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One often recalls Charlie Kindleberger, my respected professor, who warned that overthinking international money can lead to madness. It’s a delicate subject, where mysticism often masquerades as wisdom.
Hélène Rey of the London Business School, a trusted economist on topics like the global role of the dollar, has gracefully avoided this fate. We engaged in a discussion about international currencies, current events, and more. Below is the conversation transcript.
Hélène Rey: Greetings, Paul. Delighted once more to speak with you.
Krugman: Ah, jolly good. There’s been a bit of hullabaloo with the Trump’s tariffs full steam ahead. From your European vantage point, how does it appear?
Rey: Well, these so-called deals between the US and Europe seem largely unenforceable. Many investments promised are private sector-driven and thus uncontrollable. It appears at times the European Commission has bowed somewhat to Trump’s whims, which could undermine Europe’s sovereignty. Additionally, the constant uncertainty surrounding Trump’s policies keeps Europe uneasy, especially with more pressing concerns like Ukraine on our mind.
Krugman: Indeed, it’s astonishing. Trump recently claimed a $600 billion fund from Europe available to him, which Europe never agreed to. Quite an exaggeration, isn’t it?
Rey: Precisely. Whatever deal Trump perceives appears far removed from Europe’s understanding.
Krugman: And now, about currencies, Trump’s policies seem to weaken the dollar instead of strengthening it as expected. Any insights on this irony?
Rey: Certainly, Trump’s unpredictability injects vast uncertainty into macroeconomic policies. His fondness for undermining US institutions could be diminishing the dollar’s credibility globally. Furthermore, what is noteworthy is that the global confidence in US assets appears shaken.
This unique situation emerged with the so-called April 2nd Liberation Day. Global markets had been heavily invested in US equities for years. But recent US policies have led many to rethink their positions, resulting in the dollar’s depreciation despite being a typical safe haven. But the reassessment is due to a series of policies affecting institutional credibility.
Krugman: Essentially, you believe global markets are less inclined to hold US assets due to uncertainty around America’s commitment to principles?
Rey: Exactly.
Krugman: Speaking of that, you were last stateside just a few months ago. Any concerns visiting given the current political climate?
Rey: Indeed, many academics worry. Random immigration checks, phone inspections, and social media scrutiny add an air of unpredictability, rendering travel tense.
Krugman: Some European academics now travel with burner phones to avoid potential issues. Amazing how things have changed. Speaking of changes, could you describe the international role of the dollar, often enveloped in mysticism?
Rey: The dollar’s significance is multifaceted, acting as a key medium of exchange and debt issuance in international markets. Its role is amplified by being the primary currency in commodities and as the reserve currency for central banks. All these factors reinforce its importance, making it an indispensable asset globally. This leads us to its “exorbitant privilege,” a fascinating topic.
Krugman: Charles de Gaulle might have lamented about this but, intriguingly, his finance minister, Giscard d’Estaing, coined the term. Could you delve into what gives the dollar this privilege?
Rey: The dollar’s status allows the US to issue debt that the world desires, thus financing at lower rates while investing in higher-yield assets. Essentially, this provides America with the means to earn more on its international assets than it pays on its liabilities. The strategic reserve currency role insulates the nation, providing stability others can’t achieve.
Krugman: For everyday folks, it’s akin to the US being a “world banker,” isn’t it?
Rey: Precisely. And this status is not easily challenged since the network of dollar transactions embeds it deeply into global finance.
Krugman: Yet, one wonders, if the dollar’s supremacy falters, what then? Would a new global currency emerge?
Rey: Despite slow changes, there’s currently no credible alternative to the dollar. The euro, while significant, lacks the integrated debt market needed to rival dollar power. An upheaval might lead to fractionalized alternatives rather than a new leader, introducing instability reminiscent of the interwar period.
Krugman: Is that not concerning? The risk of no singular safe asset could destabilize markets.
Rey: It indeed could cause abrupt portfolio shifts and financial instability. Cybersecurity threats, especially concerning cryptocurrencies, compound these risks.
Krugman: What Europe does next is crucial. It stands as a bastion for shared values, more so as American policies waver. It’s been enlightening speaking with you, thank you.
Rey: My pleasure, Paul. Let’s continue these enlightening discussions in times ahead.
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