The dollar will remain the safe haven currency of the world
| Photo Credit:
PonyWang
Donald Trump’s trade policy has drawn two types of comments. One deserves to be rejected and the other requires closer scrutiny.
The comments to be rejected are politically inspired, that he is trying to manipulate the financial markets so that someone can make money. This is plain silly. His close friend Elon Musk has actually lost more than $30 billion.
The other set of comments is about economics, that Trump is trying to devalue the dollar so that American exports become competitive. The simple answer to this is that a global reserve currency is, by definition, one that requires trade deficits.
So the idea that Trump doesn’t want the dollar to be the reserve currency by engineering a trade surplus for America is completely ludicrous. It could and has depreciated. But that’s temporary.
Public memory may be short but I had thought economists would have somewhat longer memories. But apparently not, because they have forgotten what happened in the four decades from 1950 to 1990.
The simple truth is this: what’s happening now is a replay of those years, namely, huge American budget and trade deficits accompanied by massive accumulation of dollars outside American control.
A brief recap
The only difference is that it was Europe and Japan which were the villains then and it’s China that’s the villain now. Europe exported more to the US between 1950 and 1970 than it imported — it still does — and found itself with a massive cache of dollars, called Eurodollars. Japan between 1970 and 1990 did the same and also accumulated huge reserves.
To fix the European problem Richard Nixon, a Republican president, went off the gold standard in 1971. By the mid-1970s Europe had lost its advantage which it still has not recovered.
In 1985, Ronald Reagan, another Republican president, forced two things on Japan. He ‘persuaded’ the Japanese to accept voluntary export restraints to limit the numbers of Japanese food entering the US. The other thing was known as the Plaza Accord that ‘persuaded’ Japan to revalue its currency vis-a-vis the dollar.
By 1992, just as the the Europeans had bitten the dust by 1980, the Japanese economy also went into a stagnant phase. Neither Europe nor Japan have recovered even now.
In their place came China as the leading exporter to the US. Like Europe between 1950-70 and Japan between 1955-85 it, too, was facilitated by the US.
It then bit the hand that fed it. So now it is its turn to be hit. But will history repeat itself a third time? We will have to wait and see.
Even in the 1970s, after America had refused to honour its pledge to give a troy ounce of gold for $35, there had been the same squeals of indignation and forecasts of apocalypse. All that happened was volatility in the financial markets and petrodollars replaced the Eurodollars. That’s when the Middle East became rich.
International economics bloomed. Many papers and books were written. Some economists even won the ‘Nobel’ prize. But when all the commercial and academic dust had settled down, there the dollar was, as the safe haven currency of the world.
A legitimate question today is if America has the same leverage with China as it did with Europe and Japan because it provided military security to both. And the obvious answer is no. China is a military adversary.
When the US whipped them, Europeans responded by expanding their economic union both in trade and monetarily. The EU and the euro were the result eventually. The Japanese didn’t even try. They just rolled over.
And the dollar remained invincible. That’s the point to grasp.
What can China do? It has tried RCEP, an Asian trading block. It has tried an Asian infrastructure investment bank. It has tried to promote the yuan as the global reserve currency, directly and via BRICS. It’s pretending it’s on a par with the US on technology — via memes. It will blackmail the US via its control of rare earths but that control has now reduced.
But yes, this could hurt. Despite Trump, China also doesn’t enjoy the trust that the US enjoys — which Trump might be destroying.
US or China?
In the end, the point is this: if you had to choose between America and China, who would you choose? And that’s the trillion dollar question: the Communist Party of China or America?
All things considered China doesn’t have the ‘comprehensive power’ depth that’s needed to take on the US. I think the deal Trump will offer is that the Pacific is yours but that’s all you get. Agree, and I will reduce tariffs to 10 per cent.
We in India, meanwhile, should be wondering, like Kalia in Sholay, what’s going to be our fate. “Ab tera kya hoga, Kaliye”.
Published on April 13, 2025
