The U.S. dollar is the cornerstone of the global financial system but is facing a crisis of confidence from decades of reckless fiscal and monetary policies. If this continues, the dollar could soon lose its global reserve currency status. Global competitors such as China and Russia are taking advantage of these reckless policies, further threatening trust in the dollar.
Confidence in a currency is only as strong as that of the institutions issuing the currency. In the dollar’s case, those institutions are the federal government and the Federal Reserve. Both have been irresponsible in their respective fiscal or monetary policies, and the ramifications of their mischief for the dollar would be a weaker economy and higher inflation domestically and a reshuffling of economic power globally.
Since early 2020, Congress has added more than $7 trillion to the national debt from massive deficit spending. Congress financed this by issuing U.S. Treasury securities, crowding out investments like private sector equities and bonds. Additionally, net interest payment on U.S. debt is about 8% of the federal budget and increasing rapidly. Interest expenses are expected to exceed spending on national defense or safety nets soon if Congress fails to rein in excess spending.
While the House Republicans’ bill to raise the debt ceiling and cut spending is promising, it’s unlikely to go anywhere with Democrats in charge of the Senate and the White House.
Since the early 2000s, the Federal Reserve has held its target federal funds rate too low for too long. And in 2008, it started purchasing longer-term Treasury securities and other assets, known as quantitative easing.
The Fed operates under a dual mandate of encouraging stable prices and pursuing full employment. It violated the former part of the mandate through asset purchases that fueled inflation. It now violates the latter part of the mandate as it crushes employment with quantitative tightening and the resulting higher interest rates, hence what’s known as the “boom-and-bust cycle.”
These violations, combined with its early incoherent messaging on inflation, erode confidence in the Fed’s monetary policy prowess. And this is far from a domestic concern, as global trade partners see the writing on the wall and are acting accordingly. And if confidence in the dollar continues to wane, so will the Fed’s ability to conduct monetary policy effectively by not being able to substantially influence market interest rates.
Recently, the Saudi Arabian government approved partial membership with China’s Shanghai Cooperation Organization. This is part of China’s strategy to expand its influence beyond the West. China conducted its “first major lNG sale in renminbi instead of dollars” and made Brazil its main trading partner instead of the U.S.
Other countries are also beginning to move away from the dollar for international transactions.
Countries across the globe know the U.S. is in economic trouble and are changing the way they do business. We should react accordingly, beginning with ending these government policy failures weakening the U.S. economy and the dollar.
First, we should address excessive fiscal and monetary policy discretion by Congress and the Federal Reserve, respectively.
This can be achieved by rules-based policies, such as a strict government spending limit for Congress and the Taylor rule for the Fed. Doing so would reduce the costly mountain of debt created by Congress and the monetary mischief by the Fed, helping to provide confidence in the economy and dollar.
Second, the U.S. should eventually move off the fiat currency system eventually.
The dollar should be backed by real assets like gold and silver. Reimplementing the gold standard or something with underlying value from productive use of capital and labor, making it more attractive to domestic and international investors.
Finally, the U.S. must take international trade seriously.
It should adopt a foreign policy of peace and goodwill through free-trade agreements with countries that benefit all parties. Tariffs and other protectionist measures do not provide that path. They lead to trade wars and tension between countries and hurt people’s livelihoods across the globe. Encouragement of global trade would support a stronger dollar.
Failing to take these steps will continue the slide of confidence and value of the dollar globally. It also jeopardizes the economic future of our country. This will result in more U.S. global partners exiting agreements and reducing investment in America. The consequences will be a weak economy and dollar that will hurt Americans.
Originally posted at Daily Caller and co-authored with Chuck Beauchamp.
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Vance Ginn, Ph.D.