By Andrés Velasco
U.S. President Donald Trump believes that America should be primarily for Americans. In comparison, the U.S. dollar is available for everybody.
If the BRICS group of emerging economies decides to introduce a new currency, Trump would have tweeted , or "support any other currency as an alternative to the powerful US dollar," they will be subject to 100% tariffs.
The chairperson of Trump’s Council of Economic Advisers, Stephen Miran , does not agree. On April 7, he told The Hudson Institute argues that the worldwide usage of the dollar has led to continuous monetary imbalances and has contributed, together with other nations' unjust trade restrictions, to unbalanced trade deficits.
Miran is not the sole economist associated with "Make America Great Again" who holds this opinion. Michael Pettis , not part of the administration but still having significant influence within it, recently penned an opinion piece in the Financial Times entitled The United States would fare better without relying on the global dollar.
Globally, the desire for U.S. dollars boosts their worth. Trump views this as positive since robust nations ought to possess powerful currencies. However, his team includes experts concerned that an appreciating dollar could undermine American industries' competitiveness and lead to job losses overseas. Which perspective holds more weight?
When people from countries like the Philippines, Malaysia, Saudi Arabia, Nigeria, Colombia, and many others choose to hold dollars for saving and investing purposes, they uphold something that Valéry Giscard d'Estaing, who was serving as France’s finance minister under President Charles de Gaulle at the time, referredly termed as "exorbitant privilege" for the United States—a notion not seen as an excessive burden but rather as a benefit according to Miran and Pettis.
Nearly all governments print money to cover their expenses. Citizens readily use these banknotes when trading for products and services. This unstable system is referred to by economists as "seigniorage." Whenever confidence in the domestic currency erodes and individuals attempt to offload it—as seen in nations like Argentina, Venezuela, Sudan, and Zimbabwe—consumer prices surge dramatically.
The United States stands out because people all around the globe want to hold onto their dollars, allowing the country to earn seigniorage from the entire world. This benefit comes courtesy of the Federal Reserve. estimates Foreigners possess over $1 trillion, which constitutes 45% of the entire money supply in circulation within the United States. This serves as an inexpensive means of financing for America.
Picture an American traveling overseas who pays for a hotel stay using U.S. currency. One year later, the international hotel owner utilizes those same dollars to finance their trip to America. Should consumer prices increase within the United States over that period, it effectively equates to providing the Americans with a loan carrying a negative interest rate from the global community.
This isn’t the sole method through which the U.S. secures affordable funding. Across the globe, American bonds—and particularly those Treasury bills issued by the United States government—are utilized as security in various financial dealings.
Because of this convenience, foreigners are willing to hold Treasuries even if the interest rate is lower than that of other government bonds of equivalent risk and maturity (economists call this gap the convenience yield ).
By the close of 2024, non-residents held Almost $8.6 trillion in U.S. federal debt exists. Should its function as collateral result in a reduction of the interest rate on American debt by approximately 0.5%, then Americans stand to save around $43 billion annually.
Moreover, if the convenience yield causes Treasury interest rates to fall below the economy’s growth rate, then the US benefits from free lunch It can emit government debt without needing to pay it back.
Prior to addressing the Hudson Institute, Miran admitted that "the demand for dollars has helped keep our borrowing costs down." However, he subsequently failed to mention this important point throughout the remainder of his address.
He also overlooked an additional benefit of the worldwide use of the dollar: whenever the United States faces difficulties (such as post-Vietnam War era or during the chaotic periods following Trump’s announcement in early April about initiating a tariff conflict), the value of the dollar drops, thereby reducing the weight of the dollar-denominated debts owed globally.
Other countries that borrow in their own currency must pay an interest rate that compensates for this devaluation risk. The US does not .
Is the world losing out as America gains? Not exactly. Individuals across the globe reap benefits from possessing secure, US-dollar-denominated assets for saving and investment purposes. Currently, no other economy can offer this same service.
The clear substitute would be Europe; however, its capital market is significantly more segmented compared to that of the United States. This fragmentation exists because it was just recently, within the past several years, that the European Union started issuing debt instruments instead of individual member countries doing so independently.
While China boasts a substantial economy, its authoritative governance structure and extensive capital restrictions prevent global interest in holding assets denominated in renminbi.
The U.S. dollar serves as a worldwide currency due to the historical reliability of American policies and institutions compared to those of many other nations. Should MAGA economists view this as an issue, their leader has a straightforward fix at hand.
Through tariff impositions that breach global agreements, speculation regarding invasions of allies such as Canada and Denmark with an eye toward controlling Greenland, disregarding judicial decisions, and contemplating seeking an unconstitutional third term, Trump is causing the U.S. to resemble nations characterized by weak currencies and high inflation rates.
The global response to Trump's "Liberation Day" tariffs was clear: the value of the dollar lost almost 7% of its worth compared to the euro, with the ten-year Treasury yields also changing. rose By nearly half a percentage point. Currencies from emerging and developing nations likewise declined, as increased tariffs and a decelerating global economy diminished their growth outlooks.
Creating a policy that harms nearly everybody is no simple task, yet the MAGA economists have accomplished this impressive achievement. Should the worldwide dominance of the dollar falter as a consequence, it would be lamented by many.
Andrés Velasco, who previously served as the finance minister of Chile, currently holds the position of Dean at the School of Public Policy within the London School of Economics and Political Science.
Provided by Syndigate Media Inc. ( Syndigate.info ).