It was Nixon-era Treasury Secretary John Connally who famously told a group of European finance ministers that the “dollar is our currency, but it’s your problem.” This seems even truer now than in 1971, thanks to Trump’s presidency. On his watch, the dollar lost around 10 percent against the Japanese yen. And one of President-elect Joe Biden’s earliest challenges will be staving off a full-blown dollar reckoning.
The good news is that Janet Yellen, the battle-scarred former Federal Reserve chair, should soon be on the case. As she assumes Connally’s old job, Yellen must work fast to restore trust with America’s top financiers, most of them in Asia. Four years of Trumpian bungling have not been kind to Asian central banks holding more than $3.5 trillion in Treasury securities.
Asia has long stuck with the dollar because of a dearth of alternatives. The euro? Not with Europe veering from one debt crisis to another. The pound? Not with Brexit fallout clouding Britain’s future. The yen? Not with Japan’s rapidly aging population colliding with one of the globe’s biggest debt burdens.
Yet the dollar is now watching its back as China raises its economic game. And in the ultimate bit of Trumpian irony, the trade war might end up making Beijing’s dreams of internationalizing the yuan great again.
Beijing is keen to end the dollar hegemony that affords Washington vast power and ultra-low borrowing costs. It also wants to pull in more foreign capital to accelerate its economic development.
China is steadily catching up to America’s $21 trillion of annual output. It boasts four times as many people and is now the top trading nation. Why price oil, steel and soybeans in dollars if China buys most commodities? This has dawned on state-controlled oil giant Saudi Aramco, which might soon start floating yuan-denominated bonds instead.
The real leg up, though, might be Trump’s chaotic reign.
By leaving the Trans-Pacific Partnership, the Paris climate accord and the Iran nuclear deal, and tearing up trade pacts, Trump morphed the United States into an untrustworthy partner. So did his craven attempts to extort Japan, South Korea and others hosting U.S. troops. Trump’s ploy to score Washington a cut of any sale of the TikTok app made Asia’s worst kleptocrats blush.
The bigger damage might be financial mismanagement. Trump scrapping Washington’s long-standing “strong dollar” policy in January 2018 was a dark day for export-dependent Asia. The cause-and-effect relationship between his epic covid-19 failures and a national debt zooming toward $28 trillion is indisputable.
Last year, The Post reported that Trump advisers, anxious to punish China anew, mulled canceling part of the $1 trillion-plus the United States owes President Xi Jinping’s government. This is the stuff of Venezuela, not a AAA-rated Group of Seven nation that fancies itself the cradle of capitalism.
There are myriad reasons to fault China. The Chinese Communist Party isn’t known for transparency and accountability. Too much of China’s growth is driven by debt and credit. Rather than learning from laissez-faire Hong Kong, Xi seems determined to smother it. And really, what about Alibaba’s Jack Ma? Though he resurfaced Wednesday, the Putin-esque disappearance of China’s best-known innovator for two-plus months had Xi’s “reformers” in the headlines for all the wrong reasons.”
Yet Trump’s grievance-driven efforts to strangle China’s tech giants, meritorious or not, suffered from amateur-hour execution that damaged Washington’s free-market credentials.
In the waning days of his presidency, Trump had to reverse plans to add mainland tech titans Alibaba, Baidu and Tencent to the long list of blacklisted companies. No doubt Trump got an earful from Wall Street donors unhappy they can’t invest in the three entities, which have a combined market cap around $1.4 trillion.
Biden’s team will have to act fast to restore trust in U.S. institutions. The mere presence of Yellen in a role Steven Mnuchin leaves in disarray will be a great start. So would Antony Blinken arriving at the State Department to clean up Mike Pompeo’s last-minute geopolitical vandalism.
Biden also must build economic muscle at home. Nothing Trump did with tariffs, banning companies or tax cuts made the United States more innovative or productive. The trade war did zero to improve crumbling infrastructure or the education system.
The immediate priority, though, is reassuring Asian bankers holding Washington’s mortgage that Biden’s dollar won’t be their problem. Printing the world’s reserve currency allows the United States to borrow at uniquely low rates. Biden will need this privilege as he finances the epic cleanup job Trump leaves behind. Failure to act quickly on both these tasks means a yuan-dominated future — and folks on Wall Street and Capitol Hill boning up on their Mandarin.
Trump’s most lasting economic legacy might be trashing the dollar in ways that set up China to fill the void. Oh, the irony.