This is an audio transcript of The Economics Show podcast episode: ‘Martin Wolf talks to Kenneth Rogoff — Trump is accelerating the dollar’s decline’
Martin Wolf
The US dollar has been the world’s dominant currency since the middle of the 20th century, but that long era of supremacy hasn’t been without its shocks. Now, as President Trump has pressed ahead with a slate of aggressive tariffs, the value of the dollar, so often a safe haven for investors, has slid to multiyear lows. Is the era of dollar hegemony coming to an end? Could cryptocurrencies, or perhaps China’s yuan, knock the greenback off its perch? And how would that affect the rest of the world?
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This is The Economics Show. I’m Martin Wolf, the FT’s chief economics commentator. I’m joined today by Kenneth Rogoff, who I’ve known personally since 2001. Ken is a professor of economics at Harvard university and former chief economist at the IMF. But long before his career as an economist, he was a grandmaster at chess. Ken is an immensely influential thinker on international monetary and financial economics. Together with Carmen Reinhart, he wrote This Time Is Different: Eight Centuries of Financial Folly, a seminal book which was published in September 2009. His latest book is Our Dollar, Your Problem, and it is on the history of the dollar and what might come next for the currency. Ken, welcome to the show.
Kenneth Rogoff
Well, thank you, Martin. What a privilege to be here.
Martin Wolf
We are in the age of Donald Trump. How concerned should we be about the future of the dollar’s role as a global currency? And how much of our concern should really be about already established vulnerabilities, high US deficits and debts, over-reliance on financial sanctions as a tool of US foreign policy and so forth, and how much should our concern be about Trump himself.
Kenneth Rogoff
Well, I think the dollar was in gentle decline. I would say it actually peaked around 2015, but in gentle decline, we’re talking decades of this going on. And declining in the sense that when you lose market share, it does affect your interest rates, you still have an exorbitant privilege, but it’s less exorbitant. You still have the ability to impose sanctions, to spy on everyone, but much less, especially as that changes.
But Donald Trump is an accelerant, he’s a catalyst. And the time when the euro and the renminbi come up much closer to the dollar, which people thought was gonna happen 15 years ago, I think that’s gonna happen a lot sooner now, believe it or not.
Martin Wolf
So if we look at what’s been going on here, the US has clearly been exploiting its exorbitant privilege in the sense that its financial sector is the dominant financial sector, transactions go overwhelmingly through New York, that gives the US tremendous leverage over other countries and other economies and people have been very frustrated about this for a long time, including Europeans. Is that a significant factor in what you see as the erosion of the US position that people just fed up with, as it were, the abuse of power from their perspective?
Kenneth Rogoff
Well, absolutely. The Chinese feel that way. And I think one of the reasons everyone thought some time ago that the dollar would shrink in its footprint was Asia’s half the dollar bloc. Why would China have a fixed exchange rate to the dollar? It makes no sense. The technocrats in China wanted to change that. So that changed already in 2015 when China started to have problems fixing exchange rates. But it got accelerated mightily when the Chinese saw what we did to Russia. We seized some $300bn to $350bn in the Russian central bank assets and we’re not calling it a default, but of course it is. I mean, we consider it an honourable default, but it’s a default. China has, by my estimates, $2tn, in dollars and trillion directly. The Treasury sees another trillion through various intermediaries where they hide it. And they are thinking hard about it. But even countries like India, Brazil, Korea, everybody is a little more hesitant about how safe are their dollars.
Martin Wolf
When you look at this long history, you mentioned that 2015 was your peak. What are the measures that indicate to you that the dollar is past its peak? What can we look at concretely apart from reserve holdings?
Kenneth Rogoff
So I mean there are a number of measures that economists look at and they each are siloed. There are studies of how much trade is in dollars.
Martin Wolf
Denominated in dollars.
Kenneth Rogoff
Denominated in dollars, which is smaller than you might think, although if you took Europe out of the picture, intra-European trade, it gets larger. There’s what per cent of when countries borrow abroad, particularly their corporates but also countries how much of that’s in dollars, how much is in euro.
A measure I like because it’s a portmanteau measure that encompasses a lot of things is how do foreign central banks manage their exchange rates? Are they trying to stabilise against the euro? Are they trying to stabilise against the dollar? And I’m not talking about fixing it like Saudi Arabia does or Hong Kong does, but almost every country even when they say their inflation targeting. Inflation targeting with a heavy eye on the exchange rate. And if you look by that measure, the dollar’s dominance in 2015 was blinding. The euro’s a regional currency, the renminbi is barely there, the yen’s barely there. The dollar’s dominant. And that has moved since 2015. It’s weakened, and I think that’s gonna continue. So there are a lot of different measures, but I think by that one, it’s decreased. I think over time we’re gonna see it in others.
Martin Wolf
One of the things that Mr Trump clearly intends to do is reduce US trade. The logical consequence, if he continues with the sort of protectionist policies we’ve seen, is a ratio of trade to GDP will shrink. That itself would reduce the attraction of pegging your currency against the dollar, because one of the reasons people peg their currency against the dollar was to preserve their competitiveness in US markets. Now, if US markets are going to be closed relative to other markets, that gives a pretty powerful reason for not pegging your currency against the dollar, doesn’t it? Is the Trump administration, into your view, aware of this linkage because they often talk as if, well, we want to close our market, but we also want everybody to continue to use the dollar. Do they understand this connection?
Kenneth Rogoff
Let me try to put it in the simplest terms, which I’m not sure Donald Trump will accept. He might understand. We have big current account trade balance deficits. He particularly cares about goods, but our trade balance deficits are pretty big. But the mirror image of that is the other countries are getting savings against us, that they’re investing in the US. It’s creating jobs. It’s bidding up the price of housing. If you reduce our trade surpluses, you’re reducing that inflow. And a more subtle point is that when you throw sand in the wheels of trade, it also throws sands in the wheel of international finance.
A simple example just to make the point: if everybody puts up 100 per cent tariffs, it doesn’t pay to invest in other countries because you can’t get your money out. That principle also holds on 10 per cent tariffs, it shrinks the financial sector. Well, the United States is the winner of all winners on financial sector integration. So his policies will absolutely shrink the global financial sector. We lose. I would describe his policies as “Sell America First”. Sell your stock, sell your bonds, sell everything. And it’s incredibly counter-productive. Do they understand that? Some of the economists certainly understand that. Does that get to Donald Trump? I don’t know.
Martin Wolf
They might actually think they can retain the current account balances, though he doesn’t think that way, just with a lower ratio of trade to GDP. So trade becomes less important. You then end up with a larger current account deficit relative to trade, but you could actually continue with a large deficit and high tariffs, logically. By the way, that’s not of course how they put it, but you could think analytically, it could be separate. It seems a very strange way to go about it. That’s pretty obvious.
Kenneth Rogoff
We could run bigger government deficits. I mean if you wanted to shrink the current account, our government budget deficit is three times the current account deficit. That’s sort of an obvious place to start and I think would be a pretty good idea anyway. But if you don’t want to shrink their current account and you want to shrink what the private sector borrowing or you know make it loan more, run a bigger deficit. Maybe that is what he wants to do. I look for words to describe the policies, and it’s just very hard not to think of crude words, describing them as dumb in various different ways. Politically, I don’t know, but he seems to believe that the economics are brilliant and I just don’t get it.
Martin Wolf
There is a discussion, I don’t know whether you’ve thought about this, and I’ve tried very hard to make sense of it, of something called a “Mar-a-Lago Accord”. And the idea seems to be that it would be sort of an equivalent of what the Reagan administration reached with the G5, as it was called, the other major developed countries — Japan, Germany, France, the UK — on exchange rates. That was particularly with Japan and Germany. And the Plaza Accord was designed in, I remember in 1985, to lower the value of the dollar. The dollar had exploded as a result of the Volcker-Reagan combination of huge fiscal deficits and tight monetary policy, forced out the dollar, created huge current account deficits, which they didn’t like. So one of the things they wanted to do was to get these currencies to revalue against the dollar and then two years later they decided gone far enough, and they reached the Louvre Accord as a sort of new settlement.
They talk about this Mar-a-Lago as though it is going to be more an exchange rate adjustment, triggered by these protectionist policies. Based on this model, I think, does that make any sense to you? And this seems to be coming more from economists like Stephen Miran and Scott Bessent. Does that side make any sense to you? That parallel, can you see it at all?
Kenneth Rogoff
The thing is, if you actually look at the Plaza Accord, and Jean-Claude Trichet once showed me the paper on which they wrote down the numbers, the yen was supposed to appreciate by 10 per cent. That was the plan. And I got to talk to James Baker, who was the Treasury secretary back then, and he said, yeah, that was the plan. They went home, they said 10 per cent. They’ll have it to 10 per cent in two weeks. And he said what do you know? 10 per cent, two weeks later. But then, and he laughed when he was telling me, and four weeks later, it was up 25 per cent, and they couldn’t control it.
Martin Wolf
It was explosive, yeah.
Kenneth Rogoff
They deregulated their financial markets to achieve that. That’s really what happened. And I think …
Martin Wolf
And it blew up Japan.
Kenneth Rogoff
It eventually blew up Japan, and I think, at one time I thought that’s not really fair. There are other things that blew up Japan, it took quite a while until the bust happened. And I came around to the view I don’t know when, but certainly in writing the book, that was wrong. And what we did was we made them deregulate when they weren’t ready. And had they done it in their own sweet time, I don’t think they would have had nearly the crisis that they had. We absolutely catalysed this. And I’ve come to realise that that was a huge mistake on Japan’s part. They got bullied into doing something. They should have stood up to the US.
Now, the Mar-a-Lago Accord has a lot of bells and whistles, but one in particular is that they tell all these foreign central banks: you’ve got your $2tn in Treasuries, we’re gonna take them and we’re gonna give you 100-year bonds. Oh, by the way, you can’t trade them, but don’t worry about that. I guess we pick the interest rate. It’s a default. We’re going to default on our debt. And I think the dollar was gonna fall of its own accord. I actually think we don’t need anything to make the dollar fall. When the dollar’s way out of line, it tends to fall back in. That’s happened in ‘85, 2002, and I think it would have happened under Harris. The dollar would have fallen. Completely different policies. I still think it would have happened.
Martin Wolf
So now it’s time for a break and after that we’re going to start talking about the future of the dollar.
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Martin Wolf
Returning to this big subject: what’s gonna happen to the dollar. The other parallel which might be closer is the ‘70s and the Nixon shock and the complete recasting of the Bretton Woods accord, of the dollar going off gold and all the rest of it, does really look as though the US wants to change the monetary system in a profound way. Is this a bit like the ‘70s? Is this the Nixon shock in a modern guise?
Kenneth Rogoff
Well, it’s certainly the biggest shock since the Nixon shock and maybe in some ways worse. I think Trump’s more unstable than Nixon. I’m sorry, maybe that’s not fair of me to judge from afar. The policies at least seem unstable. I think that’s fair. So this feels worse in some ways, but I think the end game is very likely to be similar. I think we won’t solve our budget problem. He’ll declare it solved, but the market will look at it and say, you’re crazy, and the bond yields will go up. And I don’t know what reaction he’ll do. I wouldn’t be surprised if we see price controls and things like that in the Trump era. Hard to know, financial repression may come where he forces people to have savings at low interest rates. I mean, clearly, this is not a person who’s a small government conservative. I mean, he’s an emperor government, you’ve described him as a king, I guess, maybe a mad king is what you said, but I think we’re looking at a very unstable period. I thought we were anyway, whoever got elected, but this is the same thing on steroids. And the tariff thing, well, in my wildest imagination, I didn’t think it would be so bonkers is what we’re doing.
Martin Wolf
That then leads to the crucial question: how does this affect the dollar and its role in the world in this instability? Now, historically, people have tended to think the dollar always survives because there’s just no plausible alternative. The Chinese don’t really want to internationalise their capital markets. It’s a closed walled garden. The Eurozone, which is another plausible alternative, it’s not really united, it doesn’t have an integrated public debt market. There are debt markets for German, French, and Italian debt, they’re all different, and it’s not an independent sovereign military power either. And the cryptocurrency, well, it’s not really a currency, is it? So in the end, the dollar remains triumphant and dominant because there isn’t really a plausible alternative. Do you disagree with that view? Do you think that view is no longer really right?
Kenneth Rogoff
No, I think it’s no longer really right. Let’s step back 15 years when very leading economists Barry Eichengreen at Berkeley, Jeff Frankel at Harvard, many others were writing papers saying we’re moving to a tripolar system with the renminbi, the euro, the dollar being much more equal. A lot of people were saying that’s where it’s going. And that got derailed partly because China went off in a very eccentric direction politically. Europe had the euro crisis, which was not very good for building confidence. And the Fed did a pretty good job overall, which inspired confidence in the dollar. And we, instead of falling, reached a new height.
But I think some of those forces are in place. You say the Chinese want a wall. They’re expanding that wall to include a number of countries in Latin America and Africa. You may say, well, why trust the Chinese? They don’t trust us. They don’t trust the US. So …
Martin Wolf
And lots of other people trust the US less than they used to.
Kenneth Rogoff
Absolutely. And I think the Europeans were never entirely comfortable with the situation of the power that it gave the United States.
Martin Wolf
Part of the reason they created the euro.
Kenneth Rogoff
Part of the reason they create the euro and it fell short in many ways of where it was going, but you know. Trump may come along as the best thing that ever happened to the euro project. I mean, if he doesn’t put a fire under their energy about being more of a geopolitical power, I don’t know what will. So I certainly see a world where the dollar is on top, but less, much less than it was.
But also, you know this is gonna lead to fiscal problems at the end of this with Trump. I mean, he’s shrinking growth. He’s undermining our academic institutions that create innovation. He’s stopping the brilliant foreigners who come in from working. You can’t get a visa. This is not good for growth. You don’t need a PhD in economics. And he’s gonna bust spending and tax cuts. We all know that. So this isn’t, you know, this isn’t gonna end well. It’s not the end of the world. It wasn’t the end of the world in the ‘70s, but I think in the next — I say in the book, five to seven years and maybe need to make that a little shorter — we’re going to get another big burst of inflation. We’re gonna get financial repression, which they already do a lot in Europe and Japan in a big way, stuffing debt into the insurance companies, pension funds, the banks. That’s terrible for growth because it reduces the funds flowing into the private sector. I think this ends in a more chaotic situation and who’s gonna have the first financial crisis? I don’t know. Believe me, it’s coming. I mean, if you have a situation with all this volatility, rising real interest rates, which we haven’t talked about, everything going on. Something’s gonna blow up and we’re gonna say of course that blew up when it happened. It’s a very volatile period. The ‘70s were not a great period in the US and it’s certainly looking like not just the next four years, but longer than that because he’s doing things. You know, where you can’t unring the bell that he’s done, the loss of trust. So I think again blaming him for everything, if Americans do that, they’re kidding themselves. There were deep-seated problems. He’s certainly a catalyst, an accelerant in many ways.
Martin Wolf
Well, the one thing that was working, as you said, was the dynamism of the economy. And if he damages that, that damages a lot of American power and influence in the world.
Kenneth Rogoff
You never know. He could adjust, but I think the damage done already is profound. Let’s take tariffs. Say he says, OK, 10 per cent on everybody, we made a deal. You made concessions. We did that with Canada and Mexico just four years ago in his presidency. How do I know he’s gonna not roll out of bed and change his mind? The rest of the world is gonna reroute trade, reroute finance, and try to depend less on the dollar. And by the way, crypto is more important than most people realise, because there’s a global underground economy. My estimate it’s 20 per cent of global GDP. Crypto is growing and growing. They’re claiming market share from the dollar there. So I wouldn’t say the dollar is being replaced so much as being cut down several notches, a process that should have taken several decades to adjust to, and seems like it could happen much faster.
Martin Wolf
So let’s think about that, sort of, end game or medium-end game. I was one of the people who until now was convinced that actually nothing would replace the dollar. And though the US had problems, it was still overwhelmingly the most attractive economy. It had very powerful institutions. It was a huge integrated economy. So I thought it was going to be reasonably stable.
Now we’re looking at a world where that might change quite quickly. There could be flight and there is flight, you can see it in the bond market, you can see it in the exchange rate, there is flight and it’s going to be difficult for them to stabilise that. So how does that affect the economy? Assume you’re right, the US continues with its fiscal problems, it tries repression, how does this play out? Do we have the prospect of some really big disruptions occurring, some interlocking prices of the dollar, of confidence in America and global finance. What might that look like?
Kenneth Rogoff
Well, we’ll land somewhere, but probably it’s gonna be pretty unstable in the transition. These transitions aren’t stable. And that’s even assuming he stays controlled, which remains to be seen.
Martin Wolf
So basically what you’re saying is we are set for a really turbulent period and we shouldn’t perhaps focus so much on the possible decline of the dollar, which in some sense you could imagine occurring in a quite natural and normal way. But the turmoil that is likely to be associated with it, in which quite big things and big shocks can occur. And in this context, a crucial point I’ve just been writing about is that we’ve already had a lot of turmoil. I mean, if you think of the last 20 years, we had a huge financial crisis, quite a struggle to overcome it. And you could argue we never did, given the real interest rate situation. And we had the pandemic, the post-pandemic inflation, the war in Ukraine and all the disruption that occurred there, particularly in Europe with huge terms of trade shock. And now we have Trump. So, you’re really predicting more, possibly even worse turmoil, which inevitably is also political and geopolitical. Is that right?
Kenneth Rogoff
Yeah. I mean, as an academic, I can’t say things as crisply and eloquently as you just did. I’m more measured, but yes, I see this as a very difficult period coming up. And we have a long time to go to him. I don’t know. What are we gonna get in 2028? Ocasio-Cortez, Mini-Maga-Me, you know, on the other side. I have no idea. I mean what’s there to look forward to here? So it could be a while until we find our way.
Now, Clinton came along and pulled the Democratic party to the centre. Maybe something like that will happen. I mean, it’s not gonna go on forever, but I guess I do think the betting odds in the next, certainly five years, probably 10 years, are gonna be incredibly volatile. Can you imagine this team handling a real shock as opposed to being the shock? I mean, I’ve been thinking that about China for some time where they have not used meritocracy nearly as much in picking the high people. Can they handle a real problem? Can the Trump team, who has some very good people, but he makes all the decisions, can they handle the real problem? I think the answer’s no. I think we’d really have to worry. Well, I mean I hope he does. I’m an American. I want it to go well. A good bet is that volatility is going to go up and if I look at markets at the moment, they seem still incredibly complacent to me about what’s going on. They have total faith in the Fed. I mean, I do too, but the Fed is a creature of Congress. The president and Congress together can make the Fed disappear in a week. So, you’re pulling me in with your eloquence about what could go wrong. But it’s hard for me to say no when you say it that way.
Martin Wolf
Let’s cheer up the listeners. Let’s suppose they see the error of their ways as it were, and you were called in to give advice. How do they restore the position and leave aside the trade policy, pretty obvious. That’s pretty batty. Would your first and most important piece of advice be: fix the fiscal position, because I think that will be consistent with your past position that we have to look reality in the face and recognise we can’t afford what we’re committed to. That means higher taxes and spending cuts. Fix that first, or are there other things that you would say now are even more fundamental.
Kenneth Rogoff
Well, I mean the easy thing to say is let’s have more productivity.
Martin Wolf
But the US isn’t doing badly about that.
Kenneth Rogoff
We’re not. We weren’t doing badly and …
Martin Wolf
Well, obviously a bit of a problem now but they could go back to what was going on before.
Kenneth Rogoff
We were, you know, running towards 7 per cent deficits and that’s not sustainable and the economy hasn’t prepared for that. Social security is not sustainable the way it is. Nobody’s been prepared for that. My view on these things is until there’s blood in the streets, it’s very hard to make these changes. It’s very hard to go out and say, I think there could be a problem, I want to prepare for a rainy day.
Let me step back on the issue of debt actually. There are people who say the level of debt doesn’t matter for anything, we shouldn’t care. And most of those people will also say stimulus is the most fantastic thing in the world if we can do it. You know, you want to use stimulus, but you don’t wanna owe a lot. One of the incredible paradoxes I find and particularly in progressive thinking is this lack of trade-offs. Stimulus, great. Shouldn’t care about the debt as opposed to let’s look at how good the stimulus is, let’s think about what the debt is. And needless to say, the Republicans say, well, let’s cut taxes because we will grow so much. You don’t have to worry about it. And it never happens.
Martin Wolf
We’ve been tested that hypothesis to the stretch.
Kenneth Rogoff
Again and again and again. Yeah, again and again and again. So fiscal stimulus is great, tax cuts are great, maybe we need to think about a trade-off.
Martin Wolf
Well, thank you very much, Kenneth Rogoff, for a wonderful discussion, and perhaps it reminds us that economics is known as the “dismal science” for a reason. But also that if we don’t recognise the choices we have in front of us, what will happen may be something that we will really dislike, and that’s a pretty important lesson. So thank you very much for being with us.
Kenneth Rogoff
Thank you so much for having me. It’s a great honour.
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Martin Wolf
That is all for this week. You have been listening to The Economics Show from the Financial Times. This episode was produced by Mischa Frankl-Duval, with original music and sound engineering from Breen Turner. The broadcast engineers are Andrew Georgiadis and Rod Fitzgerald. Our executive producer is Manuela Saragosa. Cheryl Brumley is the FT’s global head of audio. I’m Martin Wolf, thanks for listening.
