With long‑standing dominance of the U.S. dollar under pressure, this session explores whether global finance is moving toward reducing reliance on the dollar or reinforcing its role, examining the economic, political and strategic forces shaping currency choice and international trade.
At Davos, panelists debated whether “dedollarization” is real or overstated, concluding the dollar remains dominant but faces mounting, policy-driven risk. Kristin Forbes stressed that most usage metrics barely budged: the dollar is “about 88% of transactions,” still over half of global loans and debt issuance, and central bank diversification is the main area of decline. That reflects geopolitics: Jeffry Frieden argued confidence in the dollar is confidence in the US not “to use or misuse currency for political purposes,” citing sanctions, freezes, and rising threats to Federal Reserve independence. Kenneth Rogoff warned these institutional and fiscal pressures can trigger a 1970s-style “move out of currencies into everything else” (commodities, real estate) before any clean shift to the euro or renminbi.
Europe could benefit, Rogoff said, if it builds the “rails” and back-office infrastructure to reduce reliance on US-controlled payment plumbing. But Frieden noted barriers: the eurozone still lacks a unified safe asset. Forbes highlighted a market “disconnect between demand for dollars and demand for dollar debt,” a potential early warning. Stablecoins may “reinforc[e] the role of the dollar” for transactions, yet panelists cautioned that financial controls or taxes on foreign capital could permanently damage trust: “It takes 50 years to build up a reputation, five weeks to ruin it.”
Sometimes when you're a journalist, you prepare something for a while, and then global events shift and you walk into your they shift in your favor, I should say, and make your piece more relevant. And you walk into your boss's office and claim the credit for your brilliant foresight about how the world is going. And in that spirit, I'm going to take all the credit for being sitting here in Davos today, talking about the future of dollar hegemony when the global order is shifting beneath our feet as we speak, with what's going on, when financial markets are reacting to that, when, the US Treasury secretary says the head of Deutsche Bank has called him to disavow a report on how many dollar assets European investors might dump. It's incredible, incredible timing for a panel about the future of dollar hegemony. And we have brilliant people here to discuss it. Of course, the flip side of that. Good luck. Is that anything you say on this subject about the future global order could go out of date in about an hour and a half, when President Trump stands up and tells us, where it's where it's all going. But you could not ask for better experts to discuss our topic of the dollar. With furthest away from me, we have Ken Rogoff. Ken is a professor at Harvard, former chief economist of the IMF, the author of many books, including one recently specifically on the dollar. Next to him, we have Jeff Frieden of Columbia University, who is also the author of many books and an expert on the intersection between politics and international economics. And closest to me, we have Kristin Forbes of MIT, who has held many prominent public policy economics positions, including as a central banker, and also has written a book recently about central banking. So where I want to start this is on the geopolitics and the terrain that is shifting as we speak. And Jeff, I'm going to start with you. Do you think there is a line to be drawn between what America is doing with respect to Greenland and tearing up the international order in that respect, and the future of the dollar in the financial system?
Absolutely. I think confidence in a currency is also confidence in the government that issues the currency, not to unduly allow politics or geopolitics to interfere with the use of the currency and monetary and financial stability. And that obviously comes into play when there are tensions among the major players and when the government may have an incentive to use or misuse currency for political purposes. And then on an even more direct way, what we've seen over the past year is not only in the Trump administration, but but for the past 15 or 20 years, is the use of the dollar and the dollar based financial system for geopolitical purposes, for sanctions, for asset freezes, for things along those lines. So the geopolitics obviously has a major effect on whether people think the dollar is a safe place to keep their money, and whether they think the US government is going to safeguard the dollar's, the dollar's value and its use in the future. And all of those are directly implicated by both the more immediate geopolitical characteristics of the government's position and the state of the international economic order, such as it is.
Kristin, when I used to, I used to when I talked to investors last year when the protectionism first started coming in from the Trump administration, a lot of them would say, yes, walls are going up everywhere, but the American economy is so strong that you'd rather be inside the wall than outside. Now, I'd say with what's going on, it's a little bit less clear that American hegemony isn't going to be undermined in a more costly way. How do you see the links between what the Trump administration is doing and, and, and the dollar's dominance?
Yeah. So clearly, if the US economy is a less important role in the global economy, there's going to be less demand for dollars. But I also think we need to be cautious. I agree with everything you said, Jeff, on what is sort of supported the role of the dollar. But there have been a number of periods throughout history we've talked about the decline of the dollar. I think one of the most common phrases you hear in these types of discussions is Mark Twain's famous quote, that my death has been greatly exaggerated, and I think that applies to the dollar. You know, Jeff can tell us about other times in history. We've had similar discussions, including last spring. But when you look at what has actually happened to the use of the dollar, most metrics, it has not declined that much despite all of these concerns. Look at dollar share of transactions. It's about 88% of transactions. Dollar is 15 to 25% of the global economy based on what measure you use. But US dollar is over half of global loans. It's over half of global debt issuance. It's well over half of invoicing for trade. So the dollar is still dominant. Its share has not moved much except in one measure, which is the one that often gets the most attention. And cited is is a share of FX reserves. So central banks, sovereign wealth funds that hold FX reserves, they have decreased the share of dollar holdings. And, you know, partly because of all these concerns and partly because of just geopolitical risk, they don't want to see those reserves locked up and have no access to them. But I think that really highlights a really important point. Governments are going to be more cautious about holding dollars because of these geopolitical concerns. That's the one area we've seen a decline. But the private sector, they just want to keep doing business with the most liquid currency and with whatever's cheapest. In the US, dollar is still the most liquid market by far. There's no close replacement. So that's where I think there will be a gradual shift, especially in any transactions demand for the dollar related to governments because they're the ones most cautious. But just for day to day transactions, it's hard to see a rapid shift despite all of these very legitimate concerns.
That's a good point. I wish to bring Ken in because, Ken, your book acknowledged all those points that Christine made about the existing dominance of the dollar, but did contain quite a few warnings and also was written mostly before the events of last year. So how have you adjusted your views based on what's been going on?
Well, I actually think the dollar has been in. It goes in ebbs and flows by measures. You look like in the 70s it went down by a lot of measures. It did went way down in the 30s it was still competing with the pound. And actually it really only colonized the whole world outside of Europe after the global financial crisis. And I put it as peaking about 2015. And I think actually by quite a few measures, another one being how central banks set their foreign exchange, their foreign exchange stabilization policy, the dollar has been in decline for some time. We can come back. We can come back to that. These things don't move quickly. It's not like, you know, suddenly it changes overnight. And the part of the reason for that is you need a banking system, a clearance system that doesn't run through the United States being not just the major currency, but the major military power. Very, very important, has given the US outsized share of the bargaining over how the IMF works, how swift works, how everything works. And the Chinese recognize some time ago and they're moving. And believe me, this will happen on developing their own way of doing international transactions using modern technologies. The Europeans were sort of they don't like the US being so dominant. They're sort of moving along. I think Greenland is a watershed moment in this. I think we'll see an acceleration of the euro. And just finally yeah, it's efficient to have one currency. It would be efficient to have one AI program. It would be efficient to have, you know, one Amazon. But in a political world, Europe shouldn't want that. China shouldn't want that. And I think that's not where we're headed. And Donald Trump has greatly accelerated that process.
So an acceleration of the euro. Lots of people here who are very pessimistic given what's going on, I'm sure would be delighted to hear you make that prediction. When you say that, do you mean we could start to see some of the other metrics that haven't hitherto moved on dollar dominance move? Or do you mean the euro is going to accelerate in other respects?
Well, I mean, the big one is the euro needs to develop a part in the jargon, the rails of doing transactions. It's the back office. And it hasn't done that. It hasn't sufficiently done that. But it's not hard to do, especially with new technologies, even without new technologies. And I mean the fact that we control everything American lets us do sanctions on the Europeans, famously in Iran. But more things are coming, not just that it lets us spy on everyone. It gives us a tremendous amount of information. I think European financial leaders are well aware of this. The public is not, and they're starting to worry about it. So, just because, you know, Europe slowed down its growth, I think Germany will pick up. It will pick up. It doesn't mean this process won't continue going on. And again, if you didn't need to be told that you can't just depend completely on the United States. You know, we're speaking in advance of the president. I don't know if we're going to see in this backdrop American troops entering Greenland, but I think this is a real wake up call. I've never seen the Europeans so angry, apoplectic, as I have this year at Davos, I don't think I think if you're in a negotiation in Europe about what should we do? You're getting nervous. Somebody says Greenland, I think it's really going to make a difference.
Jeff, what do you see as the as the future of Europe now? Do you agree with Ken that there are actually elements of opportunity here?
I think there is an opportunity. I guess I would let me take things in a slightly different direction to say everything that, that Christine and Ken have said is absolutely right, that the US control of the financial system and of the back office, so to speak, of the dollar system is absolutely crucial, especially in a geopolitical sense. But there's also the politics of monetary policy itself. And part of confidence in a currency is also confidence that the monetary that the currency will remain a stable money, and that the monetary policy of the issuing country will not again be unduly influenced by political concerns. And I think we are now in an environment in which there is a real threat to the independence of the of the fed and a real threat to the notion that monetary policy is made by monetary authorities and not by sitting politicians. And that, I think, will also contribute to an erosion of confidence in the dollar and a move away from it, not only by, official reserves, but perhaps also by some private agents who may be concerned about the future of the dollar, which about which a lot of people are bearish, including me. So given what's happened politically. So I think that that that's the backdrop. Can the euro rise to the occasion. It hasn't it could Greenland and the past year have been a wake up call. But there are major barriers to the euro to the eurozone actually getting its act together enough for the euro to really be a challenger to the US dollar, both in the back office sense and even in the sense as a safe asset that private actors and governments would want to hold.
Ken, you want to.
Come in just one quick point. You don't have to rush out of your treasuries into euro. You can rush out of your treasuries into real estate, into commodities. That's what happened in the 70s. US interest rates go up so that whether or not there's a transition period, if you're concerned about the United States, it creates a lot of problems for everybody. It doesn't have to be that it bids up the euro. Yeah.
Christine.
Just jump on your question of is this an opportunity? I think this is an opportunity for two very different reasons for the rest of the world. One is US policy and one is technology. Let me take each so US policy. If you hit a list of what to do to undermine the value of your currency, the US is doing most of the things on that list, you know, undermine the independence of your central bank check, have inflation above target for five years in a row? Check. So you are changing the rules of the game. Rules. Rules around. Yes, check. You could run a large debt deficit. So you worry about the stability of the debt undermining the currency check. So so the US is providing the opportunity if someone else can step in with some viable alternatives and at the same time. So that's one side. At the same time, technology is potentially creating some exciting opportunities. You have digital currencies, you have bitcoin stablecoins, you have this whole gamut. You also have focusing on the pipes. I think it is also very important to differentiate between currencies and the pipes through which different currencies flow. There's a lot of experimentation there. The Enbridge, the ice bridge, the lots of cool names. But what's interesting is we don't yet know which ones are going to work and be adopted. I think we've seen some countries experiment. El Salvador was really early trying to push to use Bitcoin. And you'd think remittances for a country that really doesn't have its own currency, this would be a natural place for it to take off. And only about 1% of transactions are now being using these bitcoins that have gotten a lot of attention. So I think there's a lot of great ideas out there, but we don't yet know which are the ones that are going to take off. And that's where it's really interesting. And different regions are pursuing very different strategies. You've got the digital currency in Europe, you've got stablecoins in the US, more attraction to bitcoins and some other countries and all sorts of other discussions. So opportunities there. But a lot of question marks about which will be the model, which are any going to be viable alternatives.
So I want, I want to come back to stablecoins, but I wonder if we can first just focus in on the central banks question a little bit, because I think everyone would agree that independent central bank. You've all said it, if not on this panel, then elsewhere is very important feature of, issuing the global reserve currency. Of course, we've had this incredible campaign against the fed. Now, there's a case at the Supreme Court. The Federal Reserve has been issued with subpoenas. Ken, you wrote that central bank independence, if it is lost, would result in us returning to the macroeconomic stone ages, i.e. the 1970s. Now that there's been such an assault on the fed, what do you think the danger is to the dollar's position from that?
Well, I signed a couple letters on this, but one recently with, all the recent Federal Reserve chairs and, Treasury secretaries and stuff. Just saying how serious this is. And hopefully the Supreme Court will, uphold that. That fed independence is important. I don't know if they will. I just want to I do think Trump's going to take substantial control over the fed, directly or indirectly. He's willing to do anything. I think the Powell, subpoena was directed not at Powell, but at the other governors. Powell was actually a fairly wealthy person when he entered the fed. He can pay for a lawyer. If you're an academic, like Jeff or myself or Kristen or, your Ben civil service a long time, which many of the bank presidents and central bank fed governors have been. You you have to fold. I mean, it's like in America, when you get sued by a rich person, you know, you have to try to find a compromise. So it's a directed at them. And I think there are other ways that he's undermining independence. That said, it's not the end of the world overnight. These things are slow burns. They don't move quickly. We're not going to get hyperinflation. But even hyperinflation doesn't move quickly. But yeah, it's it's one of many, many things where an erosion of public confidence, erosion of our institutions, I think, is going to have profound long term consequences. But, you know, when I let's let's just say he appoints Donald Trump Jr to be fed chair, maybe he'll announce that in a, in a shortly, we're not going to get 10% inflation overnight. I don't even think interest rates will necessarily move that crazy. But give it some time.
So I just want to dig into this question of the dynamics. If there is a crazy situation, maybe not Donald Trump Jr, but capture of the fed in what is an indebted economy with institutions that people are beginning to question because, what what while it's true that, the position now is very strong, some people have warned that there can be run like dynamics when you have transitions from one currency to another. And indeed in history, the believe once the transition is underway, the evidence is that it can happen very quickly. So so what do you think, Kristen, if things went really crazy on central Bank independence, you know, how bad would it get?
So if there was a viable alternative, I would be very, very worried. But right now, again, it's hard to see if you want to run out of the dollars. Where do you go? And that's where you see the central bank diversification that has happened. We've seen some of the biggest movement out of dollars. A lot of it is not into one you see a little bit, but the increase in the one share is still pretty tiny. What you see is an increased diversification into dollar like currencies, into Canadian dollars, Australian dollars, New Zealand dollars, Korean one. Other currencies that are like the US in some ways, but those currencies just can't absorb a huge outflow of dollars. You're going to see their currencies appreciate that's going to create domestic problems. So yes, I think I worry more about the slow bleed scenario. And also just one point on central bank independence that I'm puzzled. This hasn't received more attention. The main reason you give central banks independence is to keep inflation low, stable prices. That is what led for the support for Volcker to raise interest rates very high, create a lot of pain. It was because of concern about inflation and the price level and interest rates. If you pull Americans today, one of the biggest concerns is cost of living. So there's some some misperceptions around inflation and whether prices will go back to where they used to be, all of that. But I would think for someone worried about elections, the most the biggest frustration of your voters is the cost of living. And that feeds through into high interest rates. One way to target that or deal with that is to have an independent central bank and show your tough on inflation, and instead he's going the opposite direction. So that's where I hope the discourse could change at some point. I'm probably being optimistic, but.
Well, that's a really interesting point though, because there's a lot of fatalism about the direction in which the world is going are stemming from the rise of populism and its apparent appeal. But, of course, that's correct, that the number one complaint of voters at the moment and the bane of incumbents everywhere, is high prices. So, Jeff, do you think there's a there's a fundamental point there that that the politics actually might point you back towards independent central banks?
Well, I think the, the original arguments like Ken's on Central bank independence pointed out that what you're trying to avoid is a politician using, monetary policy in the run up to an election. And that, I think, is the incentive that the Trump administration faces saying, yes, there's concern about inflation, but 2.7%, not that big a deal. But if we face the possibility of a recession or a big increase in unemployment, then we're in trouble. So I think the the problem faced by those who support central bank independence is the politicians, always, in the short run, want to in the long run, they love it. In the short run they want to avoid it and override it. And that's what's happening here, I think. Now, can I just also say it's not only about monetary policy, it's also about confidence, especially given what some members, current members of the Fed Board have said. It's also about confidence in the debt of the US government. The, the there there have been proposals floated to effectively expropriate holders of Treasury securities. There have been proposals floated to change the way the Treasury market works. And I think that feeds into concern about the safety of the safest asset we now have, which is US treasuries. So it's not only about monetary policy, it's also about the Fed's role in helping safeguard the true value of of of the most important financial asset in the world.
Ken, I should give an I pushed back on your point. I should give you right of reply. Isn't it the case that the network effects behind the dollar dominance can go into reverse? And actually things can start to. Well.
I think I think it actually the big point is that if you're the world's largest debtor and you're very dependent on pushing a lot of currency out there, then a generalised move out of currencies because of loss of confidence, that's what happened in the 1970s. It's bad for everyone. It's particularly bad for the US dollar. For American taxpayers. It's going to push interest rates up. Inflation will be higher. So I think I think I do this carefully in my book, actually, of what the immediate concerns are in the longer term, before you get something else, you get this devolution, if I want to call it, of the dollar regime, where I think it's quite possible within 4 to 5 years on the track, we're on with central bank independence, with our debt and our political unwillingness to deal with it. There had been this belief among progressives, and many others, that interest rates would just always be zero. And debt was a free lunch of otherwise. I wrote my book before I knew who would win the election. I thought Harris would go in a wrong, a different, wrong direction. So that's what happens. First, it leads. We lived in a world of, you know, Pax dollar. Like it was just good for everybody. And that's part of why everybody stood for it. I hate to say Pax dollar, but I don't know what else to say. You know, we live in this world where you just wish the United States didn't have so much power and what to do about it. There's nothing you can do about it quickly. But, you know, in the near term, it's not that you rush into Euro or certainly RMB, you just looking for metals, you're looking for real estate, you're looking for where to put money. That puts pressure on interest rates. We are by far we, the United States, are by far the world's biggest debtor, also on the private side. And that can lead to all kinds of problems.
But there are Christian, of course, to your point about the lack of alternatives. You know, Europe especially has its own problems with public debt, not perhaps so much in aggregate level, but concentrated on, individual countries. So what do you see in terms of the role of public debt in this.
So a couple of points. So first public indebtedness is definitely important. Large public debt market especially if it's very liquid. That has been part of the demand for dollars. So very important. But what I think is very interesting that's been happening recently, that hasn't gotten a lot of attention, is there has been a bit of a disconnect between demand for dollars and demand for dollar debt. There's a really nice paper by Wen-chin do and Jessie Schrager, where they use a number of different financial market measures to show that demand for dollar debt has decreased. The convenience yield on dollar debt has fallen quite a bit. People don't want to pay as much to hold dollars. They don't put as much value in the liquidity that it provides, but they haven't seen the same move out of dollars by these financial market indicators. So it's a really interesting disconnect. More concern about dollar debt, not so much about the dollar. And there's a real question how long can that last. Maybe for a while. These things often go on a lot longer than you think. But then they can suddenly end faster than you think. The old Rudi Dornbusch principle. So for now.
We see your supervisor. Yes, yes, yes.
So so that's just one interesting issue. There seems to be this disconnect opening between demand for US debt and US dollars. Again, how long will that last, and is that a risk that we need to watch. Then so other alternatives, say RMB is always pushed is one option. Chinese have been supporting more international role of the RMB. But the big challenge is if you get more shift into RMB, not only the privacy issues, which you mentioned earlier, if you're worried about the US watching your transactions, I'm pretty sure the Chinese are just as good at that. But also, if there's a big shift into RMB, you're going to get a big appreciation of the yuan. And right now all China wants to do is export to support growth. So there's a real disconnect there. So then back to other options. Europe is the one, area that could pick up some of the slack. But the key as you said, it's a lot of different debt markets now. So one solution, if they really are feeling pressure unlike they have before, would be to talk more seriously about mutualisation of the debt, create one sort of big Eurobond market. There's a lot of discussion about that. About a decade ago during the euro crisis. I think it's time to look back at some of that work. The red bond, blue bond. There's all sorts of creative ideas out there. If Europe is really worried, if they really want to reduce, reliance on the dollar, that is one option that should be on the table.
Ken, did you want to come in? Yeah.
But just to come back to the big issue is not the move out of dollars into RMB. It's the move out of currencies into everything else. If we if Donald Trump conquers the whole world, he's got three years. And the dollar is everything and it's US debt. It's US dollars. You can still have a very high interest rate because people don't trust it. You can still have inflation because people don't trust it. You know, I wouldn't I certainly wouldn't take false confidence if I were the US Treasury in the fact that the euro is still, you know, European leaders are still floundering to think we can do whatever we want. Our debt has increased massively relative to GDP. Interest rates were zero on average. Real interest rates, I'm sorry, from 2010 to 2022. They are not. They've gone up 2% at least since then by some measures more. That's the immediate issue. That's what you see over the transition and that's, you know, part of the step process by which other currencies could do better. But it's not immediately it's not. You framed it and there's often a rush out of one currency to another. That's not true for the dominant currency. It's a long, slow process. But having these episodes is part of what drives the eventual change.
Could you not think that, say, Europe got its act together or China liberalized its capital account? Do you think even in those scenarios you wouldn't have a have the potential for a run like dynamic? Because there have been researchers who have who have warned of those sorts of things in the so-called, I believe it's called the new Triffin dilemma.
Yeah. I mean, so, you know, the Federal Reserve can buy up all the debt. I mean, I think the literal run on US debt, really an inflation issue, like in the there was this great economist from Yale who backed when the dollar was on gold, said there's not enough gold. And eventually people start turning it in and blow up. And he was ten years ahead of his time when he said it. But Nixon came along, and that's where the title of my book comes from, our Dollar Your Problem. But in this era, I think that's a little overblown. The new Triffin problem. If you think you have an independent central bank and you really can't do anything about it, which I don't know is ever the case, then you really have a problem. If you really believe inflation is always going to be 2%, we have allowed, you know, someone who's just has a religious conviction about that, a moral conviction. It can never have inflation. Oh my goodness. You know, we would have we would have runs much sooner. But in reality you can have inflation, you can have financial repression. Jeff mentioned default. You really think Donald Trump would be above putting a tax on foreign investors. You know, doing something. You've got to be kidding. I mean, he's he's the second coming of Richard Nixon. I know that's a little unkind to Nixon, but, you know, it's it's you know, Nixon was, you know, really willing to do all of these things. And of course he would. And by the way, you know, in some circumstances it's the right thing. But no, I think we're in a just a different world than our preconceptions from before.
Okay. So, I'd like to move on to discuss the stablecoin, point now because, of course, our entire conversation hitherto has been about the, the potential for transition away from the dollar. But the US administration hopes that stablecoins are, in fact, going to reinforce dollar dominance by making it so easy for everyone, wherever you are in the world, to open your app and and and hold the dollar in a way that you might not have been able to do, with a bank account. Jeff, do you have a view on that? Could stablecoins, have the, properties of something that could become a sort of reserve currency of sorts.
Not a reserve currency. They're very valuable for transactional purposes. So it's like the vehicle rule of the dollar, which has a tremendous amount of persistence just because it's been used by everyone. 90% of foreign exchange transactions and stablecoin could play that role. It's an extremely efficient, very rapid. I believe it's being used more and more in remittances, especially in Central America. Not not the Bitcoin in El Salvador, but it's very commonly used in remittances. So I do think it could get greater use. I don't it's not an alternative currency. What it is is essentially in in the form that you're talking about. It's reinforcing the role of the dollar that does as I mean, relevant to what you were saying before about some of the other currencies. It does lead to an appreciation of the dollar, which the administration doesn't want. So there's that conundrum there as well, which could lead to the kinds of capital controls or interference with the mechanism that Ken was talking about. I think that one of one of the issues this is related to stablecoins. One of the issues that I think is on the horizon is direct intervention in financial markets to because a government that intervenes as directly and systematically in trade, as the Trump administration does, is not going to have any compunctions about intervening in direct investment, financial flows, other capital flows and stablecoins are part of that conundrum, part of using them as part of that conundrum. But I think there's on the horizon will involve much more control or much more attempts to control, and many more attempts to control capital flows into and out of the US.
I just want to echo that was one of the points I wanted to make, is we talk a lot about trade and new restrictions on trade, and what worries me is that this is a government that is willing to rethink all the rules of the game that we thought were pretty fixed in the next set, that I think will be under potential modification are going to be some of the financial taxes, financial tariffs and financial transactions, especially as yesterday, we heard Denmark might want to sell its US Treasury debt. We started to hear more talk like that. You're going to start to hear more talk by the US government about changes in rules and restrictions.
And and it is also related to trade because if you reduce the trade deficit, the administration keeps talking about reducing the current account deficit and increasing capital inflows. Well.
It doesn't.
Add up. That doesn't work. So what they really have in mind is controlling the capital inflows to put them in a direction that they want to control, that they want that they approve of. And I think that really, again, raises questions about how much confidence foreign investors and other governments will have in the American financial system.
In the.
Opening shot. I agree with all this, but one small thing last year when I was here, everywhere I was going around saying, you know, if you want to think of some out of the box things that might happen, price controls, like when we got inflation, of course we'll have price. Nixon did that, Jerry Ford did that. You know, and I still think we're starting to actually see, some movements. But when inflation picks up to three and a half, 4%, it seems to be hurting ratings. You know, I wouldn't be surprised to see anything.
On the financial controls. One, there was one announcement in December. It didn't get much attention, maybe because it was December and there was a lot else going on. But the IRS proposed changing how it taxes sovereign wealth fund investment in the US. That's sort of an opening shot. I think what could happen and that could affect will affect a sovereign wealth fund, willingness to invest in the US. And it will probably be a wake up call to others, even for stablecoins. There could be changes in the rules of the game. And there's also some nice academic work that shows that when you're a country, if you put these types of taxes on, even if then you get a new government in, you delete them all. Go back to your starting point. People remember you have a stigma. And so that is a longer term risk of if we go down this path in the US now, put on some taxes changing how financial flows into the US again, even if they're taken off, it could raise the cost of external capital for years afterwards.
Do you think it's clear what the administration actually wants? I mean, Jeff said the administration wouldn't welcome a strong dollar, but it seems that there are definitely camps within the administration with radically different attitudes to dollar hegemony. So, you know, these proposals get floated by one element or leap from one part of the administration. And then the sense is that it's not the case at all that everyone's on board with that. So I mean, how much should you wait? Maybe Jeff, seeing as you made the comment.
Every administration, like every American political party, is made up of factions. The trade policy has 3 or 4 or even five different, somewhat inconsistent goals, and they can't all be achieved at the same time. The same thing is true about monetary policy. I think there are people in the administration that probably would would welcome a relatively strong dollar, but those who are concerned about the current account deficit and about Reindustrialization definitely want a weaker dollar and have achieved one. I think just a point on what you said a lot. This is not a, a lot of these things. A lot of what's happening now are not reversible. You know, it takes 50 years to build up a reputation, five weeks to ruin it. And any investor and any foreign government is going to look at what's happened over the past ten years in American politics and say, even if Donald Trump is not in office, what's going to happen two years from now? What's going to happen four years from now? We now know that the US can be an extraordinarily volatile polity, and its policies can be as volatile as any major economy has ever seen in modern times. And that changes expectations. The way countries interact with each other is based on expectations of behavior, not on rules. The rules help determine the guardrails, but it's really expectations of behavior. And this administration has violated the expectations of behavior of virtually every other government that it's interacting with. And that is very hard to walk back from.
One question from me, and then I'll go to the room. One last one. Let's say we're in Ken's world of this slow transition rather than anything that looks remotely sudden. What are the favored metrics we should watch for seeing that that going on? Are there 1 or 2 that you'd pick? And Ken, I'll start with you.
Well, I actually central bank policy I would say is the single portmanteau measure of what's going on in the economy. What exchange rate are they looking at? How are they trying to manage their exchange rate policy?
Kristen.
So I look at some of the metrics I started with, not what people are saying, but what people are actually doing in business. So what currencies are people using for trade? What currencies are they using for FX transactions? Look at relative cost of financing debt in different currencies. Just look at what is actually being priced in markets, not what people are saying.
Okay Jeff, what do you watch?
And since I'm less interested in the transactional purpose, I'm looking more at what governments and private agents are doing with their investments. How many of them are denominated in dollars, how many are in treasuries or something else?
Okay. All right. Do we have any questions in the room for our, great panelists? Yes, please. I think Mike will be brought to you. Yeah. I think wait for the mic, because we're being broadcast. Please. Thank you.
Thank you. My name is Nonkululeko from central Bank Group in South Africa. So very, very sort of peripheral to the discussion, that we've had, although that was fascinating. My curiosity and anyone can take the question is if we had a member of the current administration as one of the panelists and they were posed the same question that you started with, how would they be seeing the world vis a vis the one that you have sketched? What is it that they see that we don't?
I can take a stab. I was just on a panel with, Secretary Lutnick, so I heard it firsthand. The US is the strongest economy in the world. It has great potential. It is just good, I think 4.3% over. I don't know what his time frame was last quarter last year. It's expected to grow faster next year. We are the place where a lot of exciting things are going on, so people are going to want to invest in the US economy, major economy, largest major economy growing quickly and that will support demand for the dollar.
Irrespective of policy.
Again, I'm channeling him. But no, but that is the I mean, there is I think in this policy there's a lot that we can certainly criticize. There are some things they are doing that is good for supporting growth, at least in the short term, and a dynamic economy that is growing quickly with investment, fiscal stimulus supporting it, you know, long term problems building up. But at least over the next few years, they are very excited about the potential for economy. And that is where as a business you would want to invest. And that means you're going to have to use the US dollar.
Jeff, do you want to comment on that?
Is that a good impersonation?
I think I think that's exactly right on target. I think there's a lot of resilience in the economy. And the real the real benefits of the US are the real attractions of the US allow for a lot of what we might consider to be irresponsible policy or policies that, I suppose, the administration would say are pursuing their strategy of rebuilding America. So you don't like those policies? The US is a very strong economy. We're pursuing policies that do things that we think are really important, and it's not going to interfere with the underlying strength of the US economy. I think that's their general view.
Yes. There's another question at the front here.
Hi, Chairman Bruegel. So, I thought that the US was unique among advanced countries in not only having a very large fiscal problem, but just not acknowledging it. Right. So in Europe, there's some countries that require comparable fiscal adjustment, but they tend to be worried about it and at least, you know, say they want to do something about it. Now yesterday I was in in the session with Scott Bessent where he said actually said something that surprised me that sounded rather French to me in both senses of the word good and bad. So he said, well, not only have I brought down the inherited deficit by over 1.5% of GDP, which I think is an exaggeration, but we will bring it down to 3% by, the end of this, this term. And so maybe there is actually a plausible fiscal strategy out there that works on the deficit, but also works on increasing demand for T-bills, which is, of course, the other way you can interpret the stablecoins, not just additional demand for dollar cash, but they need to be backed by T-bills. And that is certainly one of the stories. So in your view, does this somehow hang together? Is there sort of a benevolent interpretation of what might be going on in the administration? This was a bit inspired by by your, your approach, Ken.
Well, I mean, he's the US Treasury secretary. What is he supposed to say? You know, like, boy, if you saw what our plans are, you'd be, you know, bidding up interest rates. And so, of course, he's, But, yeah, I mean, there's a lot they have a lot of optimistic calculations. Maybe they'll prove right. There, you know, I think a thing that's a little hard to measure on Trump is that there are a lot of things he's doing that are short, maybe in short, to medium run. Good for the economy. I don't want to say broadly, but disastrous longer run. Actually, I think the way they've rolled out stablecoins is an example of that. But, let me pick on the deregulation of AI, which lines the streets of the promenade here. I think we're making a historic mistake not to put some guardrails on AI, just use the things we tools we have like copyright, intellectual property rights. Let people sue them, slow it down. And instead, you know, he's put out an executive order promising them complete protection. Well, of course, they're investing a lot when they believe they have many years of protection. But I look at the damage that social media has done. I think AI is tenex. You know, I look at unemployment that will be created by moving AI too fast without having the ability to adjust to it. I think AI could be a large multiple of what we saw with globalization. This undermines the middle class, spills over into politics, etc.. So some of this short term joy from let's just deregulate everything. And I think we see problems, you know, with the, the bottom 50% for sure. Maybe 75% aren't really benefiting from all this, of what the long term stability is. But, you know, he's trying to get through the midterm elections and maybe it'll work. But yeah, I mean, it's Scott Bessent very impressive person. I've been you know, I've no question about that. But it's his job to lull you into buying the bonds, as are all the finance ministers and presidents that are walking around here trying to get you to buy their bonds.
Yeah, I mean, he does seem to be doing a good job. Are you surprised that there hasn't been more of a reaction in the ten year bond yield, to to what's happened. And you know what there what there has been he was blaming on the moves in Japan.
Well, I mean, long term real rates are still pretty high. And, you know, we could get off into it. But yeah, I mean, you know, interest rates, they think interest rates can come down a lot. I don't think so. I mean it's a short answer. And if they don't come down a lot then his 3% is a pipe dream.
You want to.
You want to hop in. So I think we all know the Matthew. If AI delivers on its promise raises productivity growth. We can run larger deficits and debt. But having said that, if you put some numbers in, even if you're pretty optimistic on the benefits of AI, it's hard to see that still being enough to make the debt look like it's on a sustainable path in the US. But I want to just broaden the conversation a little. We all tend to focus on the US government debt and deficits. That's the natural one, gets a lot of focus. But there's also this other debt that we don't spend enough time on. And since this is an international room, I just want to put it on the table. It's the US international investment position and IP. So that's basically what the US is as a whole borrows from the rest of the world. It's not just the government debt, it's also the debt of the financial sector of companies and households. And we all know we've seen through history, when you have a crisis, the government often assumes debt of the sector that gets in trouble. So I think it's useful to look at overall debt, not just the government debt. Look, again, financial sector in particular, and look at what's owed abroad because that often is harder to pay back and the adjustment is harder. And if you look at that debt position in the US, it's grown even faster by some measures than the US sovereign debt. And I don't think we've talked about this enough. US and borrowing from abroad is now 90% of GDP. It's almost doubled in about five years. I mean, that is a rapid growth in what it owes the rest of the world. And when you look at it as a share of global GDP, it's about a quarter of global GDP. We have never had a country with that sort of international debt relative to global GDP. And just to put it in context, the big surplus countries, the creditors are Japan and China. Their surplus position is 3% of GDP each. We're 25% of GDP. So there's this huge global imbalance. This is part of global imbalances that are feeding a lot of protectionism. And I think that's a debt that has to adjust to and probably sooner than the US sovereign debt. And when you think about how that's going to adjust, a big part of it is probably going to be a depreciation of the dollar. That's a way to sort of clear it out pretty quickly. It's how the UK has reduced its international position a few times and a big depreciation around Brexit in 2008. So that's I think something coming. The other big factor behind this big increase in US exposure is equity markets have done so well in the US. A lot of the dividends returns are going abroad. So if the US equity market adjusts and falls, that will also be big spillovers. I think the rest of the world hasn't quite appreciated how much they have gained is the US has borrowed so much more from the rest of the world, shared its gains from its equity markets. I was just looking at some numbers recently, and there's a number of countries like South Africa or as governor just left South Africa to Canada, to Hungary, Norway. They've all gained over 25% of GDP of transfer from the US to them over the since 2010. So huge transfers of wealth from the US abroad as the US's borrowed more from abroad or taken investment, that's got to adjust to part of it's going to be depreciation. And I think that adjustment is going to have some big spillovers. We have not fully processed or internalized ready.
For so very confident in dollar dominance, but predicting a depreciation of the dollar. That's a nice bold prediction on which to end because we are right out of time. It's an absolutely wonderful discussion. Please join with me in thanking our panelists.
Thank you.
So reminiscent of the run up to 2008, of course.
Well.
It was different. Yeah.