America Should Not Push Other Countries to Adopt the Dollar
When Donald Trump returned to the White House, many feared his administration would weaken the dollar's international role. Today, that concern seems far away. Instead, the White House now sees an opportunity to expand the dollar's reach through stablecoins. These cryptocurrencies maintain a stable value because each coin is backed by dollar-based safe assets.
The administration reportedly considers encouraging other nations to switch to the greenback. This idea goes beyond troubled economies like Argentina. Even large, wealthy countries feel nervous. Officials at the Bank of England and the European Central Bank have warned about the dangers of digital dollarization.
The Appeal of Dollar Dominance
For America, more dollar users would lower borrowing costs for its government and businesses. The dollar's primacy already reduces the returns foreigners demand when investing in America by 1-2 percentage points yearly. This "exorbitant privilege" would grow as more countries adopt the dollar or foreigners hold dollar stablecoins.
Abroad, dollarization can serve as a useful source of discipline. The dollar offers a store of value for those escaping inflation caused by lax economic policies. Many Argentines, for example, keep mattresses stuffed with hard currency. The more accessible stablecoins make the dollar, the harder it becomes for governments to control capital movement and inflate away their debt.
In some places, dollarization remains the only route to long-term price stability. Both Ecuador and El Salvador use the dollar and enjoy low inflation even under populist left-wing leaders.
The Hidden Costs of Dollarization
Nevertheless, America should not pursue a pro-dollarization agenda. In stable economies, dollarization is unnecessary and brings significant costs. Dollarized economies import the Federal Reserve's monetary policy instead of setting their own. This makes fighting recessions tougher.
Because they cannot create money, it becomes harder to support the financial system temporarily during a crisis. A transition to dollar stablecoins could lead to chaos, involving bank runs and market crashes. Countries rightly defend their monetary sovereignty. It is not in America's interest to be blamed by allies for turmoil.
Risks for America Itself
Dollarization also has a dark side for America. Ironically, the dollar's status is the main reason America can run a carefree fiscal policy. It carries net debts of 100% of GDP and a budget deficit around 6%. If more of the world used dollars, it would delay the moment when a fiscal adjustment becomes necessary.
That may sound good if you sit in the Treasury today. However, the more debt America accumulates, the worse an eventual crisis might be. America itself could face a run on its currency on an epic scale. Others fear this scenario, and America is not immune.
Fixing the budget beats finding more buyers for American debt. It would avoid the danger of crisis and make America's reserve-currency status more likely to endure. It would also dodge a glaring contradiction in Mr. Trump's agenda. A model of high debt and global dollarization almost certainly means bigger trade deficits, which the president loathes.
Inflows of capital largely mirror the trade deficit. That is why the administration's trade hawks remain suspicious of the dollar's global status.
A Balanced Approach
It is a relief that the pro-dollar camp within the administration has prevailed. The greenback has not recovered much from the panic that followed Mr. Trump's "Liberation Day" tariffs. Investors are warier of unhedged dollar risk than before. At one point, taxes on foreign investors were on the cards.
Yet that does not mean the White House should overcorrect and seek dollarization where it is unnecessary and unwanted. The best way to make your currency attractive is to run good economic policy at home. Strong domestic policies will naturally enhance the dollar's appeal without forcing adoption on others.
