NICHOLAS SHUBITZ: Why dedollarisation may in fact be good for the US

There are many reasons dedollarisation may be good for the US. A weaker dollar could make US exporters more competitive and encourage localisation. This could improve the US trade balance and lead to smaller government budget deficits. Dedollarisation could even enhance the country’s political cohesion as rural states regain their manufacturing competitiveness. As such, the US may be one of the biggest beneficiaries of a more diversified global currency system.   

While the strength of the dollar resulting from its use as the world’s dominant trade and reserve currency is usually considered an extraordinary privilege, in many ways a strong dollar may be less of a blessing than a curse. As explained by the Triffin dilemma, the US is forced to run deficits to provide dollar liquidity to foreign countries. This external demand for the dollar has produced large twin deficits and fomented increased socioeconomic divisions.   

The US has been running persistent trade deficits since 1976, after abandoning the gold standard in 1971. During the 1970s, the dollar lost one-third of its value, which drove up the cost of imports and produced a trade deficit. Then, in the 1980s, the price of oil declined, and the dollar recouped its losses, but this made imports from Asia cheaper than domestically produced goods and led to the trade deficit becoming entrenched.    

The US trade deficit has been growing ever since, constantly breaking new records in recent years. This has occurred despite former US president Donald Trump’s attempts at using tariffs to improve the US balance of trade with China, and President Joe Biden’s subsidies for green energy, which are intended to restore US manufacturing competitiveness. Even with disruptions to global trade from the coronavirus and the war in Ukraine, the US trade deficit has continued to increase, approaching almost $1-trillion a year. 

When a country spends more on imports than it earns from exports, the deficit needs to be funded somehow. This is why growing US trade deficits have led to large budget deficits as well as high levels of corporate and household debt. Until recently, low interest rates and quantitative easing enabled the US to avoid a debt crisis, but with inflation at its highest level in decades, the Federal Reserve has been left with no choice but to raise interest rates. This has led to the collapse of several large banks and a potential US default is now on the cards due to political squabbles over the budget deficit.    

The strong dollar may have even caused some of the country’s political divisions as it shipped jobs overseas and produced low interest rates, which disproportionately benefited wealthy stock and property owners. This partially explains the difference in voting patterns between urban educated homeowners and rural voters who lack large equity portfolios and tertiary educations. Trump won 80% of US counties in the 2016 election, saying the dollar was “too strong” while campaigning for increased protectionism. 

Meanwhile, tertiary-educated urban voters, who tend to lean Democrat, enjoyed large increases in the value of their homes and were less affected by the offshoring of manufacturing jobs to countries such as China. In the low interest rates environment, these homeowners often generated more wealth from increases in residential property prices than the sum of US wages, which have largely declined in real terms since the 1970s.

Dedollarisation may help resolve some of these issues. It would likely produce a weaker dollar as demand for the greenback in trade and foreign reserve holdings declines. This would make imports more expensive and US exports more competitive in international markets, reversing a multidecade trend that has seen the US lose much of its manufacturing competitiveness to the detriment of less-educated workers.   

Lower trade deficits may also lessen the debt burden on the government as the US would be better equipped to fund imports with export income rather than debt. Without such a large budget deficit, the recurring dramas about the US debt ceiling may become less of an issue. That said, it is ironic that Republicans have complained about Biden’s green energy subsidies when most of the money will be spent in rural areas in red states that have the best wind and solar energy potential.      

Of course, a weaker dollar could produce higher levels of inflation and consequently result in interest rates remaining higher for longer. But this may actually be a good thing for the US. Higher interest rates could help prevent speculative bubbles, make homes more affordable, and encourage sound investment decisions, which would result in higher productivity.  

A weaker dollar could also boost foreign earnings of US firms who operate abroad. As the global economy is significantly larger than the US economy, this could be a substantial increase in income, while other money that would otherwise have gone overseas will remain in the economy, offsetting the loss of purchasing power from a weaker currency. US assets would become cheaper for foreign buyers, boosting prices, and any increase in inflation resulting from a weaker dollar could help inflate away the country’s enormous debt levels.  

While there may be potential downsides to dedollarisation for the US, including increased inflation, reduced purchasing power, higher interest rates, and a decline in the value of US assets in foreign currency terms, a weaker dollar may be the best way to ensure the long-term success of the US economy, improve political cohesion, and reduce the risk of default.  

As the Brics and other emerging markets seek to dedollarise trade due to the weaponisation of the dollar, and central banks begin dedollarising their reserve holdings due to declines in the value of US treasuries, a weaker dollar could be on the horizon. Despite fears that this will represent the end of US hegemony, it may turn out to be the best medicine for the long-term health of the US economy.  

• Shubitz is an independent Brics analyst.