By Andrés Velasco
US President Donald Trump thinks America is only for Americans. The US dollar, by contrast, is for everyone.
Should the BRICS grouping of emerging economies create a new currency, Trump has
tweeted
, or “back any other currency to replace the mighty US dollar,” they will face 100% tariffs.
The chairman of Trump’s Council of Economic Advisers,
Stephen Miran
, disagrees. On April 7, he
told
the Hudson Institute that the global use of the dollar has “caused persistent currency distortions and contributed, along with other countries’ unfair barriers to trade, to unsustainable trade deficits.”
Miran is not the only MAGA (“Make America Great Again”) economist to hold that view.
Michael Pettis
, not of the administration but influential within it, recently wrote a commentary in the
Financial Times
entitled
The United States would fare better without relying on the international dollar.
Globally, the desire for U.S. dollars boosts their worth. Trump views this as positive since robust nations ought to possess powerful currencies. However, his team includes experts concerned that an appreciating dollar could undermine American industries’ competitiveness and lead to job losses overseas. Which perspective holds more weight?
When individuals from countries like the Philippines, Malaysia, Saudi Arabia, Nigeria, Colombia, and many others choose to hold dollars for savings and investments, they uphold what Valéry Giscard d’Estaing, who was serving as France’s finance minister under President Charles de Gaulle at the time, characterized irritably as an “exorbitant privilege” for the United States—a notion viewed differently by Miran and Pettis, seeing it more as an excessive burden rather than a benefit.
Nearly all governments produce money to cover their expenses. Residents readily use these paper notes when trading for products and services. This unstable system is referred to by economists as “seigniorage.” Whenever citizens start losing trust in their national currency and attempt to offload it—as seen in nations like Argentina, Venezuela, Sudan, and Zimbabwe—this often leads to soaring inflation rates.
The United States stands out because people all around the globe want to possess greenbacks, allowing the country to earn seigniorage from the entire world. This benefit comes courtesy of the Federal Reserve.
estimates
Foreigners possess over $1 trillion, which constitutes 45% of the entire circulating currency. This serves as an inexpensive means of financing for the United States.
Picture an American traveling overseas who pays for a hotel stay using U.S. currency. One year later, the international hotel owner utilizes those same dollars to finance their trip to America. Should U.S. price levels increase within that timeframe, it effectively equates to providing the United States with a loan carrying a negative interest rate from the global community.
That is not the only way the US obtains funds on the cheap. All over the world, American bonds – and especially the Treasury bills issued by the US government – are used as collateral in financial transactions.
Because of this convenience, foreigners are willing to hold Treasuries even if the interest rate is lower than that of other government bonds of equivalent risk and maturity (economists call this gap the
convenience yield
).
At the end of 2024, foreigners
held
Almost $8.6 trillion in U.S. federal debt exists. Should its function as collateral result in an interest rate on American debt being 0.5% less than what it might typically be, then Americans stand to save around $43 billion annually.
Moreover, if the convenience yield causes Treasury interest rates to fall below the economy’s growth rate, the US benefits from a
free lunch
It can emit government debt without needing to pay it back ever.
Prior to addressing the Hudson Institute, Miran admitted that “the demand for dollars has helped keep our borrowing costs down.” However, he failed to mention this significant point for the remainder of his talk.
Nor did he consider another advantage of the global dollar: when the US gets into trouble (for instance, after the Vietnam War, or in the tumultuous weeks following Trump’s April 2 declaration of a tariff war), the dollar’s value declines, and so does the burden of the dollar debts it owes to the rest of the world.
Other countries that borrow in their own currency must pay an interest rate that compensates for this devaluation risk. The US
does not
.
Is the world losing out as America gains? Not really. Individuals across the globe benefit from access to secure, U.S.-dollar denominated investment options for saving and investing. Currently, no other economy offers this level of service.
Europe is the obvious alternative, but its capital market is far more fragmented than that of the US, since only in the last few years has the European Union (as opposed to individual member states) begun to issue debt instruments.
While China boasts a substantial economy, its authoritative governmental structure and extensive capital restrictions prevent global enthusiasm for acquiring assets denominated in Renminbi. Thus, the international community isn’t readily embracing such investments.
The U.S. dollar serves as a worldwide currency due to the historical reliability of American policies and institutions compared to those of many other nations. Should the MAGA economists view this as an issue, their leader has a straightforward fix at hand.
Through tariff impositions that breach global agreements, speculation regarding invasions of allied nations such as Canada and Denmark (with intentions toward Greenland), disregard for judicial decisions, and threats to pursue an unconstitutionally barred third term, Trump is causing the U.S. to resemble those with weaker currencies and higher inflation rates.
The global response to Trump’s “Liberation Day” tariffs was clear: the value of the dollar
lost
almost 7% of its worth compared to the euro, with the ten-year Treasury yields also increasing.
rose
by almost half a percentage point. The currencies of emerging and developing countries also plunged, because higher tariffs and a slowing world economy dim their growth prospects.
Creating a policy that harms nearly everybody is no simple task, yet the MAGA economists have accomplished this impressive achievement. Should the worldwide dominance of the dollar falter as a consequence, it would elicit widespread grief.
Andrés Velasco, who previously served as the finance minister of Chile, currently holds the position of Dean at the School of Public Policy within the London School of Economics and Political Science.
Provided by Syndigate Media Inc. (
Syndigate.info
).
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