By Stephen Roach - [Bloomberg]
June 09, 2020 "Information
Clearing House" - The era of the U.S.
dollar’s “exorbitant privilege” as the world’s
primary reserve currency is coming to an end. Then
French Finance Minister Valery Giscard d’Estaing
coined that phrase in the 1960s largely out of
frustration, bemoaning a U.S. that drew freely on
the rest of the world to support its over-extended
standard of living. For almost 60 years, the world
complained but did nothing about it. Those days are
over.
Already stressed by the impact of the Covid-19
pandemic, U.S. living standards are about to be
squeezed as never before. At the same time, the
world is having serious doubts about the once widely
accepted presumption of American exceptionalism.
Currencies set the equilibrium between these two
forces — domestic economic fundamentals and foreign
perceptions of a nation’s strength or weakness. The
balance is shifting, and a crash in the dollar could
well be in the offing.
The seeds of this problem were sown by a profound
shortfall in domestic U.S. savings that was
glaringly apparent before the pandemic. In the first
quarter of 2020, net national saving, which includes
depreciation-adjusted saving of households,
businesses and the government sector, fell to 1.4%
of national income. This was the lowest reading
since late 2011 and one-fifth the average of 7% from
1960 to 2005.
Lacking in domestic saving, and wanting to invest
and grow, the U.S. has taken great advantage of the
dollar’s role as the world’s primary reserve
currency and drawn heavily on surplus savings from
abroad to square the circle. But not without a
price. In order to attract foreign capital, the U.S.
has run a deficit in its current account — which is
the broadest measure of trade because it includes
investment — every year since 1982.
Covid-19, and the economic crisis it has triggered,
is stretching this tension between saving and the
current-account to the breaking point. The culprit:
exploding government budget deficits. According to
the bi-partisan Congressional Budget Office, the
federal budget deficit is likely to soar to a
peacetime record of 17.9% of gross domestic product
in 2020 before hopefully receding to 9.8% in 2021.
A significant portion of the fiscal support has
initially been saved by fear-driven, unemployed U.S.
workers. That tends to ameliorate some of the
immediate pressures on overall national saving.
However, monthly Treasury Department data show that
the crisis-related expansion of the federal deficit
has far outstripped the fear-driven surge in
personal saving, with the April deficit 5.7 times
the shortfall in the first quarter, or fully 50%
larger than the April increment of personal saving.
In other words, intense downward pressure is now
building on already sharply depressed domestic
saving. Compared with the situation during the
global financial crisis, when domestic saving was a
net negative for the first time on record, averaging
-1.8% of national income from the third quarter of
2008 to the second quarter of 2010, a much sharper
drop into negative territory is now likely, possibly
plunging into the unheard of -5% to -10% zone.
And that is where the dollar will come into play.
For the moment, the greenback is strong, benefiting
from typical safe-haven demand long evident during
periods of crisis. Against a broad cross-section of
U.S. trading partners, the dollar was up almost 7%
over the January to April period in
inflation-adjusted, trade-weighted terms to a level
that stands fully 33% above its July 2011 low, Bank
for International Settlements data show.
(Preliminary data hint at a fractional slippage in
early June.)
But the coming collapse in saving points to a sharp
widening of the current-account deficit, likely
taking it well beyond the prior record of -6.3% of
GDP that it reached in late 2005. Reserve currency
or not, the dollar will not be spared under these
circumstances. The key question is what will spark
the decline?
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Look no further than the Trump administration.
Protectionist trade policies, withdrawal from the
architectural pillars of globalization such as the
Paris Agreement on Climate, Trans-Pacific
Partnership, World Health Organization and
traditional Atlantic alliances, gross mismanagement
of Covid-19 response, together with wrenching social
turmoil not seen since the late 1960s, are all
painfully visible manifestations of America’s
sharply diminished global leadership.
As the economic crisis starts to stabilize,
hopefully later this year or in early 2021, that
realization should hit home just as domestic
saving plunges. The dollar could easily test its
July 2011 lows, weakening by as much as 35% in
broad trade-weighted, inflation-adjusted terms.
The coming collapse in the dollar will have
three key implications: It will be inflationary
— a welcome short-term buffer against deflation
but, in conjunction with what is likely to be a
weak post-Covid economic recovery, yet another
reason to worry about an onset of stagflation —
the tough combination of weak economic growth
and rising inflation that wreaks havoc on
financial markets.
Moreover, to the extent a weaker dollar is
symptomatic of an exploding current-account
deficit, look for a sharp widening of America’s
trade deficit. Protectionist pressures on the
largest piece of the country’s multilateral
shortfall with 102 nations – namely the Chinese
bilateral imbalance — will backfire and divert
trade to other, higher-cost, producers,
effectively taxing beleaguered U.S. consumers.
Finally, in the face of Washington’s poorly
timed wish for financial decoupling from China,
who will fund the saving deficit of a nation
that has finally lost its exorbitant privilege?
And what terms — namely interest rates — will
that funding now require?
Like Covid-19 and racial turmoil, the fall of
the almighty dollar will cast global economic
leadership of a saving-short U.S. economy in a
very harsh light. Exorbitant privilege needs to
be earned, not taken for granted.
This column does not necessarily reflect the
opinion of the editorial board or Bloomberg LP
and its owners.
Stephen Roach, a faculty member at Yale
University and former chairman of Morgan Stanley
Asia, is the author of "Unbalanced: The
Codependency of America and China." -
"Source"
©2020 Bloomberg L.P.
