The U.S. dollar being the world’s reserve currency has only benefited American institutions and not regular workers, according to labor economist, founder, and president of the Economic Strategy Institute Clyde Prestowitz.
Prestovitz has served as an adviser to Presidents Ronald Reagan, George H.W. Bush, Bill Clinton, and Barack Obama, and as a counselor to the secretary of commerce in the Reagan administration.
Reserve currencies are those widely held by central banks and other major financial institutions, including governments and private institutions, and are used for large investments, transactions, and international trade.
Along with the U.S. dollar, other currencies with the same status include the euro, Japanese yen, Swiss franc, British pound, Canadian and Australian dollars, and the Chinese renminbi (RMB).
This has many benefits, Prestovitz noted, as people all over the world are borrowing and trading in U.S. dollars.
“I think it was Charles de Gaulle who spoke about the extra exorbitant privilege of the dollar as the world’s reserve currency. And he was right in the sense that, if you have the world’s mean currency, you can accumulate power and you can do things that other countries can’t do,” he said.
But challenges are also presented by governments manipulating the currency market. “The problem is that the currency market is not free, the currency market is manipulated,” he explained. "The treasury departments or the finance departments of many major governments are intervening in the market, they’re selling dollars or buying dollars, or they’re, in some way, limiting the flow of capital in and out of their own countries.
This manipulation has seen the dollar generally valued higher than other currencies due to its trustworthiness as a reserve currency. But this has, in recent decades, seen domestic manufacturing and production go offshore at a disadvantage Americans.
“China is a good example, you can’t just send money to China, you can’t just take money out of China. So the Chinese currency is artificially undervalued. And what that does is, of course, stimulates exports from China,” he said.
Meanwhile, things like U.S. stocks, U.S. treasury securities, or other financial assets have enjoyed significant investment but the wealth has generally remained concentrated in the nation’s institutions.
Tackling Overvaluation
Despite the COVID-19 pandemic and soaring inflation, which dropped slightly to 8.3 percent in August from 8.5 percent in July, the dollar has continued to gain strength.In order to slow the overvaluation of the U.S. dollar, Prestovitz proposed what is called a market access contribution (MAC). Through MAC, a charge would be placed on incoming investment into the U.S. in things like treasury bonds, real estate, or entire businesses.
“The charge could vary but let’s say we had a 4 percent charge,” the economist explained. “So that 4 percent charge would effectively be a decrease in the interest rate that would be paid on the investment, and money accumulated from it could be put into an infrastructure reconstruction fund that would fund the reconstruction of U.S. infrastructure.”
“That kind of policy would tend to work against the overvaluation of the dollar and also fund the reconstruction of U.S. infrastructure,” Prestovitz said.
Chinese Reserve Currency?
Prestovitz also said he’s not opposed to the RMB becoming more of a reserve currency.“Whereas I oppose a lot of Chinese policies, I hope that the Chinese RMB would become more of a reserve currency because then it couldn’t be easily undervalued,” he said.
Another benefit is that the competition would force the United States government to exercise more self control.
“Because we have the world’s currency, it makes it easy for us to accumulate debt,” he said of the U.S. government’s habit of running a budget deficit without raising the taxes needed to match its spending. “If we were going to discipline ourselves, we'd have to dramatically [raise], I mean like double, taxes, particularly on the wealthy and middle income in the U.S. I don’t know of any American politician right now calling for a dramatic increase in taxes, so I think it’s not going to happen.”
As the reserve currency, “You can borrow more or less indefinitely, you can accumulate trade deficits, it doesn’t matter,” he said.
“But it does matter. It matters over the long term,” he said of prevailing financial policy. “When I was in the Reagan administration in the 1980s, the rest of the world owed the United States money. Today, the United States owes the rest of the world $20 trillion, more than a year of GDP of the United States economy. And that will accumulate; that’s going to rise this year by another trillion dollars.
“We’re now running debt with the rest of the world at a trillion dollars a year. Well, ultimately, this is not supportable and there needs to be some kind of discipline. Ideally, the United States itself would realize this is not feasible long-term and would take steps to withdraw. But history tells us it’s probably not going to do that. So, having a competitive system might be a way of forcing the U.S. to be more careful about its international debt situation.”
He added that he’s not worried about China displacing the U.S. dollar, because “China is beginning to run out of steam”—they’re running out of things to copy, there are now other places where it’s cheaper to manufacture, and they have weak demographics.
“I think this is where a question of the political system comes into play; ultimately, people trust the dollar globally,” he said. “They trust it because they know that there’s rule of law in the United States. And they know that the U.S. government can’t just arbitrarily take actions that might be deleterious to their interests.
“They also know that there’s no rule of law in China, so they’re not really going to trust putting their last dollar in China.”
