Review: Our Dollar, Your Problem

 Our Dollar, Your Problem is Ken Rogoff's book about the dollar's primacy as the global currency. How did it come about? How does the US benefit from its use as the primary currency? And what are the burdens that the US bear because the rest of the world feels obliged to hold such dollar reserves. Ken Rogoff was the former chief economist of the International Monetary Fund, so he's credible and knows what he's talking about.

In this book, you get inside baseball about how the decisions of the international organizations are run:

“When there is a dispute between two small nations, the UN steps in and the dispute disappears. When there is a dispute between a small nation and a large nation, the UN steps in and the small nation disappears. When there is a dispute between two large nations, the UN disappears.” (kindle loc 2319)

Rogoff makes many claims that will be surprised by. For instance, he thinks that the exchange rate control that China imposed was not responsible for the huge Chinese trade surpluses:

the exchange rate undervaluation story misses perhaps the most important device the Chinese authorities were using to keep their economy so hypercompetitive: the steady migration of millions of people each year from agrarian rural China to its cities and manufacturing centers. The real problem that Western economies were facing was a never-ending stream of impoverished rural Chinese being lifted out of desperate poverty each year through the chance to work in the productive city centers. Exchange market intervention might have contributed to the supposed undervaluation of China’s currency, but it was likely secondary. (kindle loc 3155)

 In other words, the real economy is what's driving Chinese trade surpluses and insanely competitive prices, not just exchange rate intervention. Similarly, while the US does gain some benefit from being able to borrow in its own currency, the benefit is not that big compared to the real drivers of the American economies and the wild deficit financed spending of both parties.

Interestingly enough, Rogoff spends a lot of time knocking down the idea that deficits don't matter and that interest rates would stay low forever. The thing is, he could have published this book in 2019 before the pandemic and then really made good on his predictions, instead of waiting until 2025 to do it. He never comes out and say why interest rates would rise (is it because the world is running out of savings? capital controls?). In any case he does congratulate himself for predicting the increased interest rates of the post pandemic world (partly due to high inflation), but he also notes that it was never a given that the dollar would last as long as it did as the world's currency:

Had Russia liberalized its economy in the mid-1960s, had Japan not allowed itself to be browbeaten into a destabilizing currency appreciation in the mid-1980s, had France not insisted on including Greece in the euro in 2001, or had China moved to a full-fledged floating exchange rate regime in 2010’s, the dollar would likely still be on top, but perhaps not nearly to the extent it is today. In any of these alternative realities, U.S. interest rates would probably be higher; the dollar’s exorbitant privilege less. (kindle loc 5283)

In any case, I think Americans by accelerating the decline of the dollar's dominance (by electing officials who appear hell bent on decreasing the world's dependence on the USA) are in for a shock over the next few years when the rest of the world realizes that the American market will be superceded by those in Asia.