The U.S. dollar is the lingua franca of the global financial system. The fact that so much of the world relies on our currency has long been understood as our exorbitant privilege — the reason we have so much leverage in the global economy and are able to borrow at lower interest rates.But the Trump administration has a much more complicated relationship with the dollar. It has come to see dollar dominance as a burden we bear on behalf of the rest of the world. But in its attempts to move away from dollar dominance, is the Trump administration on the verge of creating a financial crisis?Kenneth Rogoff is a former chief economist at the International Monetary Fund and a professor of economics at Harvard University. He has a book coming out called “Our Dollar, Your Problem.” In this conversation he walks through the history of dollar dominance, why it’s been waning in recent years and what ripple effects the Trump administration’s policies might have.This episode contains strong language.Book Recommendations:Muppets in Moscow by Natasha Lance RogoffThe Queen’s Gambit by Walter TevisBenjamin Franklin by Walter IsaacsonThoughts? Guest suggestions? Email us at [email protected] can find the transcript and more episodes of “The Ezra Klein Show” at nytimes.com/ezra-klein-podcast. Book recommendations from all our guests are listed at https://www.nytimes.com/article/ezra-klein-show-book-recs.htmlThis episode of “The Ezra Klein Show” was produced by Rollin Hu. Fact-checking by Michelle Harris, with Kate Sinclair and Mary Marge Locker. Our senior engineer is Jeff Geld, with additional mixing by Aman Sahota. Our executive producer is Claire Gordon. The show’s production team also includes Marie Cascione, Annie Galvin, Elias Isquith, Marina King, Jan Kobal, Kristin Lin and Jack McCordick. Original music by Pat McCusker. Audience strategy by Kristina Samulewski and Shannon Busta. The director of New York Times Opinion Audio is Annie-Rose Strasser. Unlock full access to New York Times podcasts and explore everything from politics to pop culture. Subscribe today at nytimes.com/podcasts or on Apple Podcasts and Spotify.
Chapter 1: What is the history of dollar dominance?
For decades now, America has dominated the global financial system. Our currency is the currency that international trade runs on. Our financial plumbing is a plumbing that basically everybody to some degree or another uses. This has been called our, quote, exorbitant privilege. Because of it, our borrowing costs are lower.
Because of it, we know things about the global economy nobody else knows, have access to information nobody else has access to. We can wrap sanctions around our enemies in a way no one else can. The worry for a long time has been that the world will slip out of this system. There have been challengers. Japan in the 80s the EU in the 2000s, now China.
But no one has really come anywhere near dislodging it. And that was partially because it's hard to build something new and partially because we were fairly, at least until recently, restrained in how we used it. We are in a way selling the world, our currency and our financial system to make it easier for them to do their transactions.
We don't want to make it too hard to use the thing we're selling. The Trump administration is at a much more complicated relationship with this, to say the least. They've come to see dollar dominance and its cousin, our military dominance, as a burden we bear on behalf of the rest of the world and a burden they should be paying more for the privilege of using.
They think that having dollar dominance has made our dollar too expensive, which has hurt manufacturing, even if it's meant cheap consumer goods. And they think that it's given us leverage. that all these idiots who came before them just haven't used, but they're going to use it. Ken Rogoff is the former chief economist at the International Monetary Fund.
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Chapter 2: How has the Trump administration altered dollar dominance?
He's a professor of economics at Harvard, and he has a new book coming out, very well-timed. It drops on May 6th, called Our Dollar, Your Problem, which is a history of dollar dominance, a history of how we built it, a history of the challenges to it, and a warning written before the Trump administration that the rest of the world was already beginning to look for exits from it.
Chapter 3: What are the risks of dollar dominance today?
But now the Trump administration has taken the stress that system was under and begun to put true cracks in it. Rogoff doesn't think we're going to be able to unring that bell.
But even bigger than that, the possibility that when you bring together our debt, now pressure on the dollar, Trump's behavior, that these things together could create a genuine financial crisis, a debt crisis, an inflationary crisis. He thinks we are way underrating the risk of it. As always, my email, EzraKleinShow at NYTimes.com. Ken Rogoff, welcome to the show. Thank you for having me, Ezra.
So I want to get at the basics of how the dollar works in the international financial system. We sell dollars to other countries. Other countries buy them. Why?
So the most important thing is the English analogy. It's something everyone understands. Partly they know what it is, and partly they like it. It's something they know and trust. There are, I think, 150-plus currencies in the world, and just imagine two people trying to communicate with two currencies they never saw. Let's just deal in dollars. So that's a big part of it.
Chapter 4: Why do other countries prefer using the dollar?
It's like a common language. How did we build that trust? Part of how we built the trust early was the dollar was good as gold. And used to be your dollar bill that you have in your pocket actually said how much it was worth in gold. And you could take it to banks and get gold for it. And that actually continued for countries until just over 50 years ago.
And then we moved to it not being based on gold, it being based on trust in the United States and how we would manage the dollar.
Well, we did. But we didn't tell anyone we were going to do that, and they weren't very happy about it. I mean, they were holding dollars because they were good as gold, and they literally meant gold. And when President Nixon in 1971 decided, hmm, I don't want to do that anymore, it was just a shock. It was actually, I think, the biggest shock until recently.
But something you often run into when you start trying to study this or prep for conversations about it is the intensity of the demand for dollar-backed assets. And one thing other countries don't have is the depth of the assets we have to sell.
And so it's not just that the dollar and dollar-backed assets like treasuries are, I think, though, I like the way you put it, are basically the lingua franca of international finance. It's also, there's enough of them to go around. There's just not as much liquidity in, you know, German currency back then.
So liquidity is an important word, and it means if you want to sell it, do you have to pay a big discount? You know that if you want to sell your house, you can sell it, but it's not necessarily something you can sell quickly. So you're... I don't know, from India and you bought a treasury bill, you can sell it to anyone in the world. They know what it is.
There's a price, usually not a very big discount from whatever the market price is. Their currency is the rupiah. If you wanted to sell your rupiah abroad, you'd pay a big discount. So deep financial markets, rule of law, There are other things like open to trade because you can get your money in and out. We've had a very open system.
I want to be careful, though, about just saying the more we print, the more the demand for it. Nothing could be further from the truth. I mean, actually, as we have more and more debt, the interest rate we pay actually goes up after a while. So there's sort of a tradeoff. But nevertheless, we pay a lower interest rate than we would if we were another country trying to do the same thing.
So this moves us a bit into the question of what we get for this dominance. Why do we want other countries to buy dollars? It's free money to us. So when they literally are buying currency, which are like the dollar bills in your pocket, that doesn't pay any interest. And in a way, they're making an interest-free loan to us.
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Chapter 5: What are the economic benefits of dollar dominance for the U.S.?
You get a lower interest rate on your mortgage because someone in China likes dollars.
What are the estimates of how much lower borrowing costs are, interest rates are in America, because the whole world is working off of our financial system?
So a short answer is for the government, half a percent to a percent, sort of the range of the estimates. That doesn't mean that we're paying a lower rate than Germany because we borrow so much more than Germany. Be very careful about that. But given how much we're borrowing, think of half a percent to a percent. And I said, what does that matter?
When you owe 36 going on $37 trillion, that's real money each percent. But it's not just the government. It's your mortgage, your car loan. It pushes down interest rates all over. Those things like your mortgage and your car loan, They can get repackaged in some complicated way, pushed out to Germany, to Japan, to someone else. So it's affecting everything.
People like to have dollars because it's the best known currency.
So tell me about some of the other benefits. I mean, the dollar dominance, it gets called the exorbitant privilege. Your book is so interesting to read in this moment because it comes from the perspective of, that this is this huge privilege America has that the other countries in the world are growing tired of. And the question is, can we maintain it?
And it comes out at this moment when you have administration that is more or less claiming it to be a burden that the other countries in the world are free riding off of and that we need to begin to pull it back. So why to the rest of the world does this seem like a great benefit for us?
Well, so the phrase exorbitant privilege was coined by Giscard d'Estaing, and literally, pardon my French, I'm not saying his name correctly, who didn't like the idea that the U.S. seemed to pay a lower interest rate. He didn't like the idea that we seemed to be able to borrow so much in a crisis.
And he didn't like the idea that his country needed to hold dollars to fix its exchange rate, which they did. And we were able to take that money and invest it in factories in Europe. So it combined a lot of things. It's used today often just to refer to how cheaply you can borrow. During the pandemic, we borrowed
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Chapter 6: How does dollar dominance affect manufacturing jobs?
As you lose your privilege and also your debt gets really high, you find that when you try to do it again, not so much. That's really the risk. So that's definitely one of the benefits of being able to borrow a lot when you really, really need it.
So you sometimes hear this described negatively as... It's like the rest of the world are dope dealers to America, that it's made us addicted to debt because we can do this. Is this equilibrium where the rest of the world has made it so much easier for us to borrow and cheaper for us to borrow?
Has that been good for us or has that, as you'll sometimes hear from the more austerity focused side of the debate, been a kind of net negative because it allowed us to be, in their view, irresponsible?
I mean, it's purely good for us, but where you have to be careful. For example, in the early 2000s, we made it a little too easy to come in here with your money and invest it in ways that the government was backing. We deregulated too fast. It was sucking money in. So we didn't just have the exorbitant privilege. We had, you know, you come here and not a lot of regulation. It's really cool.
And that blew up into the financial crisis. So you want to be careful between everyone loves us because we're just so wonderful and everyone loves us because we're so stupid.
So then you get into this other question, which I always find a little bit unintuitive, which is that the heavy use of our dollar worldwide makes the things we buy cheaper and the things we sell literal things cheaper. More expensive. How does that work? So it's just not true. So this is just the thing that is believed. That is just not true.
You just hear it from the Trump administration, but it's not true. It's just not true. I think they conflate the stock market and houses and things like that, which are sort of investments. with buying a car. Buying cars is cheaper here than in most countries, just because it's more competitive and stuff like that. They're not the same thing.
A lot of, even the economists you're talking to are saying that, I think are being a little incautious. So it's really a completely separate issue of what the exchange rate is. There have been times when the dollar is really cheap. Right now, it's really high. I mean, it's gone down, but it's still really high.
The forces that affect exchange rates and prices are complex interaction of demand and supply and tastes and stuff like that.
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Chapter 7: What are the implications of the U.S. financial system's weaponization?
They want to take complex forces that we don't even really fully know how to track and turn them into one thing that you can grab in your fist and squeeze.
But the very specific claim being made repeatedly is that part of why America lost so much of its industrial base, so many of its manufacturing jobs, is that because of all these financial flows, because we had so much money coming into American assets... that our dollar became overvalued. We allowed other countries to keep their currency somewhat down like China.
And that this led to American experts becoming non-competitive and the American consumer having an appetite for these newly cheap goods flooding into the country. And so very specifically, the argument is that dollar dominance has been something that has hollowed out our industrial capacity and manufacturing jobs. Do you buy that?
It's ridiculous. I mean, so let me just step back a second. You're drilling in on this, but forgive me. There's a certain romanticizing of manufacturing that you hear, that you used to hear about agriculture. I'm quite a bit older than you, but back in the 1970s— You look great, though. Back in the 1970s, you had the same ads where you see the person working on the machine line or something.
You saw them about farmers. They were constantly showing the farmers. We had to help the farmers. And you know what? Those jobs went away, even though we're the agricultural powerhouse in the world because everything became mechanized. That's a lot of what's going on in manufacturing. What we blame on China, a lot of it just has to do with the way of the world. These jobs are going away.
It doesn't matter if we don't trade with anyone, these jobs aren't going to exist. And that's just like a false sale that's being made about that. It'd be great to have middle-class jobs, but that kind of middle-class job just isn't going to be there anymore. And to blame that on the fact that everybody's using the dollar all over the place, it's silly.
What is the argument being made for that, though? You're just saying it's ridiculous. And I'm not even saying you're wrong. But I want to hear you make the argument you're arguing against.
Why does Stephen Moran, the head of Donald Trump's Council of Economic Advisors, why does he think the dollar's strength over time was a contributor, a significant contributor to the hollowing out of our industrial base? He's a Harvard-educated economist.
He is indeed, and he's very good. First of all, if you're in the Trump administration, you can have an opinion on many things, but you're not allowed to have an opinion on this. I mean, Trump has this as a religious belief, and everyone's dancing around trying to provide a rationale for it.
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Chapter 8: Could dollar dominance lead to a financial crisis?
And, you know, a lot of this has to do with that incomes are just really low in China and India and many other places. And if you have openness to trade, you can argue about that. But it's not because of the dollar. It's because you have openness to trade.
If the dollar had been 30 percent cheaper for the past 40 years, would that have had, in your view, any effect on manufacturing employment at all? It might have had some effect.
It would affect our prices probably. You know, it would have affected the prices we have. Over time, if you push the exchange rate and make it too cheap, you'll get inflation. Wages would go up faster, and eventually it wouldn't be cheaper. I mean, so the argument you can use your exchange rate to manipulate by making things cheaper fails to see that if your things are cheaper,
it'll eventually, things will push up the price to make it equal. Workers can demand more. It'll still be competitive. The reason China stayed in there so long is... Keeping their currency cheaper than it would have been otherwise. They kept their currency cheaper mainly because they had... a huge number of people earning zero out in the hinterlands.
They were bringing 12 to 15 million people a year into their cities to work. And that supply kept wages down. It kept their prices down. We could be on a gold standard. There's no dollar to manipulate. And we would have lost our manufacturing through trade like that. And by the way, most of our manufacturing jobs have been lost to automation, not trade.
This is the other side of this argument I think people actually underrate. And I find that Trump people, like J.D. Vance, really shift between very, very quickly. Sometimes you'll hear J.D.
Vance make arguments about immigration, where he says that because we've had so much illegal immigration, we have not done as much automation and increased productivity as fast as we would have without it, which is fine. You can make that argument. I think in some ways it's even true. But then on the other side, they'll make this argument about manufacturing jobs.
I mean, you're trying so hard to think about something sensible when I'm hearing polemics from them, like they know what they're supposed to say or finding arguments that can hold up for a second. On immigration, by the way, I favor having a lot of legal immigration. It would be a very good idea. It's certainly the case that when you have...
Illegal immigration, it holds down the wages of low-income people. I mean, it's very hard to be competitive as a construction worker, certain parts of construction work, be a housekeeper, be a child care. It absolutely holds down. If we didn't have that, the wages would be higher. I mean, that has an effect.
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