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The biggest threat to the dollar isn’t other countries but America’s own dysfunction, think tank experts say

Multiple one hundred dollar bills splayed out.Many viewers were unimpressed with the financial theory.

Oleg Dubyna / 500px

  • Foreign de-dollarization efforts are unlikely to spur the greenback’s demise.
  • Instead, internal dysfunction could cut into the dollar’s dominance, two think tank experts wrote in the FT.
  • That’s because the US’s global and economic power are the basis for the currency’s might.

While other countries efforts to get away from the US currency are often cited as the driving force behind de-dollarization, those worried about the trend should look at the US as the biggest culprit instead, two think tank analysts wrote in a piece for the Financial Times.

That’s because rising American dysfunction — be it political or fiscal — is the real threat to the greenback’s international role, analysts Steven B. Kamin and Mark Sobel wrote on Monday.

De-dollarization is a trend that’s gained momentum in recent years, with the goal being to decrease the world’s dependence on the greenback, which is the backbone of global trade and the biggest currency of global central bank reserves.

Proponents argue that de-dollarizing would free outside economies from US sanctions risk and give alternative tenders more sway and independence.

While they’ve grabbed a lot of attention, foreign efforts to advance the trend are questionable at best, Kamin and Sobel wrote. Possible competitors to the dollar, such as the euro and China’s yuan, do not share the dollar’s massive advantages that make it so popular.

“The US economy is huge, some 25 percent of global GDP. It is also more innovative, entrepreneurial, and faster-growing than nearly all its advanced-economy counterparts. America’s financial markets are the deepest, most liquid and open in the world. Rule of law is strong, with investor protections that apply to residents and foreigners alike,” they said.

At the same time, sanctions can’t really be the basis of a major dollar pullback, as long as the US uses them with the support of geopolitical allies. This was the case with Russia, which lost access to the dollar after it invaded Ukraine. Apart from calls for de-dollarization, the fallout has been limited.

Debates focusing on foreign action miss the point, given that dollar power is first and foremost the result of US economic leadership —when this starts to crumble, de-dollarization alarms should start ringing.

In their view, a number of factors could amplify this risk: on the domestic front, that includes political dysfunction, runaway US spending and debt, and limits to Fed independence.

And that’s just half of the list. Amplifying de-dollarization is rising trade protectionism and the potential for unilateral financial sanctions. Threats of devaluing the dollar — which make US exports cheaper — would also bode ill.

“The dollar’s global role would plunge and market disorder and volatility would explode. The malign scenario would be enormously harmful to global prosperity, including America’s,” they wrote, later adding: “If the US doesn’t keep its house in better order, dollar dominance will be the least of our worries.”

Read the original article on Business Insider

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