Is the post-dollar era approaching?

Every time global markets shake or a financial or geopolitical crisis erupts, the same scene repeats: investors flee to the dollar. This paradox raises a question that has long occupied economists and policymakers: why does the dollar remain the primary safe haven even when the United States itself is at the heart of the crisis? And could it ever lose its status as the world's most important currency?

Our Dollar... Your Problem

American economist Kenneth Rogoff, former chief economist at the International Monetary Fund, answers these questions in his book 'Our Dollar... Your Problem,' which offers a historical and analytical reading of the dollar's trajectory from the end of World War II to the present, drawing on seven decades of economic and geopolitical shifts.

Rogoff argues that the dollar's dominance was not merely a result of American economic power, but also stemmed from a combination of strong institutions, deep financial markets, and military and political influence, alongside the failure of competitors to offer a viable alternative capable of seizing the lead.

The author opens his book by recalling a famous phrase coined by U.S. Treasury Secretary John Connally in 1971, following then-President Richard Nixon's decision to end the convertibility of the dollar into gold, when he told his European counterparts: 'It’s our dollar... but it’s your problem.' From this phrase, he sets out to explain how the dollar became the cornerstone of the global financial system.

Reserve Currencies

Rogoff points out that history has seen a number of global reserve currencies, from the Spanish peso and Dutch guilder to the British pound, noting that the average lifespan of a reserve currency ranges between one and two centuries.

Compared to these historical cycles, he believes the dollar is still roughly in mid-life, meaning the end of its hegemony is not imminent, even if its future path will not be without challenges.

The author believes that the rise of the dollar was not inevitable, but rather the result of a combination of political decisions and favorable international circumstances. Since the end of World War II, numerous economic powers have tried to challenge the American currency, yet all have faced obstacles that prevented their success.

In the same context, Rogoff reviews the most notable of these attempts, starting with the Soviet Union, which failed to sustain the race of growth and innovation during the Cold War, through Japan, which in the 1980s seemed poised to surpass the United States after its real estate and financial markets eclipsed their American counterparts, before the 1985 Plaza Accord led to a rise in the yen and a long-term slowdown of the Japanese economy.

The Euro Currency

As for Europe, while it succeeded in creating a unified currency, the euro, the sovereign debt crisis, sluggish economic growth, and the return of inflationary pressures have limited the European currency's ability to effectively compete with the dollar.

In contrast, China represents today's most prominent potential competitor, but it faces growing challenges, most notably slowing growth, a real estate sector crisis, weak domestic consumption, and an economic model heavily reliant on exports—factors that the author believes diminish the yuan's chances of replacing the dollar in the foreseeable future.

Rogoff emphasizes that the United States benefited from its leading position after World War II, when the Bretton Woods system placed the dollar at the heart of the global monetary system.

It also solidified its position through strong legal institutions that protect investors, financial markets that are the largest and most liquid, currency swap agreements between central banks, and American military power, which provided an umbrella for global financial stability.

An Exceptional Advantage

Rogoff points out that these factors grant the American economy an exceptional advantage; even during crises, capital flows into the dollar rather than fleeing it, allowing the U.S. government to borrow at lower costs compared to other countries and making the prospect of bypassing the dollar more complex than it appears.

The book also addresses what is known as the 'Triffin Dilemma,' which explains the difficulty countries face when attempting to simultaneously combine a fixed exchange rate, free capital movement, and an independent monetary policy.

Rogoff notes that many countries preferred to peg their currencies to the dollar to benefit from its stability and the credibility of U.S. monetary policy, which helped them curb inflation and bolster confidence in their economies, but conversely limited their ability to manage their own monetary policies independently.

The author cites examples such as Mexico, Brazil, Russia, Lebanon, Argentina, and Venezuela, explaining that excessive reliance on pegging currencies to the dollar can turn into a burden when economic conditions change or local currencies face pressure from speculators.

Exchange Rate Stabilization

The author also reviews the evolution of economic policy management models, explaining that the 'Tokyo Consensus' emerged as a middle ground between the 'Washington Consensus,' which called for market liberalization and floating currencies, and the 'Buenos Aires Consensus,' which favored government intervention and currency pegs.

The Japanese model relies on more flexible exchange rates while maintaining massive dollar reserves, imposing some restrictions on capital movement, and strengthening financial oversight—policies derived from lessons learned from the Asian financial crisis of the late 1990s.

Digital Currencies

The book does not overlook technological developments, as it discusses the impact of central bank digital currencies, cryptocurrencies, and stablecoins, noting that these innovations may represent a partial future challenge to the dollar, especially in the informal economy and cross-border transfers, but they remain far from displacing the American currency from its central position.

Rogoff asserts that the dollar's global status has granted the United States immense economic and geopolitical privileges, including lower borrowing costs and the Federal Reserve's ability to provide global liquidity during crises, in addition to the influence Washington wields through the international financial system, including the use of financial sanctions as a pressure tool against countries and entities that violate its policies.

The Exorbitant Privilege

Nevertheless, the author clarifies that this hegemony was not imposed by force alone, but was the result of global trust in American markets and institutions, and its ability to allocate capital more efficiently than any other competitor—what economists describe as the 'exorbitant privilege.'

Despite his defense of the dollar's continued strength, Rogoff believes the real danger does not come from Beijing or Brussels, but from within the United States itself.

According to Congressional Budget Office projections, the U.S. public debt-to-GDP ratio could rise to about 166% by 2054, at a time when U.S. external liabilities have exceeded the returns generated by its external assets for the first time since World War II.