![]() Because weak consumption, along with weak investment from private businesses who depend mainly on local consumers to buy the goods they produce, leads to weak domestic demand, these economies require large, persistent trade surpluses to resolve the excess production that drives their economies.īut surplus economies must acquire foreign assets in exchange for their surpluses. The global trading system is terribly unbalanced, with several large economies-including China, Germany, Japan, and Russia-locked into unbalanced income distributions that reduce domestic consumption and force up their savings rates. There is another, more important reason for the widespread use of the dollar. In fact, not only has Beijing shown no inclination in recent years to accept any of these changes, but it has been moving in the opposite direction, especially with the centralization of bureaucratic and political power and the expansion of the state sector that China has undertaken in the past several years. This includes giving up control of its current and capital accounts and substantially reducing its ability to control credit growth and the liabilities of its financial system.Īll of these measures, at least for the foreseeable future, are extremely unlikely. ![]() dollar, Beijing would have to be willing to present the same benefits to foreigners. ![]() This means that, for example, for China’s renminbi to compete with the U.S. The world uses the dollar because the United States has the deepest and most flexible financial markets, the clearest and most transparent corporate governance, and (in spite of recent sanctions) the least amount of discrimination between domestic residents and foreigners. The dollar is the most widely used currency in international trade not just because of network effects, but also for other reasons that are hard for other countries, especially countries like China, to replicate. Can the World Find an Alternative to the U.S. This is especially the case for countries whose economies have grown around persistent trade surpluses. This is probably a good thing for the global economy overall, but with so many major economies locked into structural domestic demand deficiencies, any policy that forces an elimination or sharp reduction of global trade imbalances also would force deep institutional changes in the global economy-changes which also would likely be politically disruptive for many countries. dollar-or some unlikely alternative-as the currency lingua franca also would be a global economy in which large, persistent trade and savings imbalances are impossible. Although any move to limit the international use of the dollar would be opposed by parts of Wall Street and the foreign affairs and military establishments, as the costs rise, this outcome will become increasingly likely.Īnd third, a global economy without the U.S. dollar dominance, there is a growing awareness of the costs of playing this role to the U.S. While most analysts still believe that the United States will never willingly take the necessary steps to end U.S. financial markets as the absorber of last resort of global savings imbalances. policymakers to limit the ability of foreigners to use U.S. dollar to stop being the world’s dominant currency would mostly require specific action by U.S. Most sophisticated economic policy advisers in China and Russia know this, even if they have to express this knowledge cautiously. First, it would be extremely difficult, if not impossible, for countries like China and Russia to upend the dominance of the U.S. ![]() Savings, after all, can only be expressed as the excess production of goods and services. The issue of the dollar is part of the debate over global capital flows, but capital flows are just the obverse of trade and current account flows. That is why a vibrant debate has erupted over whether or not countries like China can establish a credible alternative to the dollar.īut while there has been much debate over whether or not the world-or at least part of the world, including countries like China, Iran, Russia, and Venezuela-can live without the dollar, there has been much less attention on an equally important issue: what the trade impact would be of a world less tied to the U.S. These same sanctions also make clear, however, why the governments of other countries that might one day be subject to such penalties are doing all they can to opt out and establish an alternative global currency system-either one they control or one that is unlikely to be controlled by potential adversaries. The sanctions imposed on Russia by the United States and its allies have demonstrated the immense geopolitical power that control of the global currency system can confer. dollar in the global trade and capital regime. Few topics have generated as much discussion in recent weeks as the evolving role of the U.S.
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