While we have, of necessity, been transfixed on the effects of the massive increases instituted by the US on imports into its economy, which remains the largest in the world, there are implications for the value of the US dollar, which remains the world’s major reserve currency. It has been proposed that for the US to achieve a better fiscal burden-sharing through increased funding and contributions by other countries, including through tariffs, the dollar should also be depreciated to revitalise the US industry. Meeting both goals would require a delicate balancing act. Foreign capital inflows in the US must be discouraged because they drive dollar appreciation, but foreign purchases of US Treasuries must be encouraged to finance the US deficit.
Let us consider the priority given to industry and the reliance on dollar depreciation to achieve re-industrialisation. It is common, even among economists, to think that industry is ‘special’. But why is it so? The assumption is that industry carries specific externalities for the rest of the economy, such as technology creation and diffusion, training, or learning by doing. As the world’s technological frontier economy, the US already possesses comparative advantages in sectors where such externalities are most significant, notably AI and the digital economy. Those advantages can be threatened by strategic competition with China, and may need to be reinforced through targeted subsidies or strategic trade policy measures – semi-conductors being a good example. But a policy of sustained dollar depreciation would not yield real benefits in those advanced sectors where the US is already a price-maker. The emphasis on the exchange rate actually reveals the true priority: to revitalise traditional industries (those that have been particularly hit by the ‘China shock’) and to recreate the jobs that have been lost as a consequence.
However, eroding the US dollar’s role as the world’s primary reserve currency may not serve any of these objectives. And the costs may be significant. Today, the US dominates the international monetary and financial system because it issues the safest assets in the world. Despite a negative net international investment position, the US consistently generates a positive net income from abroad, which contributes to its GDP. From a purely fiscal standpoint, the issuance of safe assets yields for the US an invisible seigniorage many times bigger than the revenues that could be raised from any proposed burden-sharing mechanism. As long as Treasury debt is considered safe and liquid, it is held voluntarily by foreigners at low interest rates despite persistent and growing fiscal deficits projected over the long run. The value of US debt is derived not only from its projected cash flows, but from its unparalleled safety and tradability. Some have identified a ‘bubble’ component in the valuation of this debt, which can be profitably ‘mined’ in the form of higher and cheaper debt issuance in the future. According to one analyst, the safe asset quality of US Treasuries allows the US to issue 30% more public debt than otherwise would be possible, everything else being equal.
Overall, the conjunction of policy changes envisaged in the ‘new arrangement’ may prove, for the US, very self-defeating. The strategy aims at solving ‘old’ deindustrialisation problems, but it does so with the wrong remedy – stemming from a biased appreciation of the costs and benefits. Looking at issues from a purely fiscal angle also distorts the perspective. Eroding the dollar’s role would aggravate, rather than reduce, the distensions that exist in the international economy, to the detriment of the US and its partners. It would deprive the world of the safe assets it needs for the efficiency and stability of the global financial system. Many of the US’ competitors would be happy to participate and assist in the dollar’s demise, which has been a strategic objective for some of them for the last two decades.
Finally, any depreciation of the dollar value would have serious deleterious implications for our economy, because of our oil revenues being deposited with the NYFed.
