Dollars are not fragile
The writer is a contributing editor of the FT
This week, the United States is negotiating with itself again to make sure the federal government can continue borrowing. The stakes are familiar. But now the bigger concern seems to be that the dollar itself is at risk — that everyone else who has long been frustrated with the U.S. currency may seize the opportunity to stop using it.
The problem with this argument is that there is no such thing as the dollar. There are many types of dollars, each with its own characteristics. No monetary regime lasts forever. But monetary systems are not collective delusions either. Dollars won’t suddenly go up in smoke if Argentina starts pricing soybeans in renminbi. Each type of dollar has its own value and we need to determine exactly which ones are at risk.
Usually, when we talk about a currency, we actually mean bank deposits. The strength of the dollar is a measure of the desire of currency traders to exchange deposits in other countries for deposits in the United States. The Federal Deposit Insurance Corporation has made it clear through repeated crises that it will not let any deposit fail.
There is no other currency that comes close to the FDIC’s express $250,000 deposit guarantee or, apparently, the implied guarantee on many things. Eurozone bank deposits, for example, are covered only by national governments, and only up to €100,000. You may not like US bank dollars, but there is no currency that can conceivably replace them.
There are also Eurodollars – dollar-denominated deposits with foreign banks. They also enjoy an almost express guarantee from the Federal Reserve, through temporary currency exchange agreements concluded with foreign central banks in crisis situations. No other central bank offers anything close to the collateral for these swaps. You may not like this system, but again, it’s not clear what could replace it.
In financial markets, Treasury bills act like dollars—not just denominated in dollars, but in dollars. If the federal government begins to miss payments, the value of successive Treasuries could fall below par. This, in turn, would even eat up the market value of responsible asset portfolios. It would be bad. Treasury dollars are at risk.
However, since the Bank of England’s charter in 1694, sovereign debt has remained a cornerstone of the global financial system. You may not like this system – I have some questions about it too – but that’s what we have. And the sheer volume here is the undervalued strength of the Treasury dollar.
Americans view Treasuries as debt and measure it as a percentage of gross domestic product, so they can argue about what kind of debt load is sustainable. But as Michael Pettis points out, everyone else in the world thinks that the Treasury dollar is an asset, and no other country has been willing or able to produce sovereign debt instruments that are anywhere near America’s.
Adding up local and federal government borrowing, America pushed $26.9 billion of sovereign debt into global financial markets by September 2022, according to the latest benchmark data from the Bank for International Settlements. (Yes, I know the Fed owns Treasuries, too.) China and Japan are next, each holding just over $8 billion in sovereign assets in their own currencies. Very few other countries even measure their national debt in trillions.
We consider America’s ability to borrow huge dollars a privilege, but it’s possible the opposite is true. America’s eager willingness to borrow helps make Treasury dollars huge. You may no longer want to hold Treasuries in your portfolio. That’s fine, but what else are you going to hold?
All of these dollars together help explain the “bill of lading” dollar—goods shipped abroad in dollars. Traditional currency theories argued that goods are priced in the currency they come from or go to. More recent work has pointed out that exporters choose dominant currencies because stable prices are more important than the sovereign currency advantage.
The dollar prices on the waybills, on the other hand, are stable because of all the other types of dollars. You may believe that oil priced in dollars is merely a product of US aircraft carriers, but the petrodollar alone does not explain the global evidence of dominant currencies.
There are many reasons to doubt that a strong dollar is good for America. All the Treasury sales don’t seem to have paid for much productive investment, just periodic tax cuts and stimulus programs. But you don’t have to love every dollar to see that it’s not at all clear what the other choices are.