Wall Street pundits and investors are schizophrenic about US assets. The dollar weakened after Moody’s cut the United States’ credit rating, citing the increasing fiscal deficit, as well as the rising interest costs on government debt.
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On the other hand, the S&P 500 not only recovered after US President Donald Trump’s April tariff shock, but is now less than 5 per cent off its record high in February. Nevertheless, 30-year US Treasury yields recently exceeded 5 per cent per annum, indicating investors’ nervousness about US deficits and debt sustainability.
While Financial Times columnist Martin Wolf worries about Trump’s assault on the US dollar, he and others argue that there is no suitable alternative to the dollar. I beg to disagree.
Wolf listed some alternatives, such as replacing the US dollar with the Chinese renminbi or the euro, a world with multiple competing currencies or continuing the dollar status quo. Wolf also mentioned the possibility of a global currency or even a cryptocurrency-based world, but dismissed both as inconceivable. I agree that fiat currencies are not serious alternatives to the dollar, since the euro is a weak second; the Japanese yen and renminbi are not even close contenders.
A global currency, perhaps based on the International Monetary Fund’s special drawing rights, is a pipe dream. Rival powers are unable to agree on a global central bank. The US has a de facto veto on any IMF reforms that would allow for expanded special drawing rights. And even though cryptocurrencies have reportedly reached US$1.5 trillion in market value and bitcoin rose above US$100,000 after the tariff shock, most people would not be able to access cryptocurrencies if a world war breaks out and internet cables are cut.
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If we cannot trust human governance of any monetary system, the only other historically safe store of value is gold.