dollar there.

So I wouldn't say the dollar is being replaced so much as being cut down several notches, a process that should have taken several decades to adjust to, and seems like it could happen much faster.

Aaron Powell, so let's think about that sort of end game or medium end game.

I was one of the people who, until now, was convinced that actually nothing would replace the dollar.

And though the U.S.

had problems, it was still overwhelmingly the most attractive economy.

It had very powerful institutions.

It was a huge integrated economy.

So I thought it was going to be reasonably stable.

Now we're looking at a world where that might change quite quickly.

There could be flight.

And there is flight.

There is flight.

You can see it in the bond market.

You can see it in the exchange rate.

There is flight.

And it's going to be difficult for them to stabilize that.

So how does that affect the economy?

Assume you're right.

The US continues with its fiscal problems.

It tries repression.

How does this play out?

Do we have the prospect of some really big disruptions occurring, some interlocking crises of the dollar, of confidence in America and global finance?

What might that look like?

Well, we'll land somewhere, but probably it's going to be pretty unstable in the transition.

These transitions aren't stable.

And that's even assuming he stays controlled, which remains to be seen.

So basically what you're saying is we are set for a really turbulent period.

And we shouldn't perhaps focus so much on the possible decline of the dollar, which in some sense you could

imagine occurring in a quite natural and normal way, but the turmoil that is likely to be associated with it, in which quite big things and big shocks can occur.

And in this context, a crucial point I've just been writing about is that we've already had a lot of turmoil.

I mean, if you think of the last 20 years, we had a huge financial crisis,

quite a struggle to overcome it.

And you could argue we never did, given the real interest rate situation.

Then we had the pandemic, the post-pandemic inflation, the war in Ukraine, and all the disruption that occurred there, particularly in Europe with the huge terms of trade shock.

And now we have Trump.

So you're really predicting more, possibly even worse, turmoil, which inevitably is also political and geopolitical.

Is that right?

Yeah, I mean, as an academic, I can't say things as crisply and eloquently as you just did.

I'm more measured.

But yes, I see this as a very difficult period coming up.

And we have a long time to go to him.

I don't know what are we going to get in 2028?

Casio-Cortez, Mini MAGA Me, you know, on the other side.

I have no idea.

I mean, what's there to look forward to here?

So it could be a while till we find our way.

Now, Clinton came along and pulled the Democratic Party to the center.

Maybe something like that will happen.

I mean, you know, it's not going to go on forever.

But I guess I do think the betting odds are the next Certainly five years, probably 10 years are going to be incredibly volatile.

Can you imagine this team handling a real shock as opposed to being the shock?

I mean, I've been thinking that about China for some time where they have not used meritocracy nearly as much in picking the high people.

Can they handle a real problem?

Can the Trump team, who has some very good people, but he makes all the decisions, can they handle?

a real problem.

I think the answer is no.

I think we'd really have to worry.

Well, I mean, I hope he does.

I'm an American.

I want it to go well.

But a good bet is that volatility is going to go up.

And if I look at markets at the moment, they seem still incredibly complacent to me about what's going on.

They have total faith in the Fed.

I mean, I do too, but the Fed is a creature of Congress.

The president and Congress together can make the Fed disappear in a week.

So you're pulling me in with your eloquence about what could go wrong, but it's hard for me to say no when you say it that way.

Let's cheer up the listeners.

Let's suppose they see the error of their ways, as it were, and you were called in to give advice.

How do they restore the position?

Leave aside the trade policy.

Pretty obvious, that's pretty batty.

Would your first and most important piece of advice be fix the fiscal position?

Because I think that would be consistent with your past position that we have to look reality in the face and recognize we can't afford what we're committed to.

That means higher taxes and spending cuts.

Fix that first, or are there other things that you would say now are even more fundamental?

Well, I mean, the easy thing to say is let's have more productivity.

Well, the U.S.

isn't doing badly.

We weren't doing badly.

Well, obviously a bit of a problem now, but they could go back

to what was going on in the US.

We're

running towards 7% deficits, and that's not sustainable, and the economy hasn't prepared for that.

Social Security is not sustainable the way it is.

Nobody's been prepared for that.

My view on these things is until there's blood in the streets, it's very hard to make these changes.

It's very hard to go out and say, I think there could be a problem.

I want to prepare for a rainy day.

Let me step back on the issue of debt, actually.

There are people who say the level of debt doesn't matter for anything.

We shouldn't care.

And most of those people will also say stimulus is the most fantastic thing in the world if we can do it.

You know, you want to use stimulus, but you don't want to owe a lot.

One of the incredible paradoxes I find, particularly in progressive thinking, is this lack of trade-offs.

Stimulus, great.

Shouldn't care about the debt as opposed to, let's look at how good the stimulus is.

Let's think about what the debt is.

And needless to say, the Republicans say, well, let's cut taxes because we will grow so much.

You don't have to worry about it.

And it never happens.

We've been tested that way.

Again and again and again and again.

Yeah, again and again and again.

So fiscal stimulus is great.

Tax cuts are great.

Maybe we need to think about a trade-off.

Well, thank you very much, Ken Rogoff, for a wonderful discussion.

And perhaps it reminds us that economics is known as the dismal science for a reason, but also that if we don't recognize the choices we have in front of us, what will happen may be something that we will really dislike.

And that's a pretty important lesson.

So thank you very much for being with us.

Thank you so much for having me.

It's a great honor.

That is all for this week.

You have been listening to the economic show from the Financial Times.

This episode was produced by Michael Frankel Duval with original music and sound engineering from Breen Turner.

The broadcast engineers are Andrew Georgiadis and Rod Fitzgerald.

Our executive producer is Manuela Saragosa.

Cheryl Brumley is the FT's global head of audio.

I'm Martin Wolf.

Thanks for listening.