US dollar heg bad – skyrockets unemployment and inequality

In the 1960s, French Finance Minister Valéry Giscard d’Estaing complained that the dominance of the U.S. dollar gave the United States an “exorbitant privilege” to borrow cheaply from the rest of the world and live beyond its means. U.S. allies and adversaries alike have often echoed the gripe since. But the exorbitant privilege also entails exorbitant burdens that weigh on U.S. trade competitiveness and employment and that are likely to grow heavier and more destabilizing as the United States’ share of the global economy shrinks. The benefits of dollar primacy accrue mainly to financial institutions and big businesses, but the costs are generally borne by workers. For this reason, continued dollar hegemony threatens to deepen inequality as well as political polarization in the United States.

Dollar hegemony isn’t foreordained. For years, analysts have warned that China and other powers might decide to abandon the dollar and diversify their currency reserves for economic or strategic reasons. To date, there is little reason to think that global demand for dollars is drying up. But there is another way the United States could lose its status as issuer of the world’s dominant reserve currency: it could voluntarily abandon dollar hegemony because the domestic economic and political costs have grown too high.

The United States has already abandoned multilateral and security commitments during the administration of President Donald Trump—prompting international relations scholars to debate whether the country is abandoning hegemony in a broader strategic sense. The United States could abandon its commitment to dollar hegemony in a similar way: even if much of the rest of the world wants the United States to maintain the dollar’s role as a reserve currency—just as much of the world wants the United States to continue to provide security—Washington could decide that it can no longer afford to do so. It is an idea that has received surprisingly little discussion in policy circles, but it could benefit the United States and ultimately, the rest of the world.

THE PRICE OF DOLLAR DOMINANCE

The dollar’s dominance stems from the demand for it around the world. Foreign capital flows into the United States because it is a safe place to put money and because there are few other alternatives. These capital inflows dwarf those needed to finance trade many times over, and they cause the United States to run a large current account deficit. In other words, the United States is not so much living beyond its means as accommodating the world’s excess capital.

Dollar hegemony also has domestic distributional consequences—that is, it creates winners and losers within the United States. The main winners are the banks that act as the intermediaries and recipients of the capital inflows and that exercise excessive influence over U.S economic policy. The losers are the manufacturers and the workers they employ. Demand for the dollar pushes up its value, which makes U.S. exports more expensive and curtails demand for them abroad, thus leading to earnings and job losses in manufacturing.

The costs have been borne disproportionately by swing states in regions such as the Rust Belt—a consequence that in turn has deepened socioeconomic divisions and fueled political polarization. Manufacturing jobs that were once central to the economies of these regions have been offshored, leaving poverty and resentment in their wake. It is little surprise that many of the hardest-hit states voted for Trump in 2016.

The domestic costs of accommodating large capital flows are likely to increase and become more destabilizing for the United States in the future. As China and other emerging economies continue to grow and the United States’ slice of the global economy continues to shrink, capital inflows to the United States will grow relative to the size of the U.S. economy. This will amplify the distributional consequences of dollar hegemony, further benefiting U.S. financial intermediaries at the expense of the country’s industrial base. It will likely also make U.S. politics even more fraught.

Given these mounting economic and political pressures, it will become increasingly difficult for the United States to create more balanced and equitable growth while remaining the destination of choice for the world’s excess capital, with the overvalued currency and deindustrialization this implies. At some point, the United States may have little alternative but to limit capital imports in the interests of the broader economy—even if doing so means voluntarily giving up the dollar’s role as the world’s dominant reserve currency.\