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Macro Week 7

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29 views

Macro Week 7

Uploaded by

jamesnie
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Reflection for Week 7

This week’s readings were a pleasure to read and particularly informative on the rise,

stability, and present threat to the dollar, with topical relevance to the Russian invasion of

Ukraine. I was struck by rise of the dollar with the fall of the pound in the mid-20 th century and

the potential parallels between the RMB and the dollar today. Exacerbating these trends are

the US’s use of the dollar’s might, which is driving many, including allies away.

The first thing that stuck out to me is what makes a currency dominant? It appears that

is not mere economic output alone, as it took some time for the dollar to surpass the pound

even when the US had become the world’s biggest economy. Indeed, it was following the

establishment of the Federal Reserve in 1913 that the dollar’s liquidity and stability occurred.

However, economic might, stability, and liquidity – while providing convenance for business

transactions often seem to require an outside push for major change. As Ferguson stated in the

interview, war has been the biggest driver of financial innovations, spurring the development of

debt financing. It was the World Wars that brought American financial dominance to the

forefront of the world’s financial system. Today, we have many issues plaguing the dominance

of the US-led system, but not major shocks that allow for the justification of major changes.

One particularly telling point is the seeming lack of drive by American leadership to develop

digital currency. Even Henry Paulson seems reluctant to push the issue. There are clearly

logistical hassles to establishing a digital currency, but I was struck by how reluctant Paulson

was to encouraging the development of digital currency. Perhaps this comes from his

background in banking – indeed commercial banking institutions would have to adapt to a


centrally distributed digital currency, but this is a small price to pay for the importance of

investing in technologies that have the potential to maintain the US dollar as the primary global

currency. Establishing a digital currency would require significant legwork in the US, from filling

knowledge gaps in digital payment technologies and running experiments, much as China did

with the digital yuan. In addition, a lot of regulatory and policy changes would have to be

established to ensure the security and stability of digital currencies.

Going back to Ferguson’s points, merchants are most impressed with convenient,

accessible currency. While the present system based on the dollar takes days to process a

transaction, digital currency transactions can be processed in minutes. This would usher in a

new world of convenience that could greatly accelerate business. Indeed, a digital RMB could

give China a significant advantage, particularly given that major financial centers are in Hong

Kong and Shanghai, so it would not be particularly painful for businesses to shift their work

there. With the US’s short term election cycles, the long term planning required to implement a

digital currency could be greatly hampered by the grid-lock and short-sightedness of our

political system.

The US failing to show foresight in its attempts to remain a financial hegemon, despite

the benefits of lower rates paid on dollar assets, reduction of exchange risks, ability to run

larger trade deficits, and helping US banks resulting from the dollar as the world’s standard

currency. Since the 9/11 attacks, the US has levied financial warfare, imposing fines and

sanctions on countries for money laundering that supported terrorism. Trump took this the

furthest, throttling countries such as Iran and North Korea. In addition, Trump has utilized

secondary sanctions to increase indirect pressure on violator countries. The US’s financial
warfare is forcing other nations, including allies, to experiment with workarounds such as use of

local currencies and development of digital currencies as they seek to limit the chokehold that

the US can wield on the economies. Russia has gone the farthest, cutting out a significant

portion of its American Treasury debt over the last few years and the question is whether China

will follow in Russia’s path. China and Russia have agreements to settlement of bilateral trade in

their own currencies. Even the EU is getting into the fray, partly as a means of continuing trade

with Iran without incurring America’s anger.

The argument that the US’s unilateral actions, which it can wield due the dollar’s

dominance, constitute an unjustified use of power may hold weight. Indeed, the argument that

the US should seek to stop acting unilaterally and instead bring in other nations into a coalition

of action would allow the US to retain its hegemon status and reduce the pressure to find

alternatives to the dollar.

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