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.