Daniel W. Drezner

Dr. Doom confuses me

The New York Times runs two op-eds today on the future of the dollar’s status as the world’s reserve currency, particularly with regard to China.  Victor Zhikai Gao’s essay doesn’t actually say a whole lot on the matter, except for this excerpt:  Beijing recently called for a greater role in international trade for the special ...

The New York Times runs two op-eds today on the future of the dollar’s status as the world’s reserve currency, particularly with regard to China. 

Victor Zhikai Gao’s essay doesn’t actually say a whole lot on the matter, except for this excerpt: 

Beijing recently called for a greater role in international trade for the special drawing rights currency of the International Monetary Fund. But China is also fully aware that the United States can veto an I.M.F. decision. China’s call was more meant to sound an alarm to the United States.

Many Chinese people increasingly fear the rapid erosion of the American dollar. The United States may want to consider offering inflation-protection measures for China’s existing investments in America, and offer additional security or collateral for its continued investments. America should also provide its largest creditor with greater transparency and information.

As Brad Setser points out, it’s a bit rich for the Chinese to fret about U.S. inflation, since if the renminbi started appreciating, many of the macro imbalances currently plaguing the international monetary system might be lessened.  Of course, talking about "currency appreciation" puts the onus on Beijing, while talking about inflation conveniently puts the onus on the United States.  

The other op-ed is by Nouriel Roubini — a.k.a., Dr. Doom.  It’s a good primer on the benefits that accrue to the United States from having the dollar as the world’s reserve currency.  That said, this part confused me: 

We have reaped significant financial benefits from having the dollar as the reserve currency. In particular, the strong market for the dollar allows Americans to borrow at better rates. We have thus been able to finance larger deficits for longer and at lower interest rates, as foreign demand has kept Treasury yields low. We have been able to issue debt in our own currency rather than a foreign one, thus shifting the losses of a fall in the value of the dollar to our creditors. Having commodities priced in dollars has also meant that a fall in the dollar’s value doesn’t lead to a rise in the price of imports (emphasis added).

The other parts of that paragraph make sense, but that last sentence mystifies me.  Wasn’t part of the reason that oil and other commodity prices spiked last year was the declining value of the dollar? 

In general, both op-eds urge the U.S. to get its financial house in order.  I certainly don’t disagree with that recommendation.  Still, it’s a bit disingenuous to suggest that the U.S. is the only country at fault for the current overhang of dollar reserves.  Beijing needs to take a good hard look in the mirror on this issue. 

Daniel W. Drezner is a professor of international politics at the Fletcher School of Law and Diplomacy at Tufts University and the author of Theories of International Politics and Zombies. His latest book is The Toddler in Chief. Twitter: @dandrezner

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