Review of Our Dollar, Your Problem, from Head of Research at Systemically Important Central Bank
I recently received, by email, an unsolicited review of Our Dollar, Your Problem from the head of economic research at an important central bank. The review was circulated to all staff at their institution, but their position precludes posting it online themselves. They did, however, grant permission for me to post it on my own social media. The opening to the email reads (and I have edited out a couple words that would identify them)
A note of deepest appreciation to tell you how much I enjoyed and was enriched by you new book. Thanks so much. Below is a short commentary on it that I used to encourage by colleagues to read it.
The full unedited review is below (there is one edit that takes out the central banks name)
Kenneth Rogoff’s new book on “Our dollar, your problem” was published by Yale University Press about a month ago. It has got quite a bit of publicity, reviews and Rogoff himself has given several notable interviews on the book in recent weeks. [One of the recent interviews was by Steve Davis accessible through the Hoover Institution website.]
At the outset, I should say that is probably the most readable, useful and enjoyable (non-fiction) book I have read in years! At 291 pages (ex-references) and packed with lots of information and analysis, it still took me several weekends to get through (against a full-time job at a cyclical intense period…).
Overall, I would strongly recommend it. It is a book that ought not to be subject to summarizing – AI assisted or otherwise – it is really meant to read in the “gross”. Our Library should have multiple copies of it soon (both e-book and hard copy).
Allow me to make a couple of observations, please.
The book ought to be seen as a review, as the subtitle of the book says, of “seven turbulent decades of global finance”. The bulk of the book is about the global economy and the international financial system across AE, EMEs and command economies and some of the crises points they have encountered in financial, fiscal, currency stresses. His review of the Russian, Japanese, Chinese economy, inflation and currency challenges of EMEs through the 1960s and beyond are so very well done and provides enormous, rich fodder for a productive read in the hands of one of the world’s most foremost international economist. That it also weaves in autobiographical elements makes the narrative more interesting, real (“live”) and engaging.
There is an interesting chapter 15 on the “Tokyo Consensus”, where he interprets the Japanese practice of heavy intervention in fx markets in the 1990s as providing the example to other Asian economies to likewise adopt similar practices of reserve accumulation after the Asian Financial Crisis. He recognizes the underlying rationale for such actions, though points out its costs and risks and observe how most in the region have over time soften their “pegs” in conjunction with efforts to strengthen their financial resilience. As he observes :
“…one must give Asian policymakers their due. By putting a bit more sand in the wheel of their financial systems, without necessarily using heavy-handed controls, and by having ample reserves on hand, Asia’s central banks could stabilize exchange rates more effectively than economists had previously imagined. In sum, many emerging markets, particularly in Asia, did not so much reject the Washington consensus as choose to adopt key elements and insert their own improvements. Asian policymakers understood that although capital controls and financial market regulation have their uses, they cannot compensate for deep inconsistencies in macroeconomic policies. Asian policymakers thus built-up reserves, strengthened regulation and introduced some controls (particularly on inflows); the end results looked a lot more like a Tokyo consensus that a Bueno Aires consensus”.
In other words, I think Rogoff is (usefully) characterizing an Asian way or approach towards securing financial stability amid global and financial volatility, building on the Japanese experience.
Chap 16 is also a good analytical pull-together of exchange and capital flow issues –risks in the rigidity of pegs, the endogeneity of the real exchange rate (“the most important device the Chinese authorities were using to keep their economy so hypercompetitive: the steady migration of millions of people each year from agrarian rural China to its cities and manufacturing centres”), and the neglected risks in the US of accommodating so much of Asia’s excess savings especially in fragilities with its financial regulation.
The book has its dedicated discussions on the US$ that comes into focus at about the half-way mark. At the outset, I think we should recognize that there isn’t as if there is a first principles, micro-foundations based econs approach towards assessing the dominance of a currency in the international monetary system. Instead, we want a robust evidence based analysis of the issue. And here, one will find here an excellent narrative as one could possibly find, principally over Chapters 20 to 27.
Ken Rogoff’s views are a cautious one which envisages a gradual fraying (a term he uses in interviews though I don’t think it appears in the book itself; unless I missed it) of the US$ dominance. He recognizes early on that “thanks to network effects, international currency usage is a natural monopoly”. He identifies the basis and benefits of the US$ privilege or exorbitant position especially in terms of the convenience yield and in particular its ability to borrow at low costs at any time including during heightened uncertainty in global markets, pointing out that the latter concept (exorbitance) as a much broader and encompassing concept, “encompassing the myriad advantages the US, including both the government and private sector, enjoys from financial globalization”. He stresses also on the collateral use of the US$ short-term Treasury debt as part of this advantage, as it creates a special demand for UST bills globally in facilitating a range of international transactions. There is a very useful Chapter 21 that explains clearly the asymmetric advantage the US enjoys in the vastly higher returns it garners from riskier assets abroad that what foreign investors choose to get in lower return and safer bond holdings in the US market. This of course gives rise to the remarkable phenomenon of large net foreign asset position though this has been gradual eroding since about the GFC period (figure 13 of Chapter 21). This role is synonymous with Kindelberger’s characterization of the US’ ‘banker to the world role’, in which “the United States take in investments from foreigners seeking a safe place to park their money, and then lend out to risk projects aboard”.
Rogoff summarizes his read of the historical roots of the US$ dominance in that it “benefitted from not being a battle-ground in WWII, thereby gaining a giant first-mover advantage in the global economy. On top of that, the post-war Bretton Woods exchange rate system helped enshrine the United Sates at the centre of the currency system”.
Chapter 22 and 23 are short, focused ones that considers interesting aspects of the US$ role –on the how the US and US$ helps in a small way the workings of the international financial system. Here, he explains the US$ swap lines and how it effectively relieves the strains on global liquidity at the needed times, arguing that even though other smaller friends of the Fed do not as yet have a permanent line: “global dollar markets are deeply intertwined”, such that “by flooding the largest economies with dollars, the Fed is effectively taking some of the pressure off dollar liquidity everywhere”.
Chapter 23 contains his interesting view that “it is hard to sustain the role of a dominant currency without being one of the world’s geopolitical superpowers”. His thesis is that maintaining an expensive military reach is one of the costs of being a dominant currency in the context of stretched public finance resources.
More broadly, the general basis of his arguments about the fraying of US$ dominance is a sound, robust one that mainly draws on his previous views on the long-term trend of real interest rates and the risks of large public sector debt position. These are so well covered in Chapters 25 and 26 and it must be read in full to get it in full.
Chapter 25 characterizes the accelerating debt profile, estimated to reach some 160% of GDP by 2055 as the US” achilles’ heel. Rogoff early on in the chapter dispels the notion that all US government debt is “safe”, and certainly not in real terms adjusted for inflation. He is deeply concerned about the excessive spending in the US:
“the notion that government debt is a proverbial free lunch has so thoroughly pervaded the Washington establishment that there is little appetite for reducing deficits”.
“the US is running deficits at such a prolific rate that it is likely headed for trouble in almost any scenario”.
Chapter 26 strongly argues that with such public sector debt profile interest rates cannot be lower forever, a point that he has made in his research for a decade, including an important recent August 2024 American Economic Review paper (with Rossi and Schmelzing)
He does not agree that demographic or productivity trends work in the direction of lowering interest rates in the future – the correlations disappear or even reverse if one takes a longer time series of the evidence.
He points to the worldwide rise in populism as putting additional pressures on spending in the future, and thus on govt debt and notes also that the “peace dividend seems to have evaporated”.
Financial repression, as in regulations forcing banks to hold on to more government debt, cannot be a sustainable relief valve for it distorts as it is a form of taxation directed only at domestic residents in the form of lower interest rate deposit rates, higher fees on services and higher rates on loans apart from the misallocation of scare saving flows.
Rogoff also sounds a clear warning that he does not think that low and stable inflation can be taken as a given in the future, even though the technical aspects of inflation targeting have been settled upon. Central bank independence and hence assurance of price stability is coming under pressure from the “political economy roots of inflation”. (Chapter 24). This bulwark of currency dominance cannot be taken for granted in the US for the future.
Rogoff concludes that “the greatest dangers to the dollar supremacy…come from within”, reflecting the underlying dangerous currents of unsustainable public debt, higher interest rates, the misplaced complacency on price stability, the enormous costs of global military dominance, as well as at the margins, the increased use of RMB and Euro in their respective spheres of influence.
Ken Rogoff does concede that “the US dollar is several bad turns away from any such fate (i.e., the demise of Britain’s and the Sterling’s preeminent position after the interwar years), but it is still in good health”. There is no doubt in his mind though, as revealed in this new, excellent book that the US$ dominance shalt fray at the margins. And he warns:
· “…an important part of the vaunted stability seemingly engineered by central banks over the last half century is an artifact of a period in which trade and financial; globalization were rapidly increasing, great power conflict had faded and populism had been suppressed. Needless to say, all these trends may be reversing.”
· “…although the financial system usually evolves glacially, the occasional dramatic turn is to be expected”