Why Dollar as Reserve Currency Is America’s Achilles Heel
International economics 101 teaches that a country’s currency valuation should fluctuate based on the economy’s current account balance: If the country is running a deficit, the value of its currency should fall to make imports more expensive and exports cheaper. Conversely, if a country is running a trade surplus, the currency should rise in value. This is how markets are supposed to work.
Unfortunately, as Rob Atkinson writes in The Korea Times, they do not. The United States has run a current account deficit pretty much every year since 1982, and in the first quarter of 2022 it reached a record $291 billion. And yet, the U.S. currency has strengthened against foreign currencies. These levels of imbalances are fundamentally destructive and not sustainable.
The problem is that what McKinsey Global Institute calls financial globalization is driving the train. Capital is seeking safety and higher returns and flocks to the least worse place: the United States, driving up the value of the dollar, even as the United States runs record trade deficits.
This is made worse by the fact that the “Washington Consensus” has long held that a strong dollar—and having the dollar serve as the global reserve currency—is good for America. But over the moderate to long-term, a strong dollar and reserve-currency status are a result, not a cause of competitiveness and national strength. Moreover, a strong advanced industrial base is much more important to U.S. national power than having the reserve currency.