The Long Reign of King Dollar

Aside from the princeling euro, the greenback has no real competitors globally.

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(Stock photo from Getty Images.)

It has been almost a decade and a half since Chinese banker Luo Ping described the hate-hug joining Chinese financial interests to U.S. financial interests: “We hate you guys.” Why? Washington’s profligacy in the issuance of government debt, which, as fundamental economics would have it, must eventually lead to a reduction in the value of the dollar—something of keen interest in China, where much of the savings, both private and government, is in dollars and dollar-denominated assets. As Luo observed, those investments could be expected to start losing value “once you start issuing $1 trillion to $2 trillion” in debt a year. 

Well. 

In 2022, new U.S. government debt totaled about $1.4 trillion, or 5.5 percent of GDP, a deficit that was about 40 percent more in GDP terms than the 50-year average. The deficit is projected to hit $1.4 trillion again this year and then get worse, averaging $2 trillion from 2024 to 2033, according to the Congressional Budget Office, right where Beijing was afraid it would be. “So,” Luo said in 2009, “we hate you guys. But there is nothing much we can do.” 

Why was that? 

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  1. Avatar photo
    Ben Connelly

    “ That was the view in 2009. Is it still the case? ”

    As Jonah would say: in other words, buy gold!

    “ But it isn’t just the Evil League of Evil”

    That’s a good one.

    Columns like these are why I am glad you write for the Dispatch, Kevin, and not for failing publications like the New York Times or that one that’s named after an ocean.

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  2. Já

    The enduring strength of dollar consists among mentioned issues also in non existence of another similar strong country economy on the Earth, self-sufficient in basic commodities, keeping the pace with top technological development and quite reliable and predictable because of long tradition of democratic ruling. When you seek safe haven for your money, the U.S. is the best option not because of brilliance of U.S. monetary and fiscal policy, but because the other candidates for such a role are much much worse. Putin and Xi are idiots fortunately.

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  3. Avatar photo
    Brianboyce

    Some sort of a 30-year plan to simply reduce the deficit by a mere 100 billion per year would squelch even the mild possibility of the U.S. currency losing its supremacy. It would be a token amount that merely indicates a promise to financial markets that the deficit increases will stop. There are so many reasons this will not happen until a crisis truly hits, but the concept is something to ponder.

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    1. Mschuman18

      You can sure have a 30-year plan to simply reduce the deficit by a mere 100 billion per year, so long as it does nothing until the "out years," at which point you can adopt a new 30-year plan that does nothing until the "out years," at which point you can have a new 30 year plan . . . .

      No plan that actually reduces the deficit will ever actually been put in place and operated to reduce the deficit. Not for 1 year. 30 years!? It would not last 3 months in actual effect before being terminated in favor of more spending and deficits retroactively and for the foreseeable future.

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  4. James Morphew

    This is a wonderful working-man's summary explanation of currencies and International Finance from our resident English major. As I got near the end, I was surprised that KDW hadn't brought up the US current (and aging) fiscal insanity. And then he did in the closing paragraph, although in much more gentle terms and euphemisms than those to which I am accustomed from KDW. However, slamming the US fiscal leadership was not his theme or point.

    I personally feel our fiscal position is strategically much more dangerous than 30 years ago, or even 10, in that we have war-level deficits and debts with no real war, and if a war were to arise, we don't have the free equity left to easily finance it nearly as easily as wee did 80 years ago. (Ok, I might be smelling the aroma of the apocalypse lasagna.) Our transfer payment obligations, which were miniscule until a few days ago, are now much larger and entrenched.

    I don't miss many KDW articles. I had to unearth a new magazine to find him after he ran and hid.

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    1. Avatar photo
      Ben Connelly

      Something tells me The Atlantic is still sorry for his loss

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  5. Ed_Hist

    I don't think that the Australian-French deal was for nuclear submarines. The French would have supplied convention diesel/electric subs. See here: https://www.theguardian.com/australia-news/2021/sep/29/australia-tore-up-french-submarine-contract-for-convenience-naval-group-says

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  6. Ken Motamed

    Great piece, Kevin.

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  7. Avatar photo
    Kyzyl Tuva

    Don’t forget there is a $40T offshore dollar denominated debt outstanding that needs to be repaid back in USD. This is the reserve of USD demand that won’t go away any time soon. Any analysis that predict the demise of the dollar without addressing dollar debt is garbage.

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  8. Ben Kissling

    This is why cryptocurrency is so interesting. It has the potential to vastly increase economic rationality by putting currency on a completely predictable footing determined by open source and unchangeable algorithms. National currencies won't disappear since everybody still needs to pay taxes, but the days of the world holding its breath waiting for the Fed to make a decision about interest rates will be over. Currency value will be determined by pure supply and demand plus idiosyncracies of individual currencies. Some are programmed to be inflationary, but they are inflationary based on a predictable and unchangeable algorithm.

    The main obstacle here is software hurdles to crypto being widely used. If those hurdles are surmounted, you could very well see this type of power being stripped from all governments.

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    1. Kevin Williamson

      Commodities prices are determined by supply and demand, but they remain very volatile -- more volatile than the dollar. Stocks, too.

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      1. Ken Motamed

        "Stocks too." I'm not sure what you're saying here: That stock prices are determined by supply and demand? They are not. Price elasticity of demand for financial securities is infinite, meaning the slightest drop in the price of a security will create infinite demand for it. The price of a financial security is the sum of the present value of all its future cash flows. What drives the price of stocks is information.

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        1. Kwinter

          Yes, the price of a security is the present value of expected future cash flows discounted at an appropriate rate. Not everyone, however, agrees on the rate or the expected cash flows and that creates supply and demand as demonstrated in the stock market every day.

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      2. Ben Kissling

        I figured you would respond that way, which is why I qualified it with "widely used." Cryptocurrencies are not widely used as a currency. There are technical reasons for that. If those technical issues are resolved, and that is well within the realm of possibility, and if cryptocurrencies then become widely used, they would become genuine currencies with the same price stability that currencies have today.

        Another obstacle to becoming widely used would be governments that attempt to suppress them, but here again there are reasons to suspect that cryptos will win that contest in the end. If governments crack down on the last centralized institutions, exchanges, you'll then see decentralized exchanges. That's game over.

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  9. MathewA

    Overall, good comments.

    One note though. We've seen time and time again everything is fine until it's not. I suggest reading some of John Muadlin's excellent letters on fingers of instability, and how crisis happen.

    Think of a sand pile where you are randomly dropping grains of sand. Stability allows the sand pile to get higher and higher, but you develop fingers of instability in the pile. You never know which grain of sand will do what. Will it keep building, will you get a small slide, or a giant one.

    That's the same way financial collapses happen. Everything is fine until it's not.

    Moreover, our high debt levels and huge amounts of unfunded entitlements just make a crisis even more likely. The math is pretty simple. Either there will be large cuts to entitlements, large tax increases or VERY high inflation (or some combination with a fiscal crisis thrown in I suppose). I expect the last one.

    Side note freeze dried food only lasts so long. And you can't eat gold. Make sure you have plans for self sufficiency. If you have enough acreage for a dairy cow, one cow will produce about 15,000 calories a day or milk enough to feed a family of 4. Throw in some chickens, a garden and some fruit and nut trees and you've got a pretty good long term plan.

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    1. Mschuman18

      It will almost certainly be inflation. No one will cut entitlements. Ever. Large tax increases will come, but won't be enough. Inflation is the tax increase no one has to vote for, and no one takes the blame for. And you can easily demagogue it as the fault of the rich for having so much money, and the fault of capitalism because everything that happens in the US - including social security, public schools, and policy - gets blamed on capitalism. It is a perfect political solution. Happens around the world regularly - Zimbabwe, Argentina, etc. Only a question of when.

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      1. MathewA

        Agreed

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    2. Ingenero.lux

      “Make sure you have plans for self sufficiency. If you have enough acreage for a dairy cow, one cow will produce about 15,000 calories a day or milk enough to feed a family of 4. Throw in some chickens, a garden and some fruit and nut trees and you've got a pretty good long term plan.”

      Why? Tell me a single industrialized country that entered a place where self-sufficiency was necessary for the populace. Even Weimar Germany didn’t end with people starving to death if they didn’t have their own cow (I’d mention Hungary after WWII, which was much worse, but that ended with the Soviets taking over from the outside, so it isn’t as instructive). If you want to do it as a hobby or religious obligation or whatnot, go right ahead, but preparing for long term self-sufficiency in the modern era is incredibly counter-productive. It’s expensive, inefficient, and has never been needed.

      Plus, unless you’re heavily armed (and that might not even stop it), someone else (likely multiple someones) is likely to come take your cow and land if they’re hungry enough. So you’re going to have to build what amounts to a heavily armed fortress of a home if you’re actually worried about people starving to death if they aren’t self-sufficient and you think you’ll avoid that by having a hobby farm. And even with that, you’ll have to figure out how to keep thieves away unless you’re watching your cow and chickens all day. Which won’t leave much time for gardening. You’ll probably need a wall, and razor wire on the top, plus some types of watch towers. And people to man them. So you’ll need even more land and more cows and more wall and need to find more people you trust to help in the effort, and they’ll all need guns and ammunition, and by this point you’ll need to have moved to somewhere where you can find all of this farmland, build your fortress, and outfit the whole thing for long-term defense. And you’ll probably have an issue holding down a job what with all the building and maintenance and purchases you’d have to make and the necessary remote location you’d be in, so you‘re in a bit of a pickle.

      Or you could just, ya know, buy some freeze dried meals and plan for a normal emergency rather than Mad Max or a scenario where a massive economic superpower that exports a large amount of food suddenly can’t manage to feed its populace as well as Weimar Germany. But hey, you do you. Though if you’re really worried, I think lead, copper and brass are more likely to be the currency in your scenario than cows and chickens.

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  10. Avatar photo
    BrettH

    Enjoyed the read, thanks Kevin.

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