The U.S. Dollar Tipping Point

Bloomberg columnist John Berry is the dean of currency commentators, so when he has something strong to say, people notice (whether they agree or disagree). Berry has been downbeat about the U.S. dollar for some time, but in his current column his skepticism gets fused with an August NBER paper (“From World Banker to World Venture Capitalist: US External Adjustment and the Exorbitant Privilege”) to make the argument that U.S. investment income has reached a dangerous tipping point:

… all the advantages that accrue to the U.S. as the provider of the central currency in the global monetary system can’t forever offset the impact of the country consuming more than it produces. What if a “tipping point” has been reached?

Gourinchas and Rey say their analysis “does not imply that the current situation can be maintained indefinitely.”

The Possible Repercussions

“Foreign lenders could decide to stop financing the U.S. external deficit and run away from the dollar, either in favor of another currency such as the euro, or just as dramatically, require a risk premium on U.S. liquid assets whose safety could not be guaranteed any longer.

”In either case, the repercussions could be quite severe, with a decline in the value of the dollar, higher domestic interest rates and yields, and a global recession,” they caution.

“In a world where the U.S. can supply the international currency at will, and invest it in illiquid assets, it still faces a confidence risk,” they say.

Should confidence be lost, the value of the dollar could plunge, and a world financial crisis could ensue. At that point, even the U.S. could be forced to stop living beyond its means.

Related posts:

  1. IMF Paper on Dollar Troubles
  2. Tipping points, Tourism and the U.S.S. Midway
  3. Let the Dollar Drop — Or Not
  4. Billion-Dollar IPOs Only, Please
  5. A telephony inflexion point

Comments

  1. Zack Handley says:

    How long have we heard this drumbeat? 30 years?
    Unless these creditors (China/India) want their economies to come to a grinding halt they are not going to do anything except continue supporting the US account deficit.
    We are in rare air but we have been for decades. There is something going on that economist have yet to define but those who do might get an invite to Oslo.
    Zack

  2. John K says:

    Bah. The idea that the US is living beyond its means is based on some puritanical notion of what is good – and debt is not on the good list. The puritans aren’t basing their arguments on finance theory, they’re just cassandras of debt…
    The US has assets above $50Trillion and gets close to 10% ROA. I wonder how that’s happening if we are consuming so much more than we produce? The trade of dollars for cheap foreign goods is an efficient trade that enables the US to create more return on its own asset base.
    By the ROA measure, the US can easily afford more debt, and is smart to buy goods for US dollars from cheaper sources. When our return on assets dips below the interest rate we pay, then we might have to worry, but that’s a long way away…

  3. Fat Fred says:

    Here is the thing about the USD – China cannot allow the US consumer to stop buying goods manufactured on its shores…the masses over there will likely revolt with the resulting slowdown and that is bad for your long career prospects if you run an undemocratic, information controling regime…so, I’d be skeptical of a short term unhinging of the USD as a key reserve currency because China is unlikely to gleefully participate…same for Japan and any other Asian economy that exports to the US.
    Now, could they collectively ease back on USD holdings and look to diversify FC reserves? Sure, but just don’t look for anything drastic…IMO

  4. igloo says:

    Its interesting to watch and listen to the machismo blather of Americans. The bottom line here is that you have been wasting the earths resources for way too long, you are an arrogant irresponsible blight on the planet. An unusual comment since you are a very ignorant and out of touch lot.
    The other bottom line is this: there is no underlying value to any fiat currency. The only power behind this type of currency is the threat of militaristic force. This is a very basic concept, the biggest stick theory, so basic that even your moron president understands it. If you are going to use it, better not wait too long, you won’t be able to afford much war in the future, but the Chinese will have no such problem.

  5. Sandy says:

    Igloo: It would be interesting if you “watch(ed) and listen(ed)” to us machismo Americans blather…instead you choose to add your idiocy which is basically …nothing.
    A few major pioints:
    Igloo: Please, tell me what MAJOR currencies are not fiat currencies then tell me how much better they and their underlying economies have performed over the past 5, 10, 15, 20, 40 years or whatever stats you can pull. I am very interested.
    Igloo: Are you saying you would be happy if the Chinese had “no such problem”? Where do you live? We would love a perspective on areas that would love to be rules by communists…

  6. igloo says:

    Sandy, you don’t get the point. Your dollar has depreciated by about 95% since l971, your national debt is approaching 8 trillion dollars, you finance your 2-billion dollar per day deficit by borrowing from Asia, you consume oil and gas an an enormous rate, while supplying only 40% of your neeeds, your savings rate is now minus, your people are mortgaged to the hilt, you have destroyed most of your factories, and your work force cannot hope to compete, your government lies to you constantly to reassure you that everything is ok, you have systematticaly pissed off all of your friends, no-one believes a word your government says, they have zero credibility, you are on the verge of a major recession while your FED raises rates simply to try and attract more borrowed money. Don’t you feel a little exposed?? This is missmanagement on a colossal scale. But, you have actually missunderstood me on the other point, I am not anit-american, I’ve met many fine people from your country. This is merely a warning from an unbiased voice, that you have burned most of your bridges with a very dangerous situation developing in the world. Do you actually think your government intends to re-pay the massive debt it owes foreigners? You are in dreamland if you do, and what do you suppose the Asian tiger is going to do about that? He OWNS your country, has you by the proverbial “short and curlys”. Your government has placed you and your family directly on the road to war, and it sure isn’t the Senators etc. who will be on the front lines. This blog is about “greed”, I’ve never seen greed to compare with that of the military-industrial complex which runs your puppet president. They will rake it in with glee, in Iraq, in New Orleans, and wherever else they can, while your young people are killed and maimed. I feel very bad for you people. Igloo