00:00 Speaker A
It’s time now for today’s strategy session. Over the past few months, President Trump’s trade policies along with some other headwinds have weakened the US dollar against most major currencies, triggering doubt around the dollar’s long-standing dominance. This combined with record debt levels could create a genuine financial crisis, according to our next guest. Joining us now to discuss Kenneth Rogoff, a former chief economist of the International Monetary Fund and the author of “Our Dollar, Your Problem”. Ken, great to have you. Thank you for coming in studio.
00:25 Kenneth Rogoff
Glad thank you for having me.
00:27 Speaker A
We appreciate it. So, talk to me about the declines we’ve seen in the dollar. Was the dominance of the dollar already at risk prior to this administration? And what is that signaling to you?
00:37 Kenneth Rogoff
So, the dominance of the dollar, and we’re talking about not just the level of the dollar, which I will say is super high, still, even after coming down, but how much it’s used in trade, finance, what have you, like English. Uh, it actually was coming down for about a decade, at least, by many measures that I look at. And I think there are a lot of reasons for decline. One is there’s an appetite on the outside, particularly from China and parts of Asia, but Africa, parts of Asia, uh, uh, Russia, obviously, but Europe too, to have other options, not just for what things are denominated in, but for the financial system. You want to do a transaction that President Trump or the Americans can’t see? There’s a huge appetite. And, I tell you, it’s the, it’s not just the Chinese, they don’t like all this American control. So the most efficient thing is to have one currency, but not politically, not if America gives America too much power. But I’d also say, on the inside, you know, the internal problems with, particularly our budget deficit, which I know people have been talking about for decades, but interest rates have normalized in my opinion. Long-term real interest rates are probably higher for much, much, much longer. I’ve been talking about that, and writing about it for a long time in my research. Uh, you know, we had a big drop after the financial crisis happened many times. If you look at centuries, it’s high, it’s low, until it isn’t. I mean, after the Great Depression, it was down around zero for a while also. So that, when you’re the world’s biggest debtor, that’s a problem. And then if we lose some of our exorbitant privilege, which gives us a lower rate than we would pay otherwise, that’s so much the worse. I think that was fading, not going away, but clearly got an acceleration under President Trump.
03:36 Speaker B
I wonder how you evaluate all of the flows into gold by central banks and how that creates more of a long-term headwind for the dollar right now.
03:51 Kenneth Rogoff
Well, absolutely. For central bank reserves, gold has become a big option. The Russians have been doing that for ages. They’ve been absorbing their whole gold supply. The Chinese are doing it. Everybody’s doing it. So, that’s, you know, that’s not the main event.
04:16 Speaker B
Sure.
04:17 Kenneth Rogoff
But, in terms of, it’s one of the signs of, they’re just trying to look to diversify. Now over the long run, gold’s not ideal. They’d like to have something more liquid, easily traded. Uh, but I think that’ll come in time.
04:32 Speaker A
Do you mind breaking down for me, just in layman’s terms, why we like to have the world’s reserve currency? Like why does that benefit us? And why might we not want to lose that status and that privilege, as you say?
04:43 Kenneth Rogoff
So it benefits us in manifold ways. And not to pitch my book, but you kind of have to read it to read about it. But, you know, the obvious ones that I mentioned, you pay an interest rate that’s lower than you would otherwise. It’s a big market, it’s so liquid, you feel safe. That was true when the UK was the dominant currency and now we are. But there are lots of other things. So one thing is we are able to borrow a lot in a crisis. And there will be another crisis. I don’t just mean one that Trump causes. I mean a pandemic, uh, cyber war, something. We, progressives complain we don’t borrow enough, but we borrow a lot more than anybody else does. And why don’t the other countries borrow as much? Because they see their interest rate shoot up. Ours go up, but more gently. Although that has gotten worse as interest rates have gone up. There are more subtle national security things that are a big deal. A lot of modern spying is cyber. Somebody sitting with a laptop in a dark room and, you know, the uh, CIA building, not the James Bond stuff. And a lot of that is uh, what we got from the financial system. Everything flows through the United States because of our dominance, the dollar, our military dominance. So, there, there are many, and there are many things beyond that. So, why might we not like it? Of course, the Trump administration has Steve Moore, who’s very smart guy who’s the chair, has said no, it’s a burden, it’s terrible. It makes the dollar high, it de-industrializes us. And, you know, a short answer to and and makes us run deficits. And a short answer to that is we’ve been the dominant currency for a while. We weren’t running deficits in the ’60s and ’70s and we were still the dominant currency. The UK was the dominant currency when, you know, the 19th century, when the sun never set on the British Empire, and they ran surpluses. Uh, there are, you know, reasons for de-industrialization which have to do with trade. There are many things that affect our, I should say there are many things that affect our exchange rate. But the big point is that our trade deficit is basically how much the country saves versus how much we invest. Invest meaning real investment, plants and equipment, etc. Well, a lot of things affect that besides the exchange rate. One of them, what do you know, is the government budget deficit, which right now is higher than our trade deficit. So if I really cared about stability and this trade deficit, how about closing up the government budget deficit?
08:28 Speaker B
At a House meeting committee hearing Tuesday, we know Treasury Secretary, Steven Mnuchin was asked about the X-date here, the date where the U.S. government will reach its borrowing limit. I want to play a clip for you of what he said and get your reaction on the other side.
08:57 Steven Mnuchin
As an outfielder running for a fly ball, uh we are on the warning track. And, of course, the United States government will never default. That we will raise the debt ceiling and Treasury will not use the, any gimmicks. Uh, we will make sure that the debt ceiling is raised.
09:41 Speaker B
And so what, what is an appropriate level for the debt ceiling to be raised to? And, and how sustainable is the just continuous raising of the ceiling in order to accomplish what spending targets are also being put forward as well?
10:01 Kenneth Rogoff
I mean, I think it’d be fine if we got rid of the debt ceiling. That’s not really our problem. The Treasury Secretary is right, we’re always gonna raise it. The debt ceiling is sort of, I have a credit card bill, but I don’t know if I want to pay it even though I have a lot of money. Uh, no the sustainability of the debt has more to do with, most of all, that interest rates have gone up. So, back for a long time, it seemed like there was no, you know, bill to pay, you just kept borrowing and re-borrowing. You didn’t even pay the interest. But now, the interest bill, if you’ve noticed, has doubled, on its way to tripling. It’s gonna be more than, it is more than the defense budget, on its way to a trillion dollars. And that’s when you, it gets less easy to borrow another 30% of GDP if there’s a pandemic, uh, to pay for something. Uh, there there are, there’s a cost. You would rather have lower debt. I mean, there’s nothing easy to do about it. But, uh, no, the debt ceiling’s sort of theater and power grabbing. And maybe there’ll be a slip sometime and we’ll screw up and actually default. Great for sales of my book, but I don’t think it’ll ever happen.
11:45 Speaker A
Okay. Well, that is at least some good news. I do want to bring us back to some potential bad news. What is your call on a potential recession?
11:56 Kenneth Rogoff
So that is, I think it’s more than 50/50 to have at least a gentle slowdown. But we’re trying to read into the mind of Trump. Because of course, if he really did an about-face on the tariff stuff. And I don’t mean the 10%, which is maybe not the greatest idea, but just, you know, the “let’s make a deal”, “I’m uh Hollywood needs to be protected. Let’s have a tariff on that.” I was just in the UK, and you probably, maybe reported on this, but he wants them to have free speech. And they’re going like, “We gave you free speech. We, we’re the home of free speech.” And a lot of the things are just, you know, out there. That they’re asking for sort of some MAGA wish list. And it’s, it’s very disconcerting. Now I have to say, a lot of people you probably talk to, you know, big finance people and hedge fund people, and clearly the market thinks, “Uh, he’s a pragmatist at heart. He knows he screwed up.” I don’t know if he knows he screwed up. “He’s gonna back off.” And they just think it’s gonna go away. That, I think if you did a poll, you can try it, of where are we gonna be in a year? They’d all say, “10% tariffs, maybe a little fluff with China, it’ll all be over.” I’m skeptical of that. And that’s why I think the odds of recession are higher. I mean, Trump’s still gonna be Trump, uh, for better or for worse. So, I don’t see an exit from the chaos. If there’s no exit from the chaos, uh, it’s hard to see how we don’t have at least a mild recession.
13:53 Speaker B
Is this a case where we need to see some of these smaller trade deals start to come through first or is there need, there’s, does there need to be resolution on one of the larger trade partners out of the gates here to really set the tone? Because some could argue that he already kind of showed his hand. Didn’t want the stock market to go into bear market territory. That would have looked bad. And then additionally, you’ve got all the CEOs showing up at 1600 Pennsylvania Avenue’s doorstep, saying, “Hey, we’re not going to have stuff on shelves in the summer if you don’t step back off of this.”
14:30 Kenneth Rogoff
No, you are so right. That’s what not just the markets thinking, that’s what all our trade partners are thinking. They’re, why aren’t you seeing reports of, you know, sudden deals? Because they don’t want, they can’t for their own public. By the way, if Xi gave in to Trump and lost face, he’d be done. I mean, he cannot any more than Putin, you know, can surrender. Uh, he can’t. So you know, everybody, my conservative friends, and uh, I regard myself as a centrist, but my conservative friends will say, “Ah, this is just the, you know, Art of the Deal, don’t pay attention.” And I say, “Okay, but when he was a real estate mogul, he was bidding on a hundred things. So he got three of them. Great. He got three good deals, he’s making a lot of money.” We can’t walk away from the other 97 countries, you know, in this case.
15:25 Speaker B
Not a great percentage.
15:25 Kenneth Rogoff
Yeah, it’s not a good percentage when you’re President. It was a, it was a great, you know, approach when you’re a real estate mogul. So we’ll see. If I want to say something that could turn in his favor and make him look amazing in 10 or 15 years, it would be that even though it’s all chaotic, and he’s not always lasering in, China is our rival. They are down right now. He’s hitting them while they’re down. And if he didn’t, there’s gonna be something over Taiwan, there’s gonna be a problem somewhere. And so maybe he’ll say, “Oh, just a stroke of genius that he took ’em on when they were vulnerable. Xi fell and they got rid of Xi, turned into more.” I’m really playing this out. “Had a more democratic government, it all worked.” And Trump, although he was so uh, you know, brutal in his approach to trade, he got it done. Anyway, I’m an American, I wish well for our President. I hope that’s what we’re writing in 10 years.
16:51 Speaker B
Dr. Kenneth Rogoff, we really appreciate you coming on and sharing your insights with us today. Thank you.
17:13 Kenneth Rogoff
Thank you.
