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More mistakes are made in political risk analysis due to the curse of wishful thinking than any other intellectual malady that afflicts the human mind.
I was recently watching a documentary about the fall of Richard Nixon, in which one of his lawyers expressed shock that the US Supreme Court had ruled unanimously that he had to turn over the presidential tapes to the Congressional investigation into the Watergate scandal. When asked why he was so surprised — the White House had already lost court rulings every other time the issue had been raised with the lower district and appellate courts — he ruefully commented that, when you live in a bubble, you give up reason and instead all too often indulge in wish fulfillment.
This intellectual fallacy has recently reared its ugly head in terms of a lot of fashionable nonsense that the dollar is about to be displaced as the world’s reserve currency. Typical are the recent comments of President Luiz Inacio Lula da Silva of Brazil, who boldly stated that every night he asks himself why every country must use US dollars to trade.
Looked at in isolation, such a view makes sense. No one is arguing, or could possibly argue, that over the past generation — at least since the days of budget-balancing Bill Clinton — successive White Houses and Congresses have covered themselves in fiscal glory. The utterly irresponsible Democrats, in particular, never met a spending initiative they did not like.
But the Republicans have not been any better. While the Democrats are reflexively for spending, the GOP has never met a tax cut it was not for. Less often discussed are the corresponding spending cuts that are necessary to keep the federal budget in balance. Both roads lead directly to the fiscal hell of trillion-dollar deficits as far as the eye can see. This, coupled with bank failures, declining productivity and a cost-of-living crisis surely must mean the dollar’s primacy — and that of America as the dominant economic force in the world — is coming to an end.
Well, no. For wish fulfillment is driving an awful lot of this dollar doom-mongering. Lula, as a traditional, card-carrying leftist populist, is (to put it mildly) no great friend of the US. More than anything, he is — like so many pushing the dollar’s demise — trying to wish the dollar away, rather than letting facts, unpalatable as they may be, serve as his guide.
First, the dollar’s present dominance remains indisputable. As the International Monetary Fund notes, the world’s central banks still hold about 60 percent of their international reserves in dollars, far more than any other currency. Even more impressively, fully 90 percent of international trade is conducted using dollars. There simply is no other peer competitor to the greenback, even on the far horizon.
There simply is no other peer competitor to the greenback, even on the far horizon.
Dr. John C. Hulsman
Second, and crucially, is the realist admonition that, in political risk analysis, you have to replace something concretely with something else. Currently, for all of America’s genuine and concerning fiscal follies, no other currency or country is rising to challenge either the dollar or the US’s central position in the global economy. The Japanese yen, the first challenger to the dollar put forward by the doomsday cultists cheering on its demise, is too small to be a credible contender, while its rapidly aging population is too old to reinvent itself as a dynamic economic alternative to the US.
The Chinese renminbi is not even fully convertible, which stops it in its tracks right there as being a putative challenger to the greenback’s supremacy. Given its looming property and credit card bubble, the country, which is also just recovering from the economic lunacy of its zero-COVID policy, last year endured its second-slowest year of growth in the past half century. Finally, China has yet to put forward any answer at all to its looming demographic crisis; it is far more likely to get old before it gets rich. No, this peaking power is not about to overturn the dollar’s long-time dominance.
Finally, the European David is nowhere near to toppling the American Goliath. With growth at its usual sclerotic levels and suffering through its highest inflation rate since the currency was established in 1999, the euro is far from representing a dynamic economy. Rather, this power in obvious decline serves as a salutary reminder to the rest of the world as to what decadence (the French are still protesting at having to work toward the end of middle age) and too much state regulation can do over time to even the most vibrant of societies.
So, the dollar’s demise is greatly exaggerated, based as it is on wishful thinking above all else. Like all apocalyptic prophets, being analytically wrong is unlikely to stop the doom-mongers from decrying the dollar’s end again soon. The simple reply to them should be this: “Yes, American policymakers have been shamefully, and irresponsibly, profligate. Yes, the dollar’s domination of the world, as history shows, will not go on for ever. But you can only replace something with something else. And currently no currency or country in the rest of the world, given their own ingrained weaknesses, is remotely near to overturning American economic dominance.” Like it or not.
- John C. Hulsman is the president and managing partner of John C. Hulsman Enterprises, a prominent global political risk consulting firm. He is also a senior columnist for City AM, the newspaper of the City of London. He can be contacted via johnhulsman.substack.com.