The Dollar’s Special Status: Sources and Threats – Paul Krugman | Substack
Will the backwash from Iran threaten our monetary hegemony?
A recent news analysis by Al-Jazeera stated:
As the United States-Israel war on Iran — paused for two weeks on Wednesday amid fresh diplomatic talks —has roiled the global economy for more than a month, Iran and China have seized the opportunity to address a shared gripe about the global financial system.
Their common cause: ending the hegemony of the US dollar.
The motivation for this article was the fact that Iran is levying tolls on ships passing through the Strait of Hormuz, to be paid in yuan or cryptocurrency – not dollars.
There’s no question that many countries – China, in particular – want to see the dollar dethroned. And even before the omni-shambles of the Trump II administration, there were waves of what Paul Blustein, the author of of King Dollar, calls “dollar doomerism” – claims that the demise of the dollar’s role as the dominant international currency is imminent.
Thus, conservatives used to declare that budget deficits and monetary expansion would end the dollar’s dominant status. Today, critics of the Trump administration argue that demise of the dollar will be one of the dire consequences of America’s fecklessness and abuse of power. Whichever side of the political spectrum these claims come from, they are accompanied by declarations that America will suffer from the dollar’s losing its position as the dominant world currency.
But is the dollar at imminent risk of losing its special status? If it does lose that status, will that be a major blow to the United States?
I believe that the answer to both questions is no. Given its behavior, the United States may in some sense deserve to lose its status as owner of the world’s dominant currency. But economics is not a morality play. It would take a lot more than a change in the currency denomination of some payments for oil to dislodge the dollar from its leading position. And in any case, the dollar’s privileged position in global markets matters much less than many people imagine.
Today’s primer will be devoted to theory and evidence on the international role of the dollar. Beyond the paywall, I’ll address the following:
-
What do we mean by “international currencies”?
-
What is the dollar’s international role?
-
What explains the dollar’s special status?
-
How much does this special status matter for US power and prosperity?
-
What would it take to dethrone the dollar?
