Possible decline of the U.S. dollar era

It appears to be the twilight of an era for the U.S. dollar.

In his new publication “Our Dollar, Your Issue: An Insider’s Perspective on Seven Volatile Decades of Global Finance, and What Lies Ahead,” Kenneth Rogoff reflects on the currency’s influential tenure in global commerce and central bank reserves across numerous nations. He contends that this esteemed status is diminishing.

“My argument is that the U.S. dollar is about to be lowered a few rungs,” stated Rogoff, a professor of economics and the Maurits C. Boas Chair of International Economics. “It will remain the leading currency in global finance, as nothing is set to completely substitute it. The dollar simply won’t be as distinctive as it once was.”

Composed entirely before the 2024 elections, the book intertwines personal reflections with a narrative on the U.S. economy and its currency overcoming a series of rivals. As a young chess champion in the late 1960s and early ’70s, Rogoff attended tournaments in the Eastern Bloc, which provided him with unique insights concerning America’s Communist adversaries. During a tenure as a visiting scholar at the Bank of Japan in 1991, he observed a flourishing economy on the verge of calamity. Subsequently, he took on the role of chief economist at the International Monetary Fund in the early 2000s, at the nascent stages of Europe’s unified currency.

“The book is not an autobiography,” Rogoff clarified. “However, I do incorporate tales from my interactions with global leaders, decision-makers, former students, and chess enthusiasts.”

The Gazette visited Rogoff in his office to gain a glimpse of the book’s personal anecdotes and economic foresight. The dialogue was abridged for brevity and clarity.

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This publication seems exceptionally well-timed, considering the recent decline in U.S. Treasuries and the dollar’s devaluation following President Trump’s April 2 tariff declaration. What circumstances motivated you to revisit the dollar’s remarkable ascent and make forecasts for its future?

It was not due to a singular occurrence. Based on my investigations, I believed the dollar reached its global peak in 2015 and has been in gradual decline. However, I suspected that this trend could hasten. I was particularly worried about our budget deficit and increasing interest rates. Recently, I released a paper indicating that when examining the long history of interest rates, they often revert to their trend levels.

I was also very worried about the Federal Reserve losing its autonomy. Almost 45 years ago, I authored the first paper emphasizing the significance of central bank independence; it’s perhaps my most recognized work. Yet recently, I’ve observed discussions on both sides of the political aisle about limiting that independence. Federal Reserve Chairman Jerome Powell wouldn’t be sidelined spontaneously; it would require another crisis to do so. In wartime, for instance, central banks are frequently subordinated to government control.

That addresses some of the internal challenges facing dollar supremacy. What about external influences?

We’ve resorted to employing economic sanctions as an alternative to military action. This approach saves lives and conserves resources. Additionally, dollar dominance affords us access to financial intelligence that no other nation possesses. If you were to visit the CIA today, you would find someone on a laptop rather than a character like James Bond.

Thus, there is considerable interest, especially in Asia, to diminish the dollar’s influence. China certainly took note when the U.S. enacted economic sanctions against Russia after its full-scale assault on Ukraine. Naturally, China has ambitions regarding Taiwan.

For many in the U.S., the formidable position of our currency is not often a primary concern. Could you explain how dollar supremacy affects the daily lives of ordinary Americans?

For starters, we’re all enjoying reduced interest rates. While the difference may not seem significant, dealing with 6 percent on your mortgage is less preferable than facing 7 percent. Moreover, for the national government, which has a debt of $36 trillion, every additional 1 percent equates to $360 billion.

Additionally, in crises like the pandemic or the 2008 global financial disaster, the U.S. has been able to borrow extensively. Though interest rates rise alongside our debt, the impact is quite mild when compared to the U.K. or France. If this advantage were to vanish, we would certainly feel the consequences.

Can you elaborate on the title of the book?

The U.S. dollar used to be regarded as dependable as gold. If you were a foreign nation holding what is now equivalent to hundreds of billions of dollars, similar to what many Asian central banks possess today, you could have simply brought them to the U.S., and we would exchange them for gold. However, President Richard Nixon resolved in 1971 that this practice would cease.

World leaders were left in shock. As a global financial event, it was as impactful as the recent imposition of President Trump’s tariffs earlier this year. Nixon dispatched Treasury Secretary John Connally to meet with these
“`leaders in Rome. They inquired, “What should we do? Now that you’re not tied to gold, you can simply inflate this currency, and we’re left dealing with it.” Connally responded, “Well, it’s our dollar, but it’s your dilemma.”

What do Connally’s comments evoke for you today?

Connally’s statement encapsulates the hubris of American officials that foreign leaders frequently perceive. I believe our position in the global arena comes with obligations, and we ought to acknowledge that.

The title of the book carries irony as well. After departing from the gold standard, we lost a stable price reference. Nixon began to criticize Federal Reserve Chairman Arthur Burns as harshly as Trump attacks Powell today. However, it wasn’t public; it took place in the Oval Office. We only became aware of it later due to the Watergate recordings. Burns got coerced into issuing a substantial amount of currency. This led to the worst inflation the U.S. had encountered in quite some time. So even though Connally claimed, “It’s your issue,” the ensuing inflation was also disastrous for the U.S.

Other economies have risen as competitors to U.S. influence over the years. However, you begin the book with an unexpected example, particularly for those who matured after the Cold War. You open with the post-World War II ascent of the Soviet Union. Can you elaborate on that choice?

By the 1980s, it became evident that the Russian ruble would not surpass the dollar. Yet during the 1960s and ’70s, we had no such foresight. I recount meeting various professors as an undergrad at Yale, alongside textbooks by prominent economists like Paul Samuelson. Samuelson firmly believed the Soviet economy would rival the U.S. The preeminent economic historian of that time, Angus Maddison, didn’t expect the Soviet Union to catch up but thought it would perform reasonably well. These economists were not Marxists!

In later years, we were unaware that Japan would stumble. We didn’t anticipate Europe’s stagnation. We never envisioned the peaks the U.S. dollar would eventually attain. My book revisits these themes repeatedly.

How did your experiences as a globe-trotting adolescent chess champion influence your perspectives on the matter?

My professors at Yale discussed the impressive performance of the Soviet Union. However, I had lived independently abroad, mainly in the former Yugoslavia. I visited some of my chess-playing friends in their homes. Chess was a significant cultural element in the Communist bloc, so these players enjoyed better lives and superior accommodations than the average citizen. However, these appealing homes were merely small concrete blocks within these drab buildings. Their plumbing hardly met U.S. standards. This made me quite skeptical regarding Samuelson’s assertions.

You state in this book that the era of dollar supremacy is in “late middle age yet still robust.” Is that still the case considering Trump’s second-term trade conflict?

Well, the dollar is beginning to show more serious health complications under Trump. As an academic, the aim is never to write a book that will only hold true tomorrow. After joining Harvard in 1999, I took a walk across campus with former Faculty of Arts and Sciences Dean Jeremy Knowles. I’ll always remember what he said: “The ideal paper is one that everyone believes is incorrect, but in five or ten years, it’s validated.”

You’ve accomplished that previously.

Carmen Reinhart and I faced ridicule in early 2009 when we presented a paper indicating that recoveries from financial crises were typically much slower and weaker than standard recoveries. And that’s precisely what occurred. I experienced a similar situation in 2020 when my research suggested a significant issue in the Chinese real estate market.

My new book also includes some forecasts that diverge from mainstream beliefs, which I trust will ultimately be validated — regarding interest rates, inflation, and the dollar’s position. I don’t assert that dollar dominance will plummet overnight. However, Trump has acted as an accelerant. He has been a catalyst. Parts of the globe were already transitioning away from the dollar. Now, that movement is accelerating.