Transcription
So, it's not a matter of somebody replacing the dollar. Uh, you're in London, I'm in New York, we're not going to trade in R&B too much. But if you're trading, you know, between Vietnam and China, possibly India and China, maybe Sagal and China, uh, we may see quite a change. So, I see the dollar losing market share, but it's still going to be first, but gradually bleed. That's the way these things go. A dominant currency stays on top for a century, century and a half. Gradually, you go through a period where there are more parallel currencies. I don't know who's going to come out on top. And I still love the United States. I mean, I don't really see anyone beating us, but we're doing a pretty good job of beating up on ourselves. So, you know, that's sort of famously how Rome fell. And probably when the dollar falls, that's how it'll happen from, you know, weakness within.
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Hey everyone and welcome to another episode of the What the Finance podcast. My name is Anthony Fatsies. I'll be your host today and on this episode I have the pleasure of welcoming on Kenneth Rodoff, a world-renowned economist, former chief economist at the International Monetary Fund and Moritz Boas professor at Harvard University. Ken is a leading voice in international finance with his work on financial crisis, bank independence and exchange rates, notably through his influential book with Carmen Reinhardt, "This Time Is Different: Eight Centuries of Financial Folly," his latest book, "Our Dollar, Your Problem: An Insider's View of Seven Turbulent Decades of Global Finance and the Road Ahead," explores the dominance of the US dollar and the challenges facing the global financial system today. So, Ken, thanks so much for coming on the podcast.
Oh, thanks for having me. It's a pleasure.
No problem. Yeah, we were just talking there's definitely a lot to talk about at the moment. There's been so much noise in macroeconomics, politics, uh, you know, in the US and globally. So I'm sure we'll, uh, have have a lot to speak about. But, um, where I like to start all my sort of interviews with is, you know, starting very broad. So, uh, what are you currently seeing in the macro in general? What are you watching?
Well, I mean, it's sort of remarkable the disconnect between this extraordinarily unstable period geopolitically, institutionally, and markets seem to be, you know, sleeping like a baby, you know, almost. Uh, I I would sort of see eventually this has to lead to considerable volatility. So, it's really quite remarkable. Uh, the, you know, the United States is going through turmoil that I think will, uh, weaken us very much in the long run. But, you know, for now, uh, maybe people, everybody thinks, uh, AI is going to run everything anyway, so why worry about our political system?
Yeah, and there's lots of points to touch on, you know, we're mentioning sort of Fed independence. I guess, you know, it seems like most institutions are being shaped up, especially in the US, and, you know, I guess in other parts of the world, there's sort of these fringe movements which are pushing for change from what, what we've experienced. Um, but yeah, maybe we can start off with liberation day, sort of where it started, and then we can go into those more, uh, uh, sort of Fed-focused. So, uh, how, how do you see liberation day and the impact it's had on the, on the globe and, uh, and, yeah, where we are today?
Well, it's still unfolding. I mean, so we don't know where all this is going to end. Uh, Trump has developed this weapon, the tariff, that he feels he can use to, uh, help his political allies in Brazil, to fight his foes in the Soviet Union, the Russia Freudian slip, um, to fight his foes abroad, anything that he doesn't like. If, if he thinks the UK doesn't have free speech, you know, hit you with a tariff. So I, I don't see this stabilizing. We have this mercurial, uh, personality as president, and he's discovered this weapon which now, on top of financial sanctions, uh, seems to be the weapon of choice for the United States. So, uh, but on the other hand, you know, there's no doubt that the economy performed better than anyone might have guessed. Inflation was less than almost anyone would have guessed. So, uh, liberation day, you know, created this extraordinary moment of volatility, and I think people have calmed down, possibly in the false belief that the tariff situation stabilized. But also, I mean, now they're 15% tariff is still pretty darn high, but it's not 150% tariff.
Yeah. And sometimes you wonder if that was a strategy or if it's just, you know, promise the worst and then end up a little bit lower or, um,
Yeah. Yeah, I mean, of course, tariffs are a terrible idea to start with. So, uh, you know, any tax is, but I think tariffs are a very distortionary tax. The United States has benefited enormously from being so open, of being the market of the world. Our financial markets are linked to our openness to trade in goods. That may not be an obvious point, but actually, when you look at general equilibrium, as, uh, I did in a paper 25 years ago, and now it's become a very popular thing, it, it's absolutely fundamental. In fact, uh, you know, there are people who think that if the tariffs went up more, say to 25%, you'd really start not no longer being able to talk about the dollar as a safe currency. The difficulty of moving in and out would already trump, so to speak, uh, all these other benefits.
Yeah. Yeah. And I guess why, you know, do you think this is going to be successful in terms of bringing back manufacturing to the US? Because if we look at there have been distortions in sort of manufacturing globally. There have been countries that have, uh, basically organized their economies around manufacturing, such as, uh, China, and obviously, you know, Germany or Japan. There's these sort of, uh, that they have influenced how their economy works to benefit off off this phenomenon. So do you think this is something that could bring back, uh, manufacturers?
Yes. And also, do you think, you know, what was there previously was sustainable? Or look, um, it may bring back some manufacturing, but it's not going to bring back manufacturing jobs back in the 1970s. You're probably too young, like, to have lived through that, but I did. Uh, you could go see politicians talking about farming. Uh, we have to help the farmers, or all these ads. The farmer was the focus. How do we protect them? Well, the United States today is a powerhouse in agriculture, but there are almost no farming jobs. It's all automated. Of course, that's the future in manufacturing. There may be jobs for electricians. There may be jobs for plumbers, but in terms of these big manufacturing plants, those jobs are going to get scarcer and scarcer. So, um, no, of course it's not going to bring back the jobs. And no, it's not going to bring back all manufacturing. That, the United States is in no position, uh, to begin to be able to substitute for what it buys. China is so much bigger than everybody else. You can't exaggerate it. Uh, I think there's a statistic something along the lines that the United States spends as much on our military as the next six nations combined. China's manufacturing size. There's paper by Richard, uh, Baldwin, uh, at the Center for Economic Policy Research in London. Uh, China manufacturing is big as the manufacturing of the next nine countries. No, we're not easily going to be able to substitute. That doesn't happen overnight. Uh, will we make great iPhones in America? I doubt it. Uh, I, I don't think we're going to be able to find workers to do a lot of these jobs, but we will get some of it through automation.
Yeah. And do you see risks with such a concentration of, I guess, supply chains in one country? Because it does, there is something in me which, you know, maybe it's not economically the right thing, but there is a risk of having that, and you need to diversify away from one country controlling basically.
Well, for sure, that that's how a lot of the world feels about the United States, by the way. But, uh, in, you know, finance and biotech, tech, there's quite a total concentration in the United States, and the rest of the world is terrified. China has manufacturing, which is sort of almost a lame by comparison to the things that the United States has. Uh, yeah, I mean, so shipbuilding would be a good example, but are we bringing shipbuilding back to the United States? What about our allies, Korea, Japan? They're actually really good at shipbuilding. China's number one, and Korea and Japan occupy the two, three spots. We c, we need to have big shipbuilding in order to build, build our navy. We're not bringing back the United States. That's a joke. Uh, so we need alliances. In fact, I think a thing which has just been somewhat misconceived about the whole Trumpomics approach is to not recognize the importance of our alliances and making the United States much more important, much larger than we are, uh, by ourselves. So, we'll see. I mean, for sure, they're important things to push back on. Uh, I think one of the things where Trump won really had it right, and a lot of even his fiercest opponents quietly admit it, was that we had to take a look at what was going on with China. Doesn't look like they're turning into a democracy. Uh, how much power do we want to give them? I think I saw Bill Clinton once say, in a moment where he was sure China was going to take over from the United States, we're going to get there. Let's just hope, you know, it's all good when we pass off the baton. I think it's pretty clear that it's not going to be all good when we pass off the baton, and we don't want to. We need alliances. So, we don't just have tariffs on China, we have them on Japan, we have them on Korea, and lately, they're up to 50% on India and Brazil.
Yeah. Yeah. And that does, as you said, there's sort of been this, you know, post World War II alliance, you know, sort of linked to the US dollar and and trade and an economy and everything else, WTO, all these institutions. And now this seems to be at risk with what's happening here. And, you know, if you just have to talk to people in Europe or the UK, and they don't think kindly or very well of, uh, sort of the, yeah, American politicians at the moment.
I, you're not going to get me, you know, trying to bolster American politicians. Uh, I mean, the left, uh, has its own craziness. Uh, I actually finished my book, which was very concerned about the future of our budget deficit, Federal Reserve independence, the dollar. I finished it before I knew who would win the presidency. If I, uh, listen to my progressive colleagues, if I look at some of the ideas, they don't like Fed independence. They think budgets, deficits are a free lunch. Uh, so, yeah, the, there are these extremes, uh, with the centrists just getting forced to walk the plank. If it's on the left, they, anyone moves to the center, they run somebody more left against them in the Democratic party. On the Republican side, if you dare, you know, question that Trump is not 100% right about everything, uh, they primary you. They find someone in the primaries to defeat you. It's a, a very discouraging moment. Uh, the United States has had lasted through a lot of things. Uh, I think we'll get through this, but I don't yet see the other side of it.
Yeah. And so, so let's go into deficits because as you're saying, they've sort of been a massive issue over the past few years. It seems like since COVID, we saw this massive shift up in deficits, you know, globally, but especially the US is sort of one of the highest in the world. So, so what, in your opinion, what has been the driver of that? And is this something that can be sustainable, or it sounds like you think there's sort of risks that would come from keeping it where it is?
So, so there came this view that interest rates would always be zero and debt was a free lunch. I think it became popularized by Larry Summers with his secular stagnation speech. You have a very sophisticated audience. That was at back in 2013 when he claimed if you looked at interest rate, real interest rates going back to 1980, they've been going down. The financial crisis was really nothing. Uh, not such a big deal from this. And there are many reasons to expect it to continue for a very, very long time. I, by the way, was Ben Bernanke was on that panel, and he pushed back but didn't get very far. I was on that panel too at the IMF, though no one remembers that. I pushed back and said, you know, we just had a financial crisis. Anytime there's a financial crisis, it's not unusual to get these very low interest rates for a long time. But that argument, you know, was certainly trumped by the idea they would be on forever. Uh, Paul Krugman, the president of the American Economic Association, Olivier Blanchard, there's something called Modern Monetary Theory, which is actually not so far from any of these others. It just said, don't worry, be happy. Debt is a free lunch. You don't have to worry. And I, but the trouble is, if you looked at history, you would have seen that that graph that Larry Summers had in his paper, it's a Brookings paper from 2019, the later he put it down, if you look at it, you go, before 1980, interest rates were rising. In fact, the trend, uh, after 1900, it's really not down at all. Uh, it might even be slightly upwards for real interest rates if you look at a longer term. And if you go much further back, which, which I have in my research, you go through these cycles. And so this, I think a lot of the high debt and the belief that it's free came from this idea of lower forever, that interest rates, uh, that interest rates would never, would never go up.
Yeah. And I, I think that's linked to inflation as well. So the fact, you know, it only becomes an issue if you get inflation, and then you then you increase interest rates.
Yeah. I mean, uh, we're talking about the real interest rates. Inflation adds a volatility premium to it. So I think some of that's happened. But yeah, at the same time, during the 2010s, I would be teaching inflation in my classes, and my students would be looking at me like I was, I don't know, teaching Frank Sinatra and the music of another generation that's not relevant to them. Uh, I think I even asked somebody who had worked at the European Central Bank a question about inflation, and she said to me, "We don't ever think we'll have inflation. We just don't think about it." Uh, and that was true. And so, you know, uh, I think that's very much the case with, uh, debt stress. We haven't had it, but of course, we have, we have much higher interest rates now, which makes it not a free lunch. It doesn't mean you just blow up suddenly. That could take 20 years, could take 30 years, might not happen, might happen in two years. Uh, but the higher real, the higher real interest rates, inflation adjusted interest rates, puts a lot of pressure. You, you can see that in the interest bills. Everybody's looking at it. Oh my goodness, our interest bills are so high. Not just the US, uh, the UK, I think where you're sitting, they're very worried about the fact interest rates costs are going up. France is somewhat protected by people thinking Germany will bail it out at the end of the day, but, you know, they've lost all control of their fiscal policy, and, uh, you know, they could run into trouble. Uh, so I think we, the big change is real interest rates have gone up, and at the same time, uh, geopolitical fracturing, the need to raise military spending. We haven't even had to face the kind of costs we may have with climate mitigation. Um, I, I don't know which way it'll go. I'm not guaranteeing you at all that real interest rates will stay high. And there are very smart people, uh, that think they'll come down, but there are very smart people who think they'll go up. And so countries are right to start worrying, what's the endgame to their debt?
And what impact do you think this will have in terms of if these deficits keep going, and it, you know, it doesn't look like there's, as you said, there's all these phenomena which suggest it will, especially, you know, Europe's going to be investing 2 or 3% more of their GDP into, uh, uh, defense. So, yeah, how do you see the outcome of that being if there is no change?
Well, it's sort of country by country. Uh, the United States, uh, I think is the most likely for this tendant in inflation. The Federal Reserve's not, I'm sure we'll come to talking about it later, but it's not constitutionally independent. Oh, yeah, I mean, Trump's leaning on it, but so is somebody else with enough pressure. That's not that dam's not going to burst overnight. But wait till there's a shock. The right now our debt is high. It's soaring. Our politics are paralyzed. Those are two of the three key ingredients to having a debt crisis. The third is a big shock. Now, in the United States, a debt crisis doesn't necessarily mean we won't pay, but it puts pressure either to have forced saving, basically financial repression. That's what it is. Europe already has, uh, certainly the Eur, the Eurozone already has a lot of that. Uh, it can mean inflation. That's not a solution, but that can be a part of it. Trump obviously was flirting a little bit with default. That's in the, uh, Mar-a-Lago plan of Steve Mnuchin, who had been the head of the Council of Economic Advisers, is now headed for the Federal Reserve. We had a clause in the Senate bill that didn't make it into law, but got pretty far, that would have allowed the president to, at his discretion, uh, impose taxes up to 20% on the investment income of foreigners. Those are all forms of default. And so I think when we see duress, that's when we'll see the true colors. But we've had this period where, uh, that hasn't happened. But to think that it never would, it's very much like, I, I can't tell you how many economists were saying, there'll never be another Great Depression. There'll never be another global financial crisis. We're too smart. We figured it out. The markets are better. Uh, I won't name names, but Nobel Prize-winning, most famous economists were saying this emphatically in big speeches, and it happened. The same thing about inflation. I, you know, people just thought it would never happen. And I would say this now about debt duress. They think, well, the last time the US defaulted was 193, the early 1930s under Franklin Roosevelt. We did default on our debt when we abrogated the gold clauses. Uh, and of course, the UK and, uh, France also defaulted on their war loans during that period. That hasn't happened in a long time. But, you know, if there's enough stress because of a cyber war, a pandemic, some huge climate crisis, if there's, we have this much debt and this much stress, they're going to look at what I would call the heterodox playbook, which is, you know, look at all these options.
Yeah. It would be amazing to think. And, yeah, that would be, I imagine, then you'd sort of would get a combination of the Fed and the Treasury and sort of working together in in the same direction. But I guess this links to sort of a question on, um, you know, Fed independence, central bank independence. It's been something that's been, uh, seems to be gaining speed from, as you said, from both sides in terms of them keeping interest rates so high, sort of leading to, yeah, extremely high, uh, borrowing costs, and it's increasing the deficit at a a massive rate. So, do you see this being a risk in the future that there could be a, you know, a non-independent Fed?
I mean, it's a near-term risk. This isn't some distant future thing. I, I want to start by just emphasizing the progressives hate Fed independence. They hate the banking system, frankly, and they, the, they're theorists who I live with, you know, at Harvard and in academic circles. They have all sorts of ideas about bringing the Fed back into the Treasury. And these are people who are advisers to Bernie Sanders, uh, Elizabeth Warren, Alexandria Ocasio-Cortez, probably, uh, uh, Kamala Harris. Uh, they have a, they have a lot of sway. They have arguments, you know, that, uh, they want to bring the Fed back clearly under the thumb of the Treasury. Uh, Trump is moving to do this in real time, using creative legal arguments that I think are very dangerous and destructive. Uh, would be much better if he had Congress behind him at least. It'd still be a bad idea, but then he wouldn't both be corrupting our government and undermining Federal Reserve independence at the same time. But if he, uh, if he succeeds in this current case, I don't know when you release our podcast, but as we speak, uh, Lisa Cook is under a lot of, uh, attack from the Trump administration, and they have something. I mean, I'm not going to pro, you know, uh, that they're looking at. She's innocent till proven guilty, and, uh, everybody deserves a fair hearing, and it may be nothing, but if there's a worst-case scenario, and again, Trump often makes up stories and then he's wrong. I was, I was, I think I was there when, uh, during a White House, uh, press dinner, the annual press dinner, when Trump was in attendance and Obama was speaking and mocking, uh, Trump for saying that he wasn't born in the United States, and he put up a giant picture of his birth certificate to settle that issue, that he really was born and therefore eligible to be president. I mean, we think of a thousand of these things. But, you know, if you bring the full force of the US system, the FBI, the, you know, National Security Council, the mortgage authority, and others to look for something you did wrong, you're not going to survive that. It may be jaywalking, a parking infraction that they'll blow up, but you're going to be in trouble. And I think he's, if he sees he can take out one governor, if the Supreme Court lets him, we don't know, but it's certainly in the realm of possibility they might, then you may start seeing governors resign before it even happens because they know he can get them. So, terrible for our democracy, obviously, but more importantly, Fed independence works. It has been the anchor that's held together the global financial system. It's what's replaced gold is the Fed's word that it would try not to inflate. Okay, they screw up sometimes. Sometimes they set the interest rate too high for too long. Maybe they're doing it now. I don't think so, but maybe. They certainly set it too low after the pandemic and allowed a big burst of inflation. But I don't think it's deliberate and systematic, which I think in a system run by the executive, history suggests it would be. We'd end up with higher inflation, higher interest rates, more volatile interest, uh, interest rates too, more volatile exchange rates, more economic volatility. And I think again, following a a theme from my book, if this happened, it would weaken the dominant position of the dollar, not eliminate it, but it would cut deeply into our market share.
Yeah. But from it is a new phenomenon, I think, or at least in the last, you know, century of actually having an independent central bank, if I'm not mistaken.
Well, well, uh, actually, uh, the Fed really only started acting independent in 1980. Um, it became formally independent in 1951, uh, long after it was established in 1913, but the, the Treasury could sort of force it to buy Treasury bonds, and it did that. It basically did yield curve, yield curve flattening, uh, at the Treasury's discretion and interfered with financial markets to make that work. But then especially during the 1970s, Nixon just walked all over the Federal Reserve. We know a lot about that from the Watergate tapes of what he was ordering the then chair, Arthur Burns, to do. And that led to worldwide inflation. We went off the remnants of the gold standard. And it was, it's really only since 1980 that we, the n, early 1980s that we've even begun to understand it. I think I wrote the first paper on, uh, how to use central bank independence to deal with systematic inflation 45 years ago. And when I wrote it, only Germany and the United States really had independent central banks. Nobody else did. So, it's evolved, but it's worked. One thing that's really surprised me is countries like Brazil have sort of been successful. I don't want to say super successful. You can complain about their interest rate today. You can say, I don't know what their inflation rates, you know, 5% now or something. Okay, that's not great. This is a country that had two hyperinflations during the 1980s and early 1990s. You can go around the world, it's worked. And if we take it away, I guarantee you, not right away, but eventually we will have worse outcomes, more unstable macroeconomy, you know, and all the volatility I talked about, and of course, sometimes higher inflation.
Yeah. And I guess China is probably on the other end where they, I'm assuming is not independent, but it has almost deflation. It's been very different to the rest of the world over these past few years. But I imagine as well, politically, there's less uncertainty, at least in historically, there's more focus on trajectory.
Wait, just wait. Uh, they are going through a cycle very similar to what Japan went through. It's not exactly analogous, but pretty similar, where they wildly overbuilt housing. They wildly overbuilt infrastructure. Everybody thought the price of housing would go to the moon forever in China. They're in a housing price collapse. Still, housing accounts for maybe 80% of the wealth of the typical Chinese, not the typical, the average, the average wealth of Chinese households. And with the price of housing collapsing, their consumption's collapsing, they're in deflation. But if you look at, I think, uh, they're not as mature an economy as Japan. There's more room for growth. But if you look at this, you know, what's the endgame of this? I mean, we'll see it in Japan. Japan went from being the second richest country to the United States, uh, in the late 1980s, to being almost at the bottom of the pack of the large, uh, countries going through this long, uh, post-financial crisis recession. It had many causes, but there's no question the financial crisis was central. And China's experiencing something similar. Japan's trying to come out of it, but boy, are they cornered because there's so much long-term debt, 10-year debt in the case of Japan, packed into the system, in the postal savings, uh, system, in their banks, in their pensions, in their insurance companies. The Bank of Japan's terrified to let interest rates rise because they think there'll just be bankruptcies everywhere. And I, I wouldn't be, you know, right now they're just having inflation at 3%. You know, mark my words, it would not be surprising to see them get quite a bit higher inflation before this is over. And I, I expect Japan might go, sorry, China might go in the same cycle.
Yeah. Really interesting. And if it's, if I'm not mistaken, I think the, the JGB tenure is at sort of the highest level. The yield is at one of the highest levels in the last 20 years potentially.
That's right. That's right. It's still very low, but it's going up.
Yeah. Yeah. That's really interesting to hear, and it'll be interesting to see what happens. Um, but you were mentioning sort of the US dollar, you know, dominance over the last, I guess, post World War II, 80 years. Um, and I know your new book that you recently released, "Our Dollar, Your Problem," sort of looked at that, looked at the history of it, and then I guess, you know, the exorbitant privilege that the, the US has had. But, but there has been pushback from, you know, this current administration saying that's not a privilege, it's actually, you know, a curse for a large majority of the US population. So I'd be interested to hear, you know, what is the benefit of this, uh, sort of world currency?
Well, when it works, it's a benefit to everyone. It's a benefit having a, uh, means of exchange. It's a benefit of having English. There are lots of languages, and I'm speaking as someone very privileged to grow up in an English-speaking country. It's an incredible advantage in life, as I'm sure you know, many of the people listening to this podcast know. It's a privilege to be born in the United States where the dollar is the lingua franca of the system. Uh, it's, it's great in so many ways. Uh, so first, why is it great for the rest of the world? It's very convenient to have this common denominator. There, I think 150 currencies, and if business people and finance was having to do trade and figure out moving from, you know, Argentine pesos to Polish zlotys and figuring out how to get liquid markets and those things, it would be a pain in the, pain in, you know, enormous difficulty. I had to control myself there. Um, and, and, you know, clearly, uh, having the dollar is what we call a vehicle currency, this universal language is very helpful. And, and, you know, it's also been true that the United States until recently has been mostly kind of reliable. Okay, we had that little problem with inflation in the 1970s. Okay, in the 1930s, we defaulted on our debt. We changed the price of gold from $20 to $34. Actually, the Supreme Court ruled that a default. Uh, but Franklin Roosevelt put tremendous pressure on them, so they said there was no harm done. Tell that to the, uh, central, central banks of the world, the Bank of England, the Reserve Bank of India, they lost a fortune because they held dollars in lieu of gold. So we've done this periodically, uh, and it has hurt us for a while, uh, when we've done it. Um, but it, you know, it, if we behave, uh, it's, it's very convenient for everybody. Why is it good for the United States? There's the obvious reason, which is that we pay less in interest. Actually, everybody in the United States benefits from that. But I want to be careful to say we pay less in interest controlling for how much we borrow. So I think German rates, even adjusting for, you know, exchange rate changes, are certainly not higher than the United States. Swiss rates are not higher. But look at their balance sheets, not just compared to, not just the government balance sheet, the private sector balance sheet. So we face a different demand curve for debt than everybody else. We pay a lower interest rate. That's the easy thing. That's incredibly useful during periods of stress. The United States borrowed during the pandemic and during the global financial crisis. The progressives wailed that the United States was so, so much austerity. We should have borrowed much more, maybe, but we were borrowing way more than everybody else. In fact, we've reached a world today where the United States accounts for more than half of all government borrowing among advanced economies and well over half of all corporate debt. Uh, we borrowed a lot, and so that places, places stress, but it's very convenient. There are other advantages. The development of financial markets has been more centered around the United States. Some of that's our military, and we'd get into a bit of a tangent, we'll come back to, but our military power absolutely plays a role there. It lets us put on sanctions. Nowadays, we're using trade war too, but the financial, the, the dollar lets us put on sanctions. And last, and far from least, it gives us a way to spy on everybody. We are able to see so much of what's going on in the world. And you could say, well, the National, you know, Security Council, they would never look at that. They do. In fact, it's a big part of why the United States has so, so much magically great information is because we have the financial plumbing go through us, and the Chinese don't like it. Uh, nobody, the, the Europeans don't like it. And I think that's one of the forces pushing away from being just the dollar.
Okay.
Yeah, that that makes a lot of sense. But then is there anything that can come and sort of replace the dollar? Because I guess if you look at it, it's actually gained dominance over the last 10 years or plus, you know, the Europe has sort of in terms of, uh, you know, its use, the euro has gone down quite a lot. The, you know, yuan has gone up a little bit, but it's still less than 5%. You know, pound's gone down as well. So it seems like the US is sort of still sucking in all the all the liquidity, at least currently.
I, I mean, I, I actually put dollar dominance of having peaked in 2015, 10 years ago, and the Asian block is about half of the dollar block because of course, Europe's not part of the dollar block anymore, and they've been, uh, gradually moving into gold, other currencies. The euro, you're right, the euro got crushed in the European, uh, debt crisis. In fact, a lot of the share that the United States gained was at the benefit of Europe. I think Europe's eventually going to get that back. But more fundamentally, you know, your President Xi, or the Chinese, you're looking at what the US did to Russia. You look at what they're doing, and China has its eyes on Taiwan. I, I don't know how soon it will be that they will blockade and eventually invade Taiwan. But I think it will be within Xi's lifetime. He certainly wants to get it done. We're going to sanction the daylights out of them when that happens. They know that. And they're not, they're not just preparing in terms of holding less dollars. They're preparing in terms of fixing their financial plumbing. It takes a long time, but modern technology has made that a lot easier. So, it's not a matter of somebody replacing the dollar. Uh, you're in London, I'm in New York. We're not going to trade in R&B too much. But if you're trading, you know, between Vietnam and China, possibly India and China, maybe Sagal and China, uh, we may see quite a change. So I see the dollar losing market share, but it's still going to be first, but gradually bleed. That's the way these things go. A dominant currency stays on top for a century, century and a half. Gradually, you go through a period where there are more parallel currencies. I don't know who's going to come out on top, and I still love the United States. I mean, I don't really see anyone beating us, but we're doing a pretty good job of beating up on ourselves. So, you know, that's sort of famously how Rome fell, and probably when the dollar falls, that's how it'll happen from, you know, weakness within.
Yeah. And as you saying, it does seem like these, uh, sort of countries are moving to the alternative assets such as the, the golds, you know, the precious metals, you know, Bitcoin potentially, these type of assets that sort of providing them a diversification away from the US and the sanctions they could bring out.
It, yeah, as you said, it doesn't seem like there's, it's going to be like the US and, uh, sort of the pound, where there was a shift straight away. It's more a slow decline until something comes comes along to replace it.
A slow, well, you know, we'll go through a long period where it's losing market share, but what does that mean? It means interest rates in the US will go up. Not, I mean, interest rates are perhaps as much as a percent lower than they would be otherwise, so maybe they'll go up half a percent, but that's a lot of money, you know, still annually in our debt. Our debt dynamics are already very, very vulnerable. It'll make a really big difference in terms of enforcing sanctions, in terms of collecting information. If the only charge card company is Amex, and they cut you off, you're in deep trouble. If you can go use Mastercard, Visa, other things, not so bad. And I think that's what we're seeing in terms of the diversification of the plumbing. That's what, uh, I think digital currencies, not necessarily private digital currencies, but some mechanism of making use of these new technologies will make it a lot easier to replace the SWIFT system, to replace or at least supplement the current legacy system. That may happen very fast. Maybe it'll be dollar-friendly, which of course the Trump administration's trying to have happen. But there are very strong incentives, as I've, you know, been saying, uh, for China, for Europe, frankly, even for dictators, autocrats in Africa, Latin America also to try to move away from so the US doesn't punish them.
Yeah, great point. And, and can the US stop this? Is maybe go back to deficits. Can they stop printing so much money and, and, uh, you know, providing so much debt? Because I guess it is basically a collateral. It's a lubricant for the world economy. You know, the world needs US dollars. So if they were to stop that, would you think there would be risk of, uh, sort of, uh, pressure, you know, tightening of liquidity in around the globe?
Well, you know, you can fill up the gas tank, but if you overfill it, it starts, you know, spilling out and becoming a fire hazard. And I think, sure, the rest of the world likes dollars. They hold, you know, a third of the dollars of the market held dollars, but that's not, that doesn't mean that maybe it means instead of 100% of GDP, you can be 150% of GDP with similar consequences, but it doesn't mean you can be, you know, 300% of GDP. There are limits to it. So, um, you know, it, it's nevertheless, I think, you know, there, there definitely still constraints. It's sometimes said, "Oh, it's so great. There's so much of it. It just makes the dollar more popular." I mean, yeah, it makes the markets are pretty liquid. I'm not sure adding another, uh, 10 trillion to the markets right now is going to make them more liquid as opposed to more fragile.
Yeah, great, great point. So, Ken, thanks so much for your time today. Really appreciate, uh, everything we've touched on. Um, but my last question is, what is one message you want people to take away from our conversation?
Well, I think, um, you need to look at longer historical periods than just the last 10 years, 20 years to get insight into where we might be going. And that's what I try to talk about in my book, "Our Dollar, Your Problem," to try to give, uh, perspective. It's not always right, you know, and it's hard to know when history will matter, but these things happen. We had a financial crisis. We had inflation. I think we're probably going to have a debt crisis. Uh, and it, you can't control it as a citizen, but as an investor, you can have some perspective in how you make your bets.
Great message. Thanks so much. Um, um, if anyone wanted to find out more about your work and what you do, would the where would the best place for that be?
Well, uh, I, I would say, uh, I'm pretty easy to find. Uh, if you just Google my name, uh, I'm, you know, uh, sort of out there a lot in the media, etc. And I have my, I have keep a web page at Harvard with all my research. But I, I would above all look at my book. I mean, I sort of synthesize almost my whole lifetime of thinking about things in that book. I hope in a way that's entertaining. Actually, I, I tried very hard to write it in a way that, you know, wasn't, you know, was fun to read, and, uh, at least a number of people commented on that.
Yeah, great. I'll put it in the description below if anyone, uh, can't be bothered to Google. It's, uh, it all will be down there. But thanks again for your time.
Thank you so much.
Hey everyone, thank you for listening. I really appreciate the support. Uh, if you've got value out of this, I, I'd really appreciate if you could like, subscribe, or, or comment. You know, good or bad feedback, I'm always open to that. But it really helps with the channel. Uh, as I said before, only about 14% of people actually subscribe to this channel. So if you were to do that, it would really help. It could mean we could continue to grow. Um, if not, thanks for watching and see you on the next show. And you also might like, uh, this video right here. All right. Thanks, God.