Investors are selling off U.S. government bonds. Why is this happening now?
Part of the reason they are selling bonds is because they are worried about higher inflation which makes these bonds less valuable in real terms. But another reason — and the one that really got investors and economists’ attention — is the concern that they are selling off bonds because of a loss of confidence in the U.S. economy and the U.S. dollar as a “safe haven” in a turbulent world.
Could the U.S. dollar lose global reserve currency status on account of Trump’s tariff war? If so, how could this impact the international monetary system as well as the direction of the U.S. economy?
The U.S. dollar is unlikely to completely lose its global reserve currency status now, largely for two reasons: One is inertia. Much of the rest of the world already has a lot of business of various kinds connected to the dollar: their foreign exchange reserve holding; the financial trades they make with derivatives and other financial instruments; their offshore financial activity — for example, in London, that often does not even involve U.S. financial institutions but nonetheless is denominated in dollars; and so on.
And the second reason is the lack of a clear better alternative that could completely take over for the dollar. The two rivals are the European Union (EU) and China. But Europe is not only decentralized and lacks a unified economic and military strategy, but it is also being undermined by the same forces that Trump is unleashing — economic uncertainty and an emboldened Russia. As for China, it is still perceived as “lawless” and as a potential enemy of the global capital class.
But just because the U.S. dollar is unlikely to completely lose its status in the coming period does not mean that the dollar’s role won’t significantly decline in some areas, especially in the case of the official role of reserve holdings and in trade within a growing Chinese economic bloc in Asia and inside the EU.
An interesting question is whether this likely decline will negatively impact the United States and affect the operations of the global financial system. Economists debate the issue of whether the dollar’s global role provides the U.S. with an “exorbitant privilege,” to use the derogatory term used by the French and others. The idea is that the dollar’s role allows U.S. institutions, including the government, to borrow more extensively and more cheaply from the rest of the world than they would be able to otherwise. This idea leads to the term that the U.S. can run “deficits without tears.” This is also tied to the idea that the U.S. and its dollar are seen as “safe havens” when global turmoil erupts. When the dollar fell and U.S. government interest rates went up in the wake of the recent market tariff kerfuffle, many commentators suggested that the dollar’s safe haven “exorbitant privilege” was at risk: that Trump was wrecking a valuable U.S. advantage. I believe that this privilege is real and important, even though it has often been difficult to assess because it has been so secure. Now we are witnessing a “natural experiment” in the disruptions caused by Trump and his trade adviser, Peter Navarro.
Will the rest of the world be able to benefit from this loss of “privilege?” If chaos ensues as a result in the short-to-medium run, it seems unlikely. If China or Europe seize the moment, then they might be able to benefit and capture some of this privilege. The best thing would be for the international community to issue more international “currencies,” such as the special drawing rights issued by the IMF, and transition to a more global currency that could spread these privileges around. But this is unlikely to happen as long as the U.S. is around to block these institutions from stepping out on their own.
Trump took the U.S. out of the Paris Agreement and withdrew it from the World Health Organization. That’s bad news, indeed. But there are also concerns that he will kill the Bretton Woods System by withdrawing the U.S. from the International Monetary Fund and the World Bank, which may or may not be such bad news. Your thoughts on this matter?
This question leads us to the role of the United States in international organizations, such as the IMF, the World Bank, and other organizations. It seems pretty clear that the Trump administration either wants to completely control international organizations for its own purposes or wants to destroy them. This seems like the approach it will take with respect to the IMF and the World Bank. Since these are such big and powerful institutions, the Trump administration will first try to control them and manipulate them so as to pursue its own agenda of slashing investments in preventing and adapting to climate change, slashing programs to help support women economically, and so on. The only thing possibly forcing Trump to keep the U.S. in these organizations is the fear that China might take them over.
As such, countries in the rest of the world will have to make one of the following choices: (a) give in to Trump’s destructive demands; (b) align with China and wrest control of these institutions that way or (c) develop a truly third way to control these institutions themselves. I am not knowledgeable enough about this situation to be able to predict an outcome. But, in my view, resisting Trump and Trumpism should be the first order of business.
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Source: https://truthout.org/articles/what-does-trumps-economic-chaos-mean-for-the-global-financial-system/
C.J. Polychroniou is a political scientist/political economist, author and journalist who has taught and worked in numerous universities and research centers in Europe and the United States. Currently, his main research interests are in U.S. politics and the political economy of the United States, European economic integration, globalization, climate change and environmental economics, and the deconstruction of neoliberalism’s politico-economic project. He is a columnist for Global Policy Journal and a regular contributor to Truthout. He has published scores of books, including Marxist Perspectives on Imperialism: A Theoretical Analysis; Perspectives and Issues in International Political Economy (ed.); and Socialism: Crisis and Renewal (ed.), and over 1,000 articles which have appeared in a variety of journals, magazines, newspapers and popular news websites. Many of his publications have been translated into a multitude of languages, including Arabic, Chinese, Croatian, Dutch, French, German, Greek, Italian, Japanese, Portuguese, Russian, Spanish and Turkish. His latest books are Climate Crisis and the Global Green New Deal: The Political Economy of Saving the Planet (with Noam Chomsky and Robert Pollin as primary authors, 2020); The Precipice: Neoliberalism, the Pandemic, and the Urgent Need for Radical Change (an anthology of interviews with Noam Chomsky, 2021); Economics and the Left: Interviews with Progressive Economists (2021); Illegitimate Authority: Facing the Challenges of Our Time (an anthology of interviews with Noam Chomsky, 2023); and A Livable Future Is Possible: Confronting the Threats to Our Survival (an anthology of interviews with Noam Chomsky, 2024).
