Post-Liberation Day, the dollar briefly behaved like an emerging market currency
“The interesting thing that happened after April 2 was that the dollar, which previously had always been a flight to safety currency rising during times of financial turbulence, actually fell instead. In the four years before Liberation Day, on average, the dollar had always risen in response to increases in the VIX. But for several months after Liberation Day, that sensitivity turned negative. When volatility went up, the dollar fell, making the dollar less like a safe haven currency and more like an emerging market style risk on currency.”
Mark sees stablecoins as a pernicious pass-through for crypto criminality
“Also, I see stable coins basically as a pass through mechanism for crypto. Crypto to me is about criminality, money laundering. Tether is the largest stablecoin in the world. It's in El Salvador. Who knows what it's invested in and whatnot? I think this could end unhappily.”
Exorbitant privilege from dollar dominance is overrated
“On the exorbitant principle privilege issue, I agree with Steve. I think Americans are shielded from foreign exchange risk, which is also advantage. This notion that one hears from all over the world that The US has some exorbitant privilege is overrated.”
China is exporting its way out of a housing bust, creating a second China shock
“I actually see the last twenty five years of Chinese economic development as a series of rolling shocks. So in the early naughts, massive current account surplus, undervalued currency, along comes the GFC to replace the demand. China ratchets up investment. 2015, 2016, growth scares in China. The next thing you know, the Chinese are replacing the lost demand with a housing boom. And that has now petered out. So now to replace the lost demand, you have the credit from the state owned commercial financial sector going into state owned enterprises, which keep producing manufacturing, exports that can't be absorbed domestically.”
Using trade tools to fight currency manipulation is a sketchy idea
“Steve and I both will admit there's no precise way to estimate how much currency is undervalued or not. And when we do, Steve and I are probably thinking about the trade weighted currency. But for a bilateral pair, the idea of a bilateral equilibrium exchange rate's kinda ridiculous. Countries do follow bad harmful practices at time. But on balance, I just think using trade tools to tackle currency perceived woes is a sketchy idea.”
Fiscal deficits remain the top long-term threat to the dollar
“Probably the same threat that we identified a couple of years ago when we were here even before the new administration took power, which is the fiscal. So projections for the right now, federal debt to in the hands of the public to GDP is around a 100%, which is historically high in peacetime for The United States. But the projections are given current and future fiscal deficits for debt to GDP to go up to a 150% or higher by the middle of the century.”
Bad US policies, not foreign rivals, are the real threat to dollar dominance
“We also noted that if the dollar were to be dislodged, it would be not so much because of competition from Europe or China, but because of bad economic policies in The US. And if that were the case, then the loss of dollar dominance would be the worst of our problems. So fast forward to today and the article that Mark and I wrote recently, the list of bad policies has gotten longer, and it's actually happening.”
Stablecoins are not a panacea for dollar dominance
“Stablecoins can be helpful, but they're not a panacea. In a context where our termites had been working diligently on the foundations of the house of dollar dominance, leading it to become precarious and crash, it's unclear that stablecoins would be the dollar savior. In this adverse scenario where the dollar is becoming more precarious in terms of its role and we look to stablecoin for rescue, at that point, stablecoins themselves might be a very viable entity in financial markets, but people would presumably stop pegging them to the dollar and start pegging them to other currencies.”
Europe's stablecoin panic reflects long-standing resentment of dollar dominance
“Well, they are obsessed with what they call monetary sovereignty. And it probably reflects long bristling resentments at the dominance of the dollar. I had the dubious pleasure of working on, I believe it was a g seven working group when Facebook first floated its idea for a the Libra stablecoin back in 2019. That got many members of the g seven very hot and bothered, very concerned.”
Section 122 has no real economic justification for current tariffs
“With the IEPA tariffs, my first reaction was, we've had deficits for fifty years. There's no emergency here. And I just told you there was no fundamental international payments problem. I just went through how the market functioning right now is inconsistent with the language of 122 as I think about it. So to me, why isn't 122 on its face ridiculous and out of bounds?”
