An article written by Henry M. Paulson Jr. should attract the attention of anyone trying to keep pace with the evolution of a battered global economy in a rapidly shifting geopolitical environment.
Paulson is not some lightweight journalist. He served as the United States secretary of the treasury from 2006 to 2009 following a career in the private sector that culminated with his rise to the title of chairman and CEO of Goldman Sachs. Paulson is clearly someone to be reckoned with. His career path symbolizes the economic order that has dominated the globe for the past 75 years. In the past 10 years, that order has increasingly come under threat of implosion or even conquest by a new master.
Paulson’s latest article in Foreign Affairs bears the title “The Future of the Dollar” and the somewhat defiant subtitle, “U.S. Financial Power Depends on Washington, Not Beijing.” The dollar is clearly suffering, but when someone with the authority of Paulson speaks, it can’t be a simple lamentation, but rather a call to action. He succinctly states the case: “The stature of the dollar matters.”
Paulson avoids the much too messy hypothesis of implosion and addresses exclusively the challenge of Chinese conquest. Here is how he frames the mission he hopes to see accomplished: “Above all, the United States must preserve the conditions that created the dollar’s primacy in the first place: a vibrant economy rooted in sound macroeconomic and fiscal policies; a transparent, open political system; and economic, political, and security leadership abroad.”
Paulson focuses on finding the right response in these times of trouble for the formerly unchallenged might of the dollar. Its dominance has unexpectedly been threatened by an impertinent, unpredictable and unmanageable pandemic that has already done visible damage to the US economy. Moreover, this is taking place in a historical context compounded by the growing threat from China, a nation whose intention appears to be the dethroning of the world’s favorite reserve currency
As confusion continues to reign in Washington on the question of how to put the economy back on an even keel, Paulson reminds readers that “the dollar’s status will be tested by Washington’s ability to weather the COVID-19 storm and emerge with economic policies that allow the country, over time, to manage its national debt and curb its structural fiscal deficit.” He consequently offers his invaluable practical advice.
But it turns out that defending the status quo may not be simple. There’s a question of logical consistency that must be addressed. How can you stimulate the economy and control the deficit?
But it may also be a simple question of organic longevity. Many have wondered whether the dollar as the world’s currency may not have an expiry date. Are there laws of history about the shelf life of improvised empires? Paulson recognizes that something may be amiss. “That the dollar has maintained this stature for so long is a historic anomaly, particularly in the context of a rising China,” he writes.
Paulson reminds us that the challenger to the dollar, China, may not be up to the task of defeating the reigning champion, the US. “The Chinese renminbi (RMB) has by far the greatest potential to assume a role rivaling that of the dollar. China’s economic size, prospects for future growth, integration into the global economy, and accelerated efforts to internationalize the RMB all favor an expanded role for the Chinese currency. But by themselves, these conditions are insufficient.”
The former treasury secretary pinpoints what he sees as China’s weaknesses. It suffers from not understanding its need simply to ape the US economy by adopting its ideological orientations. China, he says, “needs to make more progress in moving to a market-driven economy, improve corporate governance, and develop efficient, well-regulated financial markets that earn the respect of international investors so that Beijing can eliminate capital controls and turn the RMB into a market-determined currency.” This sounds more like the entrance requirements to join an exclusive country club than a training program for a rival champion.
Throughout the article, Paulson evokes the role of technology without necessarily appreciating some of the finer aspects of the innovation currently taking place in China and elsewhere. For Paulson, it’s all about reestablishing “balance” to allow capitalists in the US to take the lead. “Policymakers, then, need to strike a careful balance between mitigating the risks of these new technologies and supporting the ability of private U.S. companies to innovate,” he writes.
Paulson is certainly correct when he says: “To safeguard the dollar’s position, the U.S. economy must remain a model of success and for emulation. That, in turn, requires a political system capable of implementing policies that will allow more Americans to flourish and achieve economic prosperity. It also requires a political system capable of maintaining the country’s fiscal health. History knows of no country that remained on top without fiscal prudence over the long term.”
The crux of the problem is that no evidence exists that traditional economic reasoning can solve this problem on its own. How, given the divisive partisan environment of Washington, does he expect to convince enough Americans, inside and outside the Beltway, that this is the way to go? For one thing, it would mean restoring a level of international prestige that has been progressively frayed over the past two decades.
Paulson is almost certainly dreaming when he says, “To sustain that leadership, the United States should champion an initiative to adjust and update the global rules and norms that govern trade, investment, and competition in technology to reflect twenty-first-century realities.” Will President Donald Trump do it? Does he suppose Joe Biden, the Democratic presidential nominee, is up to the task? Is there sufficient trust for other nations to accept that leadership?
Twenty-first-century realities include the noticeably advanced decline of the American empire. The world continues to endure but is no longer expecting and even less clamoring for US leadership. At best, it hopes, once Trump is removed from office, that the US will help promote some other form of more collegial leadership to emerge.
To his credit, Paulson sees a multi-polar world as a desirable outcome. He opposes “[w]eaponizing the dollar,” which would energize “both U.S. allies and foes to develop alternative reserve currencies—and maybe even to join forces to do so.” He even seems to hope the euro might step up to the challenge. At least the US and Europe share some cultural roots, including having what might be called a “white” Western mentality.
In one short paragraph, Henry M. Paulson Jr. provides an explanation of the American neocolonial economic empire. Since the end of World War II, the dollar has done far more than simply offer a facility for international trade.
Paulson sums up the case for the dollar that has given the US a monopolistic edge over every other nation in the world. “The dollar’s role as the primary global reserve currency makes it possible for the United States to pay lower rates on dollar assets than it otherwise would,” he writes. “Equally significant, it enables the country to run larger trade deficits, reduces exchange-rate risk, and makes American financial markets more liquid. Finally, it favors U.S. banks because of their enhanced access to dollar funding.”
Paulson recognizes China’s success in creating a purely digital transactional economy, but he takes pride in pointing out that its “success was possible largely because China’s existing financial infrastructure was antiquated and its state banking system inefficient.” There may be a touch of sour grapes when he says that those who think Chinese innovation “might herald the end of U.S. dollar primacy misunderstand that while the form of money may be changing, its nature has not.” He believes in “real money.” Paulson hopes that “U.S. companies could create the world’s best, safest, and most secure digital currency, with robust controls against illicit finance.”
Despite his reserves, Paulson endorses the apparent resistance of Americans to adopt and adhere to the logic of the digital economy. With cryptocurrencies still on the rise and artificial intelligence on its way, the system of the future may turn out to be too different to successfully apply the logic of the past.
*[In the age of Oscar Wilde and Mark Twain, another American wit, the journalist Ambrose Bierce, produced a series of satirical definitions of commonly used terms, throwing light on their hidden meanings in real discourse. Bierce eventually collected and published them as a book, The Devil’s Dictionary, in 1911. We have shamelessly appropriated his title in the interest of continuing his wholesome pedagogical effort to enlighten generations of readers of the news.