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REMARKS
Bloomberg Businessweek
October 8, 2018
of the Treasury, warned in a speech at the Carnegie
Endowment for International Peace that “overuse of sanc-
tions could undermine our leadership position within the
global econom
y and the efectiveness of our sanctions them-
selves.” Broad support is best, he said. He added that the U.S.
“must be prepared to ofer sanctions relief if we want coun-
tries to change their behavior.” Trump’s reinstitution of sanc-
tions against the wishes of the coalition partners, without
clear evidence that Iran has meaningfully broken its com-
mitments, appears to violate both of Lew’s principles. (A
spokeswoman said Lew wasn’t available for comment.) Even
Mark Dubowitz, chief executiv
e oicer of the Foundation for
Defense of Democracies, which favors action against Iran,
says that “there’s always risk of overuse of a single instru-
ment. ... You need covert action, military, a regional strategy,
political and information warfare.”
The best thing the dollar has going for it is that its chal-
lengers are weak. The euro represents a monetary union, but
there’s no central taxing and spending authority. Italy’s recent
woes are only the latest challenge to the euro zone’s durability.
China is another pretender to the throne. But China’s undem-
ocratic leadership is wary of the openness to global trade and
capital lows that having a widely used currency requires. In a
December interview with
Quartz
news site, Eichengreen said,
“Every true global currency in the history of the world has
been the currency of a democracy or a political republic, as
far back as the republican city-states of Venice, Florence, and
Genoa in the 14th and 15th centuries.”
On the other hand, the U.S. is hardly alluring these days.
“When does the rest of the world turn to the U.S. and say,
‘What have you done for me lately?’ ” Beth Ann Bovino, chief
U.S. economist of S&P Global Ratings, asked on Sept. 30 at
the annual meeting of the National Association for Business
Economics in Boston.
The biggest long-term challenge to the dollar’s standing is
what economists term the Triin dilemma. Belgian-American
economist Robert Triin observed in 1959 that for the U.S.
to supply dollars to the rest of the world, it must run trade
deicits. Trading partners stash the dollars they earn from
exports in their reserve accounts instead of spending them on
American goods and services. Eventually, though, the chronic
U.S. trade deicits undermine conidence in the dollar. This
is what forced President Richard Nixon to abandon the dol-
lar’s convertibility to gold in 1971.
Harvard economist Carmen Reinhart cited the dollar’s
Triin dilemma at the Boston business economists’ meet-
ing. “Now you say, well, that’s not a problem, our debt is not
backed by gold,” she said. “But our debt, and anybody’s debt,
is ultimately backed by the goods and services that an econ-
omy produces.” And, she noted, “our share of world [gross
domestic product] is shrinking.”
When Giscard d’Estaing coined the phrase “exorbitant
privilege,” he was referring to the fact that the U.S. gets what
amounts to a permanent, interest-free loan from the rest of the
world when dollars are held outside the U.S. As Eichengreen
U.S. dollars Euros Yuan Yen Other
Global payment currency
International loans
Foreign exchange reserves
DATA: BANK FOR INTERNATIONAL SETTLEMENTS, INTERNATIONAL MONETARY FUND, SOCIETY FOR WORLDWIDE
INTERBANK FINANCIAL TELECOMMUNICATION, AND EUROPEAN CENTRAL BANK CALCULATIONS
Each currency’s share of the category in the international monetary system as of
the 2017 fourth quarter or latest available
40%
56%
63%
36%
23%
20%
20%
17%
11%
How Much Is That in Dollars?
points out, it costs only a few cents for the U.S. Bureau of
Engraving and Printing to produce a $100 bill, but other coun-
tries have to pony up $100 worth of actual goods and ser-
vices to obtain one. Dollars that foreigners willingly accept
and trade among themselves are like little green IOUs to the
rest of the world. They allow Americans collectively to con-
sume more than they produce—to live beyond their means.
The downside to America’s privilege is that the for-
eign demand for dollars raises the exchange rate, mak-
ing American products less competitive in world markets.
Especially in slack times, American workers can be thrown
out of work when the U.S. imports products that could have
been made domestically. And the accumulation of dollars out-
side the U.S. represents a transfer of wealth to other coun-
tries. If other countries suddenly decide to use their dollars
to buy American goods and services, the U.S. will suddenly
have plenty of work to do—but consumers will have to switch
from living beyond their means to living beneath their means.
On the whole, though, U.S. leadership beneits from hav-
ing a currency that’s in great demand. The issue is how to
keep the dollar the favored currency of the world. Preserving
diplomatic alliances is one way. Eichengreen’s research inds
that countries that rely on the U.S. nuclear umbrella ( Japan,
Germany) have a much bigger share of dollars in their for-
eign exchange reserves than countries that have their own
nukes, such as France, apparently because they feel their
dollar dependence tightens their military protector’s ties
to them. Another way is to make dollars freely available as
needed to trading partners, as the Federal Reserve did via
“swap lines” during the global inancial crisis under Chairman
Ben Bernanke. And yet another is to refrain from using the
dollar’s dominance as a cudgel against allies. As Lew said in
2016, “the more we condition use of the dollar and our inan-
cial system on adherence to U.S. foreign policy, the more
the risk of migration to other currencies and other inancial
systems in the medium term grows.” —
With Nick Wadhams,
Gregory Viscusi, and Jeanna Smialek