Economic forecasters have a poor reputation. J K Galbraith famously observed that their only function ‘is to make astrology look respectable’. Kenneth Rogoff gives the lie to that jibe, at least in one respect. Our Dollar, Your Problem was finished last summer, just before Donald Trump’s election. Yet Rogoff correctly identified that the future of the dollar as the global reserve currency would be one of 2025’s top questions. When a Financial Times headline asks, ‘Is the world losing faith in the almighty US dollar?’, you can be sure that something is up. 

Rogoff has wrestled with the dollar question for almost half a century, as a Fed researcher, chief economist at the IMF and now, at least until Trump closes his employer down, a professor at Harvard. His highly informed answer owes a debt to many professional colleagues, but also to the Gallagher brothers. It is a firm ‘definitely maybe’.

The title of his book is a reference to the response given in 1971 by John Connally, then the US treasury secretary, to European finance ministers, who complained about the chaos in currency markets resulting from the US government’s decision to suspend the convertibility of dollars to gold. An international financial system with the greenback as the world’s reserve currency will inevitably be destabilised by decisions made in Washington. Keynes thought that the Bretton Woods system needed a global asset at its heart. He proposed a currency he dubbed the ‘bancor’, but the Americans, who in 1944 held all the cards, would have none of it and insisted on the primacy of the dollar.

For most of the last eighty years, the system has worked tolerably well, if you ignore the odd meltdown. The US Treasury has supplied enough bonds, the global ‘safe asset’, to allow the financial world to function. There has been a cost, in that the United States has run a current-account deficit for most of the period. But almost all economists agree that the offsetting benefits have been huge. The United States has been able to finance its deficit at a lower cost than other countries have been able to finance theirs (the value is somewhere between 0.5 and 1 per cent of GDP). That is often dubbed the ‘exorbitant privilege’, or more properly le privilège exorbitant, as the phrase was coined by Valéry Giscard d’Estaing when he was French finance minister. 

Today’s problem is that the category ‘almost all economists’ does not include Trump’s choice as chairman of the Council of Economic Advisers, Stephen Miran. The conventional view is that to offset its large fiscal and trade deficits, a result of consumption being systematically higher than savings, the United States sucks in capital from overseas investors, notably China and the main oil exporters. In turn, this holds down interest rates. Miran looks at the world through the other end of the telescope. He argues that the dollar’s status as the world’s reserve currency pushes up its value, which in turn makes US exports uncompetitive, promotes a hollowing out of US industry and creates huge current-account deficits. This is part of the rationale of the Trump tariff policy, which is designed to alter relative prices and restore the current account to balance. 

So the Trump administration seems no longer willing to supply reserve assets, and the biggest buyer, the Chinese state, would dearly love to wean itself off its addiction to US bonds. With an unwilling seller and a reluctant buyer, one might expect the market to stagnate, and quite possibly go into reverse. That is the substance of the ‘definitely’ leg of Rogoff’s answer to the question posed by the FT. It amounts to a serious argument that the dollar’s days of dominance are over. 

But the ‘maybe’ case is not without its strong points. In particular, there is no good answer to the obvious follow-up question: if not the dollar, then what? Rogoff carefully reviews the runners and riders, but his conclusions are downbeat. Some people talk up the advantages of the IMF’s special drawing rights, an international reserve asset the value of which is based on the price of a basket of currencies. But the issue of special drawing rights is tightly constrained, and in practice trades in them are settled in dollars. They also do not have the advantage of a government with taxing powers behind them.

For a time, in the 1970s and 1980s, when the Japanese economy ruled the world, there was talk of yen dominance, but no country in Asia chose to link its currency to the yen, and the long period of very low growth in Japan has sapped its strength. Then there is the euro, the currency of an economy that rivals that of the United States in size. It is now the second global reserve currency, though it’s a long way behind the dollar. Technically the euro can be counted a success, but its position in the international reserve portfolios of central banks and others is little more than the sum of the investments they previously held in currencies such as the Deutschmark and franc. And, again, there is no government standing behind it. The European Commission has begun to issue collectively guaranteed bonds, but the market for these is in its infancy.

The renminbi? China has the most dynamic economy in the world aside from that of America, and it is growing rapidly. There is a nascent offshore renminbi market, centred on Hong Kong. But the Chinese remain hesitant about the internationalisation of their currency, and it is still not freely convertible, which any reserve currency needs to be.

What of cryptocurrencies, especially now that the White House is behind them? Could the so-called Trumpcoin take up the slack? Rogoff is sceptical. Bitcoin and its cousins finance much of the underground economy, but their prices are far too volatile to make them suitable as a store of value for state actors with an asymmetric view of risk. For a central bank, avoiding losses is the key objective. The occasional windfall profit is of secondary importance.

The depressing and alarming conclusion Rogoff reaches is that ‘Pax dollar assumptions built into today’s markets … may well be upended over the next decade, if not much sooner’. No doubt that is why the gold price has been steadily rising for some time – as, indeed, have the prices of rare first editions. These may be more reliable stores of value than the unloved greenback in the next few years.