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
Over the Lunar New Year holidays, we were all treated to the Trump Reality Show, changing the world we thought we understood with various tweets and executive orders. The tragedy is that the rest of us have to live with the consequences.
This week, after humiliating Mexico and reversing his position on Nato, Trump and his advisers have switched to stoking a currency fire, accusing China and Japan of manipulating their currency and even suggesting that Berlin is exploiting a “grossly undervalued” euro.
Whatever you think of Trump, he was smart enough to appoint someone like Steve Bannon as his chief strategist. Bannon is a pure American success story – Harvard-trained, ex-Goldman Sachs, ex-navy, and founding entrepreneur of Breitbart News, an influential news platform that claims to represent the alt-right. In a remarkable 2014 speech, Bannon claimed that the world is in “a crisis both of our church, a crisis of our faith, a crisis of the West, a crisis of capitalism”. Taken on its own, there is nothing wrong with someone having a view of the world in crisis. But Bannon is now in a position to do something about it.
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.
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.
During the Asian financial crisis, Europe sided with the US to reject the establishment of an Asian Monetary Fund. But if, today, the “America first” strategy is designed at isolating the Rest, then the Rest must unite to protect global trade and investments. If the non-dollar zone can maintain currency stability against the dollar, then there will be less accusations of currency manipulation, forcing the debate into how the US can restore its own fiscal and trade balances to maintain its own savings equilibrium.
In short, the Rest needs to remind the US that it cannot blame the Rest for its own problems.
The reserve currency central banks can play a major role to ensure currency stability. So far, the Federal Reserve has shown responsible leadership, with strong support from the European Central Bank, the Bank of England, the Bank of Japan and the People’s Bank of China. But if the dollar is being politicised, then alternatives can and should be found.
All options are now on the table. If the US is no longer dependent on oil and energy, then oil and energy suppliers can price oil trade in currencies other than the dollar. We have seen this before in the competition between different technology standards. The leading standard becomes dominant because it is willing to provide public goods (lots of freebies). But when the dominant standard becomes predatory in using its monopoly position, then it is time to use alternative standards.
No one should take their position or customers for granted. The Rest will not stand still while Trump and his cohorts decide to change allies and foes by the tweet. None of us are against the dollar; rather, we’re for global stability, common sense and mutual respect. The time of the euro, sterling, yen, renminbi and special drawing right has come.
Andrew Sheng writes on global issues from an Asian perspective