Stigler Center Assistant Director Matt Lucky reviews Kenneth Rogoff’s new book, Our Dollar, Your Problem: An Insider’s View of Seven Turbulent Decades of Global Finance, and the Road Ahead, which reflects on the rise and ongoing fall of the American dollar’s global dominance. Rogoff discusses his book with Bethany McLean and Luigi Zingales on this week’s Capitalisn’t episode, which you can listen to here.
In Our Dollar, Your Problem, Kenneth Rogoff offers a history of the American dollar as the world’s reserve currency following World War 2. This narrative of dollar dominance is primarily recounted from the perspective of the dollar’s failed rival currencies. The book ends with Rogoff’s thesis that the dollar is past “middle age,” and its global dominance will erode in the coming years. For Americans, that forebodes the end to the benefits that the dollar’s dominance has brought, including lower interest rates and cheaper imports. However, Rogoff’s soothsaying does not foretell ruin and irrelevance for the dollar. Rather, his prediction is that the dollar will share a tripolar world with the European Union euro and Chinese renminbi.
Rogoff advances his thesis across two main planks. First, he offers an inventory of historical and contemporary international challengers to the dollar’s dominance. Secondly, he contends the more dire threats to the dollar’s power originate from within the United States’ political system, particularly the party duopoly addicted to public debt and indefatigably pushing the U.S. into an untenable fiscal position.
The international challengers
Beginning with the international challengers to the dollar, Rogoff runs through a series of Postwar Era contenders, first with the Soviet ruble in the 1950s-60s, the Japanese yen in the 1980s, and then the euro after its launch in 1999. Rogoff shows how each challenger to the dollar arose in a specific historical context and under specific conditions. The Soviets, for instance, benefited from a wealth of natural resources and massive infrastructure investments that took a nation of agrarian peasants and turned it into a global superpower with a sizable lead in new technologies, arms, science, etc. In the 1980s, Japan’s stock market briefly overtook the U.S. bourses in value, and its real estate market, on an island roughly the size of California, was valued above the entire U.S. real estate market. As recently as the 2000s, the EU economy was roughly equal in size to the U.S. We know how these stories end. The Soviet economy crumbled under the weaknesses of central planning, overinvestment in the arms race, and diminishing returns on infrastructure investments. The Japanese economy languished under excessive debt and a rapidly aging population. As Rogoff explains, the EU has stagnated since the European debt crisis following the Great Recession.
One striking point in this discussion covering the Soviets, Japan, and the EU is their anticlimactic paper tiger status. No currency proves to be a true threat to dollar dominance. For instance, none of the more than 186 countries that Rogoff inventories in his book stabilizes its exchange rate against the yen. Likewise, outside the EU, only a handful of former French colonies peg their currencies to the euro. These chapters give the sense that the dollar did not face a true challenge in the 20th century.
According to Rogoff, this remains true in the 21st century, even with the ascent of China. Building on his prior research, Rogoff advances a bearish assessment of China’s economic future, contrary to years of hype from most other corners of the economic and financial world. He contends that China’s explosive growth has relied on steady investments in real estate and infrastructure. Those infrastructure investments stimulate growth directly. Yet, Rogoff surfaces the underappreciated insight that China employed those investments to manage a steady flow of its rural population into urban manufacturing roles, maintaining downward pressure on wages with an additional 10-15 million new workers per year. Those low wages have allowed China to become the world’s manufacturing hub, with about 30% of the global share in 2023.
Nevertheless, Rogoff anticipates China’s engines of growth are beginning to stall. He contends that “China has had to keep [infrastructure and real estate] investment growing ever faster to maintain the same level of output growth; this is unsustainable. This is very much part of what happened to the Soviet Union and, to some extent, to Japan” [emphasis added] (102). Thus, as with the Soviet Union, Japan, and the EU, China’s story likewise ends with the conclusion that “if China’s long-term growth is slowing anywhere near to the extent argued in this chapter, it deeply undermines the main argument underpinning the inevitability of the renminbi equaling and then surpassing the dollar” (109).
Later in this section, Rogoff also considers (mostly) non-state challengers to the dollar. A unified global currency would ease international transactions but appears inconceivable in practice given all the monetary difficulties the European Union has faced with the euro. On the one hand, Rogoff recounts how different regulations, bankruptcy laws, and government debt markets for each member state means that the EU lacks “a capital market union or a more fully integrated making system,” which all taken together “[are] a major handicap for the euro.” To harmonize these laws and regulations would require forfeiting national sovereignty and handing over more of each country’s economic autonomy to the supranational body. Already, the presence of the euro has stripped countries of the ability to devalue their currencies, which would allow those member states, particularly in the south, to pay down debts and bolster exports. A central bank digital currency (CBDC) may be a more plausible contender against dollar dominance. Rogoff notes that the European Central Bank appears to be on its way to issuing a digital euro for limited uses, and China may find strategic utility in enlisting its neighbors into a digital renminbi as an alternative to the dollar bloc. Yet, he predicts that either CBDC’s success would be contingent on the U.S. declining to compete with its own CBDC. That is, the U.S. would almost surely establish a dominant CBDC given the dollar’s current position and the US’s global leadership in tech if it took the lead.
Cryptocurrencies appear as a real threat to dollar dominance, but in a unique and narrow sense. Rogoff notes that the dollar in cash form has long been preferred in the global underground economy, criminal and otherwise. Now, Bitcoin has also become a favored currency for transactions in the underground economy as well; if nothing else, the anonymous blockchain ledger on which Bitcoin runs is good for crime. Hence, while cryptocurrencies will not dethrone the dollar in the traditional economy, Bitcoin and its kin do appear to be claiming a greater share of the global underground economy and diminishing demand for dollars on the margin.
The final conclusion of this section is that if the dollar falls from global favor, it won’t be because an alternative currency usurped it on the merits of its issuer’s economic dominance. A variation on Churchill’s famous quote about democracy captures it best: “Indeed it has been said that [the dollar] is the worst form of [reserve currency] except for all those other forms that have been tried from time to time.” To wit, the dollar’s dominance has flourished in part because its external rivals have been anemic.
The rot within
With those external challengers discounted, Rogoff turns in the final parts of the book to the true villain of his narrative: the duopoly of profligate American political parties that have assumed interest rates will remain low forever and thus debt spending a freebie. Rogoff expresses particular concern about the ability of the U.S. Federal Reserve to manage the relative strength of the dollar. ”Anyone who thinks that Federal Reserve independence is etched in stone is naive,” he writes (248-9). That is, Rogoff reminds readers (as President Donald Trump is now reminding readers with threats to fire Fed Chair Jerome Powell) that the independence of the Federal Reserve is not constitutionally protected, and it cannot endure indefinitely under political pressure to inflate in response to untenable fiscal policies. He predicts that within the next decade, the U.S. will endure another round of inflation that erodes the dollar’s global dominance.
It’s at this closing stage of the argument that Rogoff casts himself as Cassandra speaking prescient truths that none will accept as he levels repeated criticisms against economists and policymakers for ignoring the risks of another inflationary episode. His frustration with “lazy language” and naive “this time is different” thinking is communicated with a passion that is otherwise reserved for autobiographical asides. The problem with young contemporary economists, Rogoff instructs, is that they assume inflation is, for the most part, a solved technocratic problem, and they “forget that political economy exists.” I read Rogoff here to indicate that it does not matter how well technocrats solve the puzzle of managing inflation and interest rates within the Fed if perfidious politicians are willing to flip the table over on a whim.
We are left with the warning that,
If the United States does run into problems making the fiscal adjustments needed to fund its debt, it will create a major and recurrent problem for the world that could unfold in higher interest rates, greater inflation, financial instability, or more intense financial repression — or more likely than not, all four. It would not be good for the dollar’s brand (262).
Rogoff contributes an engaging historical account of the various failed rival claimants to the dollar’s dominance in the global financial system and an energetic warning of the turbulent waters ahead for the U.S. dollar. Yet, I am left unsure at the conclusion of Our Dollar, Your Problem how best to weave those two threads together regarding Rogoff’s main thesis that the dollar has hit its peak and its dominance is now eroding. The Soviet Union, Japan, the EU, and most recently China each appeared as plausible contenders to dethrone the dollar in their historical times, so why is “this time different” for dollar dominance? Yes, according to Rogoff, the main threats to dollar dominance are the internal dysfunctions in the U.S., but if other claimants are simultaneously weak and there isn’t an alternative safe harbor, then where does that get us? In more recent interviews, Rogoff more explicitly anticipates the dollar’s backward slide to a position of first among a triumvirate with the renminbi and the euro. One might read that prediction as anticlimactic, as in this future the dollar remains globally dominant but with a diminished margin of advantage over its rivals. A more pessimistic read here, given how Rogoff documents the economic vulnerabilities of the U.S., Japan, China, and the EU, is that there may not be a bright spot for the world’s leading economies on the horizon. Without a monetary safe harbor, smaller nations and investors may face choppier waters that upset trade, investment, and currency stability. Perhaps the dollar will continue its dominance yet again, merely because it is the worst reserve currency “except for all those other forms that have been tried from time to time.”
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