There are no great powers without great currencies. The competition between the United States and China also has a financial and monetary chapter, perhaps the most sensitive aspect of the bilateral relationship between the two superpowers.
Benjamin Cohen, one of the founding fathers of International Political Economy (IPE) – a field of studies that combines Economics, International Relations and Political Science – is one of the most authoritative voices to address this issue, given his experience studying the international monetary system in depth.
In an exclusive interview with Perfil, the professor of the University of California – jokingly branded by his colleagues in the United States as "the Godfather of the monetary mafia" – predicted that the dollar will continue as the most important international reserve currency and that the renmimbi (yuan) will not challenge its leadership for "at least a decade."
Although there is a very large consensus over the crisis of the liberal international order, most academics emphasise the strength of the dollar. Do you think the dollar is in decline in the international monetary system?
I think the answer depends on the time horizon you are talking about. Is the dollar in decline in the long run? Definitely yes, for a variety of reasons. But I don’t think that’s going to happen anytime soon.
The image I’ve used is that it’s not that the wolf is at the door, it's that there are termites in the woodwork. That means that there are several forces that are levelling the dollar’s position as the dominant international currency and accumulating over time we can expect a very significant effect on the dollar’s standing.
I’m thinking of the rise of the Chinese currency, of course. China is not pushing the renminbi as it did a few years ago, but there is no question that its internationalisation remains a priority for the Chinese government. The European Union is still trying to promote the euro. There is a revival interest in gold from several Central Banks, including the Russian one, for example. And all of these elements have been compounded by the last four years of government in the United States by the Donald Trump Administration, which significantly affected trust in the dollar.
The dollar has managed to retain the confidence of international investors and Central Banks because it was always assumed that the US government would back its currency at all costs. That confidence was shaken by four years of the Trump administration. And the result is that there is a more serious look for alternatives to the dollar than there used to be.
My answer, to summarise, is that we won’t see any sudden change in the dollar’s status. But over time the dollar will definitely be in decline.
Can US President Joe Biden repair that damage that Trump inflicted on the dollar?
I think it’s difficult. Did you see the image of Humpty Dumpty, that the wall falls down and breaks into a thousand pieces and then it’s problematic to put everything back together? I think that’s the situation we have here.
The world's largest investors and Central Banks have more confidence in Biden than they had in Trump. There's no question that they trust him more. But what is happening is that for the first time they have reason to believe that a future administration might revert to Donald Trump’s policies. They no longer feel America’s commitment. And that's why I see it difficult for Biden to restore the previous status quo and the confidence that there was in the world in the US dollar and the US Treasury. From now on there will be more caution on the part of investors and Central Banks.
Why is leadership so important for the stability of the international monetary system, and who has more leadership in it today?
At the moment there is an absence of leadership. The only nation that is capable of exercising effective leadership in the monetary system is the United States, but it is distracted now by several major crises, including the pandemic, its economic consequences inside the United States, the very sharp divisions between the Republican and Democratic parties, racial issues and inequality issues.
This administration has a very full agenda and the priority items must be domestic. I do not expect the Biden administration to take any significant initiative on international monetary issues, at least not in the next two years. And then it will all depend on what happens in the midterm elections.
The administration is clearly putting its priority on resolving the domestic crises it faces. The Biden administration knows that next year’s elections could be a disaster if it can’t get unemployment down, if it can’t get people vaccinated, if it doesn’t do something about inequality and racial issues. He knows he will be punished in the next election.
The priorities are very logically placed on the domestic front. And foreign policy in general and monetary issues in particular will be put on hold for sometime.
When will the renmimbi have the same level of internationalisation of the dollar?
If you had asked me that question five years ago I would have said within five years. But something happened in 2015. As you may recall, there was a major capital flight out of China. They spent over a trillion dollars to deal with that. Since then, they were much more cautious about the internationalisation of the renminbi and went back to their previous strategy of incremental change.
They have made some initiatives, opening up their domestic bond market for institutional investors to some extent, but they haven't taken any major steps since that episode in 2015. And I don't think they will do that. By 2015 it became clear to the Chinese Communist Party leadership that the only way they could really bring the renmimbi in a position to seriously challenge the dollar would involve a major development of domestic financial markets, and that would require a much more open capital account in the balance of payments and a much more sophisticated domestic financial market. Without that, it became clear that the renminbi couldn’t really challenge the dollar as a major international currency.
But the Chinese Communist Party also recognises that the opening up, liberalisation and deregulation of the financial market in China comes at a cost, in terms of less control over the economy by the authorities. This is a government, that of President Xi Jinping, that prioritises domestic control over everything else. All the efforts they have made in dealing with the Uighurs in Xinjiang is an example of the lengths Xi and his government will go to maintain domestic control. We know they are working on facial recognition surveillance systems, with millions of cameras across the country. There is no question that when it came to a trade off between internationalisation of their currency and domestic control, they chose domestic control. And the corollary of that is a slower development of the renminbi as an international currency. I think the dollar will not be challenged by the renminbi for at least another decade.
Economist Charles Kindleberger wrote that the dollar will end up on history’s ash heap, like other currencies. Do you agree with him? Will we live to see that?
Again, it’s a time-horizon issue. In my most recent book, which is called Currency Statecraft, I pointed out that every international currency in history prior to the dollar has eventually gone into decline and ended up on the ash heap of history. That includes pound sterling, which has not disappeared, but is clearly a minor currency today.
This will also happen with the dollar. There is no reason to assume that history has stopped now and that the dollar will stand its ground. We had great currencies going all the way back to the drachma in ancient Athens, the solidus in the Byzantine Empire, the Dutch guilder, the pound sterling and they all ended up on the ash heap of history. With the exception of the pound, they don’t even exist anymore.
That will happen with the dollar eventually, but not in my lifetime. I warn you, I’m pretty old. I’m only willing to predict for the length of my lifetime!
What role do digital currencies play in the competition between the dollar and the renminbi?
No direct role. If digital currencies were to play a role, it would be as rivals to both the dollar and the renminbi. I am not persuaded that there is any digital currency out there now that can pose a serious threat to the dollar or any other national currency that functions as an international currency. And I include bitcoin in that. But there is no reason to believe that this will never happen.
I think that with each new generation of these digital currencies, they become more and more promising as rivals, as competitors, to existing state currencies that function as international currencies today. I don’t think it will tip the balance between the dollar and the renminbi – I think if anything it will tip the balance away from both.
Basically we are talking about what Friedrich Hayek called "denationalisation of money." He was a big advocate of the denationalisation of money, leaving money to be created by the private sector through competition from financial institutions. And I think digital currencies are the current manifestations of what he was talking about the denationalisation of money.
Argentina has a double financial dependence: on one side, with the United States and the IMF Board and on the other with China because of the Central Bank swap. How does Argentina avoid collateral damage in the face of the competition between the dollar and the renminbi?
Delicately. I think the answer is a matter of statecraft, it’s a matter of not becoming too dependent on either one. That means avoiding a situation where one of the major powers – the United States or China – might feel threatened by an inclination for the other. And that is a matter of statecraft. I use the word delicately, of being sensitive to avoiding a tilt in one direction or the other.
Of course, that assumes that the government of Argentina can manage its economy satisfactorily. And as we know that is an open question in Argentina’s history. I always tell my students that Argentina is one of the saddest cases in economic history. Argentina, as you know, was one of the wealthiest countries at the beginning of the 20th century, and it is tragic to see such a great country go in decline because it cannot manage its own affairs. I went to Argentina several times and loved every visit I made.
Argentina has had high inflation for 14 years, the devaluation of its currency, a fiscal deficit and, in the last three years, recession. How does a country like Argentina strengthen its currency?
It is easy for me to say what is needed, but politically it is difficult. What is needed is much better management of fiscal policy, even at the provincial level. The period in 1990 where there was currency board arrangement, Argentina had inflation under control, not for too many years, but that showed that it was possible.
What wrecked [Domingo] Cavallo's plan was the fact that the provincial governments spent excessively, relying on the national government to bail them out. Inflation was a direct result of fiscal policies that required government borrowing and ultimately the printing of money. If there is any way Argentina is going to be able to avoid recurrent and periodic inflation it is to have fiscal policy under control, including control of provincial spending, so there is no need to borrow money from the Central Bank.
That requires a strict control of fiscal policy, which is a political issue. And I am aware of how difficult it would be to implement it politically, but I think that is the solution.
You wrote "the construction of a field like IPE is never complete." What do you think IPE should investigate today?
It’s interesting that you ask that question, because I’m writing a book right now that is a follow up to [the book] International Political Economy: An Intellectual History – I call it ‘Rethinking IPE.’ And I’m working on a chapter right now that asks what is the range of issues that we should be addressing now in IPE.
In my view, there are three or four really high priority issues that should be addressed, starting with the decline of the liberal international order. Four years of Trump have made us realise that the order that was established after World War II is now receding into history very rapidly. Authoritarianism is on the rise, mercantilism, economic nationalism and chauvinism – this is a major issue.
Too much of what is being published in the IPE literature today assumes a liberal system and takes for granted that there is an open international economy, and talks about issues of trade, money, or investment in that context. But that context is changing. A new world system is slowly being developed, in which there is more priority on economic nationalism, [and] to some extent deglobalisation. I expect to see a lot of re-shoring by corporations from the US and Europe, bringing back activities that were previously gone.
Number one on my list would be the decline of the liberal international order. Number two: inequality. We are living in an era where inequality levels are at their highest in history, higher than they were in the 19th century and in 1929. The issue of inequality and related to that the issue of poverty definitely need to be addressed.
And then there is climate change. There is no question that we are living in a period of serious threats to our survival as a civilisation and as a species because of climate change. IPE has a lot to offer in terms of how to manage the problems linked to climate change.
Those are my top three priorities: the liberal international order, including China as a rising power, the issue of inequality and the issue of climate change.