00:00We begin with the continuing conflict in Iran.
00:02Harvard professor and former IMF chief economist Ken Rogoff
00:06chronicled the U.S. dollar's rise in the beginning of its decline as a global currency
00:11in his latest book, Our Dollar, Your Problem.
00:14It turns out that it's not just oil and aluminum at risk in the Iran war,
00:18it also may be the status of the dollar.
00:23Ken, in your book, Our Dollar, Your Problem,
00:25you talk about the position of the U.S. dollar as declining gradually over time
00:30in relation to other currencies.
00:32We now have a conflict in Iran. Is that affecting that decline?
00:37I don't think there's any question that it will affect the decline.
00:41It could go either way. It depends on how it comes out.
00:44If the U.S. comes out incredibly triumphant, there's peace in the Middle East,
00:51everyone looks to the United States to maintain peace,
00:54that's one outcome.
00:56Another outcome where it's viewed as a strategic defeat and China gains.
01:01But, you know, it's a step.
01:03I don't think either way it's changing a dynamic that was going to happen.
01:08Anyways, there are things on the outside that it influences,
01:12so it's definitely going to help China accelerate getting other countries to use its currency,
01:20particularly for Chinese imports.
01:22For example, if China buys oil or China buys anything, it's going to help in that dimension.
01:28But it's also affecting global debt because everybody sees a lot of need for military expending.
01:35The U.S. is the biggest debtor in the world.
01:37We lose the most when global interest rates go up.
01:42So there are pressures from the outside coming from everybody trying to look for other options
01:48and pressures from the inside that we're, you know, running this big debt that is manageable if we wanted to,
01:58but there's not a lot of will to want to.
02:00Is the strength of a currency reflective of the strength, including military strength of the country?
02:06In your book, you go back to the Armada, actually, with Queen Elizabeth I and the Spanish.
02:11Is this potentially a barometer of how the world is perceiving the relative military strength of the United States?
02:17The military strength is a piece of being the dominant currency.
02:21And here, just to be clear, we're talking about the dollar's market share,
02:24which reached an incredible peak about 10 years ago.
02:29But also, military strength gives you the ability to affect negotiations.
02:34They can be over very unrelated things.
02:37They can have to do with how the IMF works.
02:40They can have to do with how global banking regulation works.
02:45So having the military power at the end of the day says, well, you know, of course it matters for
02:51a lot of things.
02:51And if you're looked at as weaker, it hurts you.
02:55And part of the protection, historically, going back to, like, 1974, was of the Gulf states, countries like Saudi Arabia,
03:01because of U.S. military protection.
03:03Now, as you say, it depends on how this all plays out.
03:06But if, in fact, the United States does not have a triumph of some sort over Iran,
03:12does it really undermine the confidence of the Gulf states using the U.S. dollar?
03:16Well, the Gulf states are a really important anchor of the U.S. dollar.
03:20And, you know, it's interesting you picked the 1970s because it really fell in the 1970s.
03:26Europe left the dollar.
03:29That's worth remembering.
03:30And the Gulf states, when they sort of did their recycling of their petrodollars through the United States
03:38and priced oil in dollars, I think it was sort of helpful, although, nevertheless, you know, that period was down.
03:46I don't want to overstate the petrodollar.
03:49I want to be a little careful about that because oil is a very flexible price.
03:54We're all staring at Brent crude, and it's still here.
03:57It goes here.
03:58It can move very fast.
04:00So it's a little bit like my paying with Visa or MasterCard.
04:06It matters a lot more whether goods, manufactured goods, are priced in dollars.
04:13But it's important.
04:14I mean, it fills a lot of roles.
04:16The Gulf states use dollars.
04:18Saudis still pegged to the dollar.
04:20I don't know how long that's going to last, but they still are.
04:24And because so many of them are pegged to the dollar, rotate around the dollar, they hold more dollars.
04:31They've been very important to our business model, not as important as China, but they've been important.
04:38And it's unclear how this is playing out.
04:42I mean, I think a lot of the Gulf states are looking at us and saying, wait, I thought you
04:48built those bases to protect us.
04:51I didn't know you built those various military complexes in our country so we could be target practice.
05:00And are you on our side?
05:02Are you on their side?
05:03Like, what's going on?
05:04That's been a delicate dance.
05:06I don't think we know how it comes out yet.
05:08So, you know, China is kind of playing it cool.
05:13A lot of people say they may benefit.
05:15They might.
05:16But I just think we have to see what the end game of this is.
05:20The Chinese might benefit.
05:21Will the yuan benefit?
05:23Because we see Iran saying we'll let oil through the straight oil moves if you sell it in yuan, for
05:29example.
05:30And China certainly wants more transactions to nominate.
05:33They're doing quite a bit in crypto, too, also, by the way.
05:36Yeah, I mean, if they get paid in dollars, we can sanction them immediately.
05:39They're putting it hostage.
05:41Why the heck should they do that?
05:42That's certainly significant.
05:44But the big thing of the Iran war in the future of the dollar is its raised global interest rates.
05:52They were going up and up and up.
05:54So if I look at the dynamic of how I see things unfolding, it's that there's this pressures from the
06:02outside that are very slow moving, but they're happening, to have a more multipolar system.
06:08And there are problems on the inside where we're the richest country ever, ever, ever.
06:14But we still have trouble paying our bills and running these crazy large debts.
06:20There's no political consensus in either party.
06:24The Republicans don't want to tax anyone.
06:26The Democrats think 1% of people can pay, which doesn't add up.
06:31And so we are racing towards having a fiscal problem.
06:36And then central bank independence becomes a problem because when you have a fiscal problem, you're kind of looking for
06:42the central bank to bail you out.
06:44And if all that's happening, that's sort of what happened in the 70s in a way.
06:49It undermines the dollar.
06:50So what are the metrics that people should use in figuring out where we are in the relative prominence of
06:56the dollars?
06:57What do you look at?
06:57I mean, for example, were you surprised that the dollar was not more of a safe harbor when the Iran
07:02conflict broke out?
07:03So there are people in finance who are doing all these papers showing that the premium we used to extract
07:12on longer-term debt is gone.
07:15So on short-term debt, there's still a premium to dollars.
07:19It's still the safest asset.
07:22Long-term debt?
07:24It's not there anymore.
07:25I mean, it's safer than, let's say, some African or South American countries' debt.
07:33But if you compare it to many European countries, Japan, it doesn't rank that way they used to.
07:41And so there are ways in which what we're getting out of the deal is going down.
07:46Now, we can crowd everything into short-term borrowing.
07:50And Secretary Besant said, I think interest rates are going to go down.
07:54I'm going to borrow more short-term.
07:57Okay.
07:58But that's very risky.
07:59In fact, I think he was saying not to do that 10 years ago.
08:03And so we're losing.
08:05You see that in many measures.
08:09On the other hand, you know, these things are very slow-moving.
08:13If you do foreign exchange trading, it overwhelmingly goes through dollars.
08:19If you do currency of denomination of debt, it's overwhelmingly dollars.
08:27Of course, part of that's because more than 50% of the debt of the advanced countries is ours.
08:34More than that in global bonds, it might even be 60 or 70% is ours.
08:39So there's a lot of liquidity in it.
08:42I still remember 20 years ago a prominent European economist getting up at a meeting and saying, today is a
08:50big day.
08:51There's more euro debt than dollar debt, which was true that day.
08:57Well, how did that work out?
08:59You know, I mean, I think this is a slow-moving thing.
09:03We're seeing it in the interest rate spreads.
09:05We're seeing it in reserves, so what countries are choosing to do.
09:10We're seeing it in actions that the Europeans and the Chinese are taking to develop independent systems.
09:19But this isn't something the private sector is just going to do.
09:23It's mostly the Chinese, the Europeans are leading the way.
09:28We are digging our, you know, grave, so to speak, and it's all the actions of the governments.
09:36It's not something that's happening overnight.
Comments