Should U.S. fear losing reserve currency status? Dollar dominance is not worth more than ‘fraction of 1% of GDP’, says Nobel Prize-winning economist

(Kitco News)
With gloomy headlines focusing on the U.S. dollar losing its dominance, Nobel Prize-winning economist Paul Krugman responded that the greenback’s global reserve currency status is not worth much to the U.S.

“I can’t see any way that … dollar dominance is worth more to America than a fraction of 1 percent of G.D.P.,” Krugman wrote in an op-ed published in the NYT.

The economist addressed the theme of de-dollarization and the “dire” consequences some argue it poses to the U.S.

Krugman blamed a specific “type” of the crowd for the hype. “Where’s this coming from? Much of it is from the usual suspects, such as the crypto cult, people for whom Bitcoin is the answer regardless of the question. Some of it, I think, is coming from Putin sympathizers, who want us to believe that America will be punished for, as they see it, ‘weaponizing’ the dollar against the invasion of — I mean, special military operation in — Ukraine,” he said.

He even pointed the finger at Tesla CEO Elon Musk for spreading the idea that weaponizing the U.S. dollar will destroy its reserve currency status.

Krugman vehemently disagrees with this premise. First off, he doesn’t view the greenback as in danger of losing its global dominance. And on top of that, the benefits of having this global reserve currency status are highly overrated.

Being the world’s reserve currency means that a big part of global trade is settled in U.S. dollars, dollar-denominated deposits and credit are widely available, and central banks hold a large share of reserves in dollar assets.

But does it really hurt the U.S. when China sets up a contract with Brazil and avoids the U.S. dollar as the settlement currency?

“A lot of what’s written about this subject begins with the assertion that the special role of the dollar gives America a unique ability to run a large balance of payments deficits, year after year, presumably because the dollar’s status forces other countries to accept our money,” Krugman said. “But even a quick look at the data shows that this claim is false.”

America is far from the only country able to run persistent deficits, he noted, pointing to Britain, Canada and Australia.

“It turns out that there are multiple nations able to run persistent deficits, and several have run bigger deficits relative to the size of their economies than we have. Britain, which has the deepest deficits, used to own a globally dominant currency — but the pound sterling stopped playing any important international role generations ago. The Australian dollar and the Canadian dollar have never been widely used outside their issuing nations,” Krugman wrote.

Another assumed advantage of the U.S. dollar dominance is that the U.S. can borrow cheaply because dollar bonds are considered safe assets.

On this, Krugman said that “it’s hard to tell because there are multiple factors affecting interest rates — and U.S. borrowing costs are not, in fact, noticeably lower than those of other advanced countries.”

The economist concluded that for the U.S., very little is at stake here, and the dollar’s demise reports are widely exaggerated.

“I’m almost reluctant to add that reports of the dollar’s coming demise are also probably greatly exaggerated,” he said. “The bottom line in most of this analysis is that the dollar is widely used because it’s widely used — that all of the various roles the dollar plays create a web of self-reinforcement, keeping the dollar pre-eminent.”

And even if more countries do opt to use something other than the U.S. dollar to settle transactions, the logistics are still unclear since these kinds of decisions largely impact the private sector.

“And even if they can make partial de-dollarization stick, all the other advantages of the dollar as a banking and borrowing currency will remain,” he added. “So ignore all the dollar doomers out there. Or better yet, consider what their hyping of a nonissue says about their own judgment.”