Page 57 - COVID-19: The Great Reset

has also made large recent US government deficits possible,
permitted the US to run substantial trade deficits, reduced the

exchange-rate risk and made the US financial markets more
liquid. At the core of the US dollar status as a reserve currency
lies a critical issue of trust: non-Americans who hold dollars trust
that the United States will protect both its own interests (by

managing sensibly its economy) and the rest of the world as far as
the US dollar is concerned (by managing sensibly its currency, like
providing dollar liquidity to the global financial system efficiently
and rapidly).

For quite some time, some analysts and policy-makers have
been considering a possible and progressive end to the
dominance of the dollar. They now think that the pandemic might
be the catalyst that proves them right. Their argument is twofold
and relates to both sides of the trust issue.

On the one hand (managing the economy sensibly), doubters
of US dollar dominance point to the inevitable and sharp
deterioration of the US fiscal position. In their mind, unsustainable
levels of debt will eventually erode confidence in the US dollar.

Just prior to the pandemic, US defence spending, plus interest on
the federal debt, plus annual entitlement payments – Medicare,
Medicaid and social security – represented 112% of federal tax
receipts (versus 95% in 2017). This unsustainable path will

worsen in the post-pandemic, post-bailout era. This argument
suggests that something major will therefore have to change,
either through a much reduced geopolitical role or higher taxation,
or both, otherwise the rising deficit will reach a threshold beyond

which non-US investors are unwilling to fund it. After all, the status
of reserve currency cannot last longer than foreign confidence in
the ability of the holder to honour its payments.

On the other hand (managing the US dollar sensibly for the
rest of the world), doubters of the dollar’s dominance point to the

incompatibility of its status as a global reserve currency with rising
economic nationalism at home. Even though the Fed and the US
Treasury manage the dollar and its influential network worldwide

with efficacy, sceptics emphasize that the willingness of the US

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