As the US dollar becomes less reliable under a tweeting Trump, it’s time to find a different global currency
Andrew Sheng says rather than be branded currency manipulators by Trump’s America, the rest of the world should just find an alternative that actually promotes stability
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The dollar has maintained its position as a global standard because it is convenient, cheap to use and a store of value that has so far been subject to minimal political interference. The rest of the world is now stuck with a “damned if we do, damned if we don’t” dilemma. If we continue to rely on the dollar, how do we avoid being accused of being manipulators, when, in reality, market forces are stronger than any central bank on its own? If we don’t rely on the dollar, we will still be accused of being manipulators, particularly if the currency depreciates against the dollar.
None of us are against the dollar; rather, we’re for global stability, common sense and mutual respect
In other words, what is at stake is not a crisis of the West or its faith (which the “Rest” cannot change), but a crisis of faith within the Rest on the leadership in the West. The dollar remains the anchor of global stability, but when the solo anchor itself is adrift, we need to find alternative anchors. Single anchors are efficient but dangerous if they wobble. We need two or three anchors to triangulate global stability.
Here is another inconvenient truth – it’s Trump’s dollar, but the Rest’s savings. Based on the US Bureau of Economic Analysis, the US had net global liabilities of US$7.8 trillion, or 41.7 per cent of gross domestic product, at the end of the third quarter of 2016. This has deteriorated from US$2.5 trillion, or 16.8 per cent of GDP, at the end of 2010. The cumulative current account deficit (from trade) during that period was only US$2 trillion, which meant that the rest (US$3.3 trillion) was due to valuation changes (changes in the US dollar exchange rate) or financial account flows. In other words, capital flow, rather than trade, is the major driver of the exchange rate, with interest rate differentials also influencing it.
If that is the case, going forward, America’s net debt position will depend largely on future global savers, mostly in Europe and Asia. And if the savers are subject to constant lecturing by the Trump administration, an “alt-dollar” solution will have to be found.