There’s a new field of academic research — or if there isn’t, there should be — that attempts to predict the longer-term impacts of the Trump presidency on basic norms. The Wall Street Journal recently posted a nice entry in the field relating to the heating up of the NAFTA renegotiation: “Retreat from Trade Deals Poses a New Threat to the Dollar.”
The idea is simple: As the United States turns more protectionist, other countries are stepping into the breach and making trade deals that leave us out. Could this process lead to the U.S. dollar no longer reigning supreme as the dominant currency in global commerce?
The article concludes that this is a worrisome possibility. Central banks and currency investors are already “ramping up investment in such currencies as the euro and Chinese yuan, reflecting the effects of such moves as the U.S. retreat from the North American Free Trade Agreement and Trans-Pacific Partnership.”
But how worrisome is the dethroning of King Dollar? A vocal minority, among which I count myself, believes that what was once an exorbitant privilege has become a cumbersome burden.
Like everything else in economics (and life), there’s a trade-off. Having our currency be the premier reserve currency — the one that countries most want to hold to transact business and protect against shocks — has benefits and costs (dollar reserves are about 63 percent of global reserve holdings). The thing is, the benefits are no longer so beneficial, and the costs have gotten too costly.
The privileges of the reserve issuer have been twofold. First, they allowed us to run large, persistent trade deficits. This is partly a function of international accounting: When other nations buy dollars, our capital account (capital inflows from abroad) goes up, and our current account (trade deficit) goes down (it gets more negative). In fact, since the mid-1970s, countries have lent us whatever we need to consume more than we produce, meaning we have run trade deficits every year. (For the most recent quarter, the trade deficit was over $600 billion, or 3 percent of GDP.)
Of course, if you’re thinking that four decades of trade deficits are a mixed blessing/privilege, I’m with you, but more on that in a moment.
Second, being the premier reserve issuer means that other countries are happy to buy your debt