Name: Eastworld Spotlight: The dollar crash and the rise of alternative currencies
Uploaded: 2020-07-23
Duration: 11 min 35 s
Description: Yale University’s Stephen Roach talks about challenging the dollar hegemony.

[SOUND EFFECT] CLAY CHANDLER: Stephen Roach is one of Wall Street's most distinguished and most influential economists. He is a senior fellow and lecturer at Yale University, he has been the chief economist of Morgan Stanley for many years, and was also the chairman of Morgan Stanley in Asia, serving right here in Hong Kong. Stephen, it's a pleasure to have you with us today. Thanks for joining us. STEPHEN ROACH: Thank you, Clay, it's always a pleasure to talk to you. CLAY CHANDLER: You've been warning for nearly a month now that the dollar is in danger of a rather severe weakening. Tell us about that outlook and the sources of your concern. STEPHEN ROACH: Well, the dollar had a strong run. Since 2011, a broad dollar index up close to 30% in inflation-adjusted terms, and looking out over the next couple of years, Clay, I think the dollar is going to undergo a sharp correction to the downside. I look for the broad dollar index to decline by 35% on an inflation-adjusted basis for two sets of reasons. One, US macro imbalances are going to be building as never before. And by that, I mean a sharp, sharp decline in domestic saving that will trigger a record current account deficit. We entered the pandemic with a very low domestic savings rate, 1.4% of national income, courtesy of these gigantic budget deficits. We're going to see a negative savings rate to the tune of minus 5% to minus 10%. That's going to happen very, very quickly. And so that will lead to the current account issues that I alluded to, will break our prior current account deficit record of 6.3% set in 2005. And currencies are designed to be the sort of correction mechanism for current account imbalances, and the US is no exception. The second set of reasons behind the dollar call is that America has squandered its global leadership in so many ways, it's hard to really keep track of them. But we've led the charge in deglobalization, decoupling, a trade war, trade protectionism, we've had an unbelievably abysmal performance in addressing the coronavirus relative to other nations. And we have a racial catharsis going on in the United States, the likes of which we have never seen, even for somebody as old as me who lived through the late 60s. So from both standpoints, the leadership piece as well as the macroeconomic beast, the dollar is headed down. 35% is not unprecedented. CLAY CHANDLER: What emerges as an alternative to the dollar in that scenario? If you're an investor, what options do you have? STEPHEN ROACH: Well, that's for a long time been the dollar's greatest defense. The acronym for it is TINA, and TINA is not a young woman, but it stands for There Is No Alternative. Turns out there are plenty of alternatives, Clay. The most unloved major currency in the world right now is the euro, it's the most undervalued. It's been moving up recently, and I think if the European political leaders can get their act together and pass this package that funds a 750 billion EU Next Generation fund and endorses the issuance of a sovereign pan-European bond to go along with it, the euro will move up, continue to move up, sharply. I think the Chinese renminbi can also continue to move up, on a broad trade-weighted basis, it's up about 50% over the last 15 years. But if China stays the course on reform, there is more to go there, and investors speculate in exotic alternatives. But you have to look seriously at cryptocurrencies, like Bitcoin, and precious metals, like gold. So I think the idea that there is no alternative to the dollar is really going to be tested during this COVID crisis. CLAY CHANDLER: One of the things that China is working on right now, obviously, is a centralized central bank digital currency. Some people have suggested that that might in some way erode the status of the dollar as a reserve currency if China is able to roll that out on a large scale. Do you see that as a possibility? STEPHEN ROACH: Not in the near term. I think that there is no question that China, the world's global leader in fintech, is also stepping up, but the dollar today still accounts for a little bit less than 60% of official foreign exchange reserves. While that's down from a little over 70% in 2000, it's still about three times the share of the second-largest reserve holding, which is the euro, at about 20%. Over time, who knows? The dollar has been in a secular decline in terms of share of global reserves. It's still the largest by a wide margin. I think it's almost mathematically impossible for cryptocurrencies, even though they're growing at phenomenal rates, they're coming off such a small base that they're unlikely to pose any serious threat to the dollar, over the foreseeable future, as the world's dominant reserve currency. CLAY CHANDLER: You mentioned that for China to be able to play a larger role as a reserve currency, it's got to stay the course on economic reforms. Tell us a little bit more about that, and how do you think China is doing in terms of economic reforms, and what additional reform work is necessary. STEPHEN ROACH: China has pushed ahead on reforms in the past because its economy was growing so rapidly, it could afford to take the heat, but when it's undergoing a record shortfall, the appetite to do that is diminished. Nevertheless, China still has a huge reform agenda. I'd highlight three things in particular that are really critical. State-owned enterprise reform, where the progress has been very disappointing. The capital markets reforms, which have been an ongoing process, but which have slowed down, and more needs to be done, especially in the area of currency and capital market convertibility. And thirdly, as glaringly pointed out by the novel coronavirus, social safety net is still porous, and much more needs to be done investing in retirement and in health care infrastructure. And so there's plenty for China to do. The question is do they have the will to do it, and do they have the growth cushion that would enable them to exercise that will? CLAY CHANDLER: The Trump administration seems very determined in trying to prevent China from getting a hold of cutting-edge American technologies, Western technologies, certainly as they pertain to national security, but in other areas as well, and has reached out to other US allies to join this effort to keep China from becoming part of the global techno-ecosystem. Does that effort, can it succeed in slowing the pace of innovation in China. Could it even shut it down? STEPHEN ROACH: The Trump administration has moved to put Huawei and its suppliers on the so-called blacklist, or entity list, in the US. And lacking in the domestic chips that Huawei needs to be self-sufficient, this is a threat to China's greatest technology company, and it's something to take very seriously. The US has a view that China is a threat and should be contained from achieving the type of technological dominance that America has long enjoyed post-World War II. And I think that this technology battle is really at the heart of what could well be a Cold War 2.0 that we might well be in right at this moment. CLAY CHANDLER: In the case of a Biden victory, do you see a lot of scope for a significant reset? Because I have heard some people say that they think that Biden will more or less take the same hard line on China that Trump has done. STEPHEN ROACH: There are a lot of tough issues that have been put on the table in the last 2 and 1/2 years that are not going to be yanked off the table. But I think you're going to see a very different approach. Without caving into China, but one that really focuses much more on finding common ground through compromise, rather than utilizing the so-called art of the deal strategy to punish and bully a supposed economic adversary, as the Trump administration has done. On the big issues, the structural issues, of technology transfer, innovation policy, intellectual property rights, and cyber, I think Vice President Biden, if he's elected, will be very tough on those issues. But I think it'll be, again, as I said, a process that will be easier to understand, more transparent in its objectives and its tactics. 

Eastworld Spotlight: The dollar crash and the rise of alternative currencies

International

Yale's Stephen Roach on challenging the dollar hegemony.

The dollar crash and the rise of alternative currencies

Yale University’s Stephen Roach talks about challenging the dollar hegemony.