It looks like we might be witnessing the decline of the US dollar’s dominance.
In his new book, “Our Dollar, Your Problem: Insider’s Views of Global Finance for Seven Turbulent Decades, and the Way Ahead,” Kenneth Rogoff reflects on the dollar’s status in global trade and central bank reserves. He argues that its standing is slipping.
“The US dollar is facing some challenges,” Rogoff, who teaches economics and chairs international economics at Harvard, stated. “It’s still the leading currency in global finance, but there’s nothing quite ready to take its place. It’s not as unparalleled as it once was.”
Written prior to the 2024 elections, the book combines historical context of the US economy with personal anecdotes reflecting on the various rivals that the US has faced. As a teenage chess player in the late 60s and early 70s, Rogoff visited tournaments in Eastern Europe, giving him unique insights into America’s communist adversaries. His time as a visiting scholar at the Bank of Japan in 1991 offered glimpses into a rising economy at a precarious moment. He also served as the chief economist at the IMF in the early 2000s, around the time of the European common currency’s inception.
“This isn’t a memoir,” Rogoff clarified. “But I share stories from my encounters with world leaders, policymakers, former students, and chess players.”
The Gazette met with Rogoff in his office for an exploration of his book’s insights. The conversation was edited for clarity and brevity.
The book release seems timely, especially following the recent US Treasury sale and the dollar’s decline after President Trump’s tariff announcement. What events prompted a reassessment of the dollar’s impressive rise and forecasts for its future?
It wasn’t just one moment. Based on my findings, I feel the dollar peaked in global influence around 2015 and has been gradually declining since. I suspect this trend might speed up. Issues like the fiscal deficit and rising interest rates are particularly concerning. Recently published research shows that interest rates tend to revert to historical patterns.
I find myself increasingly worried about the Federal Reserve’s independence. I wrote my first paper on this topic nearly 45 years ago, which has become quite well-known. Lately, there seems to be growing pressure from both sides of the political aisle to curtail it. A crisis may be brewing as central banks often fall under governmental influence during wars.
What internal pressures are impacting the dollar’s control, and what about external factors?
Economic sanctions can substitute for military action, saving resources and potentially lives. However, having control over the dollar gives the US access to financial information that others don’t possess. Today, if you were to visit the CIA, you’d likely encounter someone using a laptop, not a classic spy like James Bond.
Because of this, there’s a strong desire, especially in Asia, to lessen dependence on the dollar. For instance, China took note when the US enforced sanctions on Russia following the invasion of Ukraine. They certainly have their sights set on Taiwan.
For most Americans, the dollar’s preeminent status isn’t a constant worry. Can you illustrate how this dominance impacts daily life for average citizens?
To start, we enjoy relatively low-interest rates. While a 6% mortgage isn’t ideal, it’s even more bothersome to face a 7% rate. And with a $36 trillion national debt, a mere 1% increase means $360 billion more to pay.
Additionally, the US was able to borrow freely during crises, like the 2008 financial meltdown and the pandemic. Rising interest rates do raise the cost of our debt, but the effect here is less severe compared to places like the UK and France. If we lose this privilege, it’s going to be noticeable.
Can you explain the book’s title?
Previously, the US dollar was nearly as reliable as gold. Countries worth billions could exchange a significant amount to the US, much like many Asian central banks still do today. But in 1971, President Nixon scrapped that arrangement.
This shocked global leaders. The situation was comparable to the recent tariffs imposed by President Trump. Nixon sent Treasury Secretary John Connally to meet with these leaders, who were understandably puzzled about what to do next. Connally’s reply, “It’s our dollars, but that’s your problem,” resonated deeply.
How do Connally’s words resonate in today’s context?
They highlight the arrogance that often characterizes American leadership in the eyes of other world leaders. It’s crucial for us to recognize our responsibility in the global arena.
The title also carries a sense of irony. After abandoning the gold standard, we lost a fundamental price anchor. Nixon strongly pressured the Chairman of the Federal Reserve, just as Trump has with Powell today. Much of this occurred behind closed doors, and the resulting monetary policies led to significant inflation—an outcome that Connally’s dismissive remark inadvertently foreshadowed.
Many economies have long been seen as potential rivals to the US. Your book begins with recounting the Soviet Union’s rise during World War II. What led to that choice?
By the 1980s, the insignificance of the ruble compared to the dollar was very apparent. Yet, in the 60s and 70s, this was still uncertain territory. I reflect on various professors I met while studying at Yale, including prominent economists like Paul Samuelson, who believed the Soviet economy might be on a steady path. Notably, they weren’t even Marxists!
I had no idea that Japan would face instability afterward or that Europe would struggle. The extent of the dollar’s ultimate ascendance was something we couldn’t have foreseen. My book explores these themes in depth.
How did your experiences as a young chess player influence your perspectives on this topic?
During my time at Yale, professors praised the Soviet Union’s strength. However, my chess travels took me primarily to the former Yugoslavia, where I visited friends. Within the communist bloc, chess players often enjoyed better living conditions than the average citizen, but many of their homes were still basic and lacked proper plumbing—nothing like what we’d consider normal in the US. This contradiction made me question the optimistic claims of economic superiority.
You describe the dollar’s era as “late middle age, still healthy.” Is that still accurate considering the current trade tensions sparked by Trump?
The dollar is indeed showing signs of distress under Trump’s administration. As an academic, your goal shouldn’t be to write an immediate bestseller. I remember a walk around campus with Dean Jeremy Knowles after I joined Harvard in 1999. He said, “The perfect paper may seem incorrect at first, but in five or ten years, it could be vindicated.”
And you’ve experienced that previously.
Carmen Reinhart and I were criticized when we presented our research in early 2009, which indicated that recoveries from financial crises tend to be slower than expected. That prediction turned out to be correct. I had a similar situation in 2020 when I raised concerns about a looming real estate crisis in China.
This new book includes predictions about interest rates, inflation, and the dollar’s future that I believe will ultimately hold true. I wouldn’t claim the dollar will suddenly disappear from dominance, but Trump has accelerated a process that was already underway. Some regions are distancing themselves from the dollar much faster now.
