MNI INTERVIEW: Trump Accelerating Dollar Decline - Eichengreen

President Donald Trump's tariff policies and sweeping changes in Washington are bringing forward the point at which the U.S. dollar loses its international reserve currency status, potentially leading to a severe shortage of global liquidity, University of California, Berkeley economist Barry Eichengreen, a leading expert on the dollar, told MNI. 

"I'm not saying there will be flight from the dollar tomorrow, but on current policies the direction of travel is clear," said Eichengreen, a former senior policy adviser at the IMF and academic presenter at the Fed's annual economic symposium in Jackson Hole.

"In the longer run, the dollar's status as a safe haven and reliable international means of payment can be undermined. But there is no other currency to step up and replace it, not the euro, not the renminbi, not anything else. 

"The result then would be a severe shortage of global liquidity, which was what happened when the dollar lost the confidence of investors in the 1930s. Resulting, alas, in the Great Depression."

Trump administration policies have significantly increased the likelihood or at least brought forward in time this long-run scenario, he said. 

DOLLAR WEAKNESS 

Wall Street conventional wisdom in November was that Trump’s tariff plans would boost the U.S. dollar. Instead, the April 2 tariff announcements sent the dollar lower.

"If the current tariff policies, surrounding uncertainty, and display of economic incoherence by the administration persist, then absolutely" there will be more dollar weakness over the medium-term, Eichengreen said. (See: MNI INTERVIEW: Tariffs Freeze Fed, Court Global Recession - Fatas) 

The dollar's safe-haven status has been somewhat impaired by a lack of confidence in U.S. policymaking. "Certain investors around the world, official and private both, are re-thinking their dependence on dollar reserves, on the U.S. banking system for payments, and on their relations with the United States generally. Hedging their bets, which is sensible in the circumstances, means looking to alternatives, or at least supplements to the dollar, as a place to park one's rainy-day funds," he said. 

White House Council of Economic Advisers Chair Stephen Miran said this week the dollar's reserve asset status is a problem and has proposed burden-sharing options. Those suggestions included other countries accepting tariffs, buying more American goods, boosting defense spending, investing in American factories, or writing checks to the U.S. Treasury. 

"The dollar's reserve currency status has both costs and benefits. Most economists, including me, think the benefits dominate," Eichengreen said. "As for Mr. Miran's ideas, these are extremely dangerous. An effort to push down the dollar 'modestly' by taxing official foreign holdings of dollars could quickly spiral out of hand."

If the dollar lost its reserve currency status, the government's borrowing costs would rise, banks and firms would lose the convenience of doing cross-border business in their own currency and the U.S. would lose the automatic insurance of having a safe-haven currency, he said. "Now, when a bad thing happens, the dollar strengthens rather than collapsing. This valuable insurance shouldn't be squandered."

FISCAL THREAT 

There is also the possibility that the global financial system moves away from the U.S. dollar because of the unsustainable trajectory of the U.S. fiscal situation, Eichengreen said. 

"The less sign there is that the Congress and executive have a coherent, politically workable plan for getting the deficit under control and stabilizing the debt-to-GDP ratio, the closer in time comes the tipping point," he said. 

"The idea that we can significantly reduce health care and defense spending – the federal government being either an army with a health plan or a health plan with an army – is social science fiction."