There is something about America that tends to shed fear. Its citizens occasionally tremble, but America as a whole exploits fear. It may do anger or retribution, or internal divisions built on personal fears. It doesn’t suffer from collective angst—or never for long. America is too big and brash. It does strength. It does hope and revival.
That’s a cliché, of course. But it’s why—when the global economy started its pandemic-driven collapse—the world’s investors flocked into dollars. America is that confident neighbor with the basketball court and pool out back as well as the high fence and well-stocked wine cellar/bunker. In a crisis, you want to know that neighbor. It’s safe at his place. Even if you don’t particularly like him.
Every economic crisis brings a new belief that foundational change is upon us. We haven’t been through an economic contraction quite like this one since the 1930s. It’s fair to argue that this might change everything from our personal behavior to what we demand of governments and how we conduct commerce.
Some things, though, are only reinforced in a crisis. And that’s where the dollar’s primacy on the world stage stands now, whatever discomfort over imbalances may have preceded this or however intellectually compelling the contrarian argument may have been before Covid-19.
The first reason: The response to the crisis has reinforced the role of the dollar as the world’s reserve currency of choice and of the Federal Reserve as the globe’s most powerful central bank. If the world has been clamoring for anything—other than a cure—it’s been dollars. And the Fed has been handing out plenty, reinforcing its standing as the de facto guardian of both its own currency and the functioning of global financial markets.
The second reason: the persistent absence of an alternative. For years pundits have predicted the rise of a challenger to dollar supremacy. Those forecasts came with the launch of the euro in 1999 and with the global financial crisis a decade later. They accompanied the 2016 inclusion of China’s renminbi in the basket that makes up the International Monetary Fund’s own de facto currency, its special drawing rights. Bitcoin and other cryptocurrencies have even laid a claim. None, though, has ever truly taken off. The dollar has, at the very least, maintained its place.
It’s evident in what central banks around the world have chosen to hold as reserves. More than $6.7 trillion, or 60%, of nations’ collective $11 trillion in sovereign foreign exchange reserves were parked in dollars at the end of last year, according to data from the IMF. China’s RMB, by contrast, accounted for $217.7 billion, or just under 2%.
Is some bigger trend afoot that could change that? A rewiring of globalization that might reduce demand for dollars, perhaps? The argument is that the crisis has triggered an existential unease about sprawling supply chains, particularly when it comes to medical supplies, and that now a great manufacturing homecoming is likely. But that discomfort has been focused primarily on authoritarian China’s growing place in the global economy. Even if U.S. or European companies were willing to give up on the enormous Chinese domestic market, it’s hard to see how a move toward more diversified supply chains undermines the dollar’s standing, even if it leads to less commerce. It certainly wouldn’t strengthen the case for the renminbi.
The argument also represents a common misdiagnosis of a longer-term trend that may indeed accelerate with the current crisis, but in far subtler ways than even the economic nationalist now in the White House might want.
Peak globalization has been falsely diagnosed many times over the past decade. A move toward shortening global supply chains has been under way since at least 2011, when the tsunami in Japan and floods in Thailand put a new premium on managing risks to production and diversifying suppliers. The “China + 1” sourcing strategy adopted by many non-Chinese companies accelerated during the recent trade wars. Those trends—and even a rebirth of American protectionism—have proven how enduring globalization has become. Factories left China, but they moved to such places as Vietnam or Mexico rather than “reshoring” to America’s industrial heartland.
Even if all medical products such as respirators and medicines were made in the U.S. it would represent a small share of world commerce. Global trade in medical products was worth roughly $2 trillion in 2019, about 5% of the total, according to the World Trade Organization. America’s imports represented less than $200 billion of that. By comparison, when the Bank for International Settlements last measured the daily turnover in global foreign exchange markets last April, it put it at more than $6.6 trillion in transactions, $5.8 trillion of which involved the U.S. dollar.
There’s a reason that America doesn’t do fear, at least not when it comes to the dollar. Even in a crisis, its place is just too big for anybody to mess with. Shawn Donnan, Bloomberg
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