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Mike Kudzel, a money manager at PIMCO, got to work on Tuesday, April 8th, ready for a crazy day. Not wearing a suit that day, dress for your day.
Wearing Kevlar. Kevlar like what firefighters wear because markets were in flames in the aftermath of President Trump's big tariff announcements. So Mike is looking at his screens and they are all red. Basically every market in the United States, all lines are going down. You had equities go down meaningfully. You had bonds go down in price meaningfully. And you had the U.S. dollar that went lower meaningfully.
And that is weird. Because normally, when investors get scared, as they were that day, they sell risky things like stocks to buy stuff that they see as safer. And historically, that safer thing has been U.S. government bonds. Treasuries.
When you buy U.S. treasuries, you're handing over a wad of cash to the government today for the promise of getting that wad of cash back plus interest in like 5 or 10 or 30 years. You're helping finance the U.S. government buying its debt. Historically, buying treasuries has been seen as the safest thing of all. So when the stock market is looking dicey, treasuries are supposed to go up and people run towards the U.S. dollar because it's safe.
But in this particular couple few days, that was not happening. A, it wasn't happening, and B, it was picking up speed. And so all of that kind of rhymes with a
you know, a kind of moving away from U.S. assets in general. I heard you almost say flight. It's a capital flight, right? That's the phrase? Rhymes with a capital flight. Mapital height. You know, I would argue that that's not what took place. Mapital height? That's what I came up with.
You got something better? I think he didn't want to say capital flight because capital flight is like a big thing. It's money sprinting away as fast as it can go, typically from an emerging market country whose government has just done something fiscally reckless or like unforgivable. So this phrase is not something that any money manager would just throw around casually.
But it was the song that was in Mike's head. So he's looking at his red screens. Treasury prices are dropping because all of a sudden they're seen as riskier. Was there like some kind of tipping point that you're like, if that keeps going, we're beeped? Yeah, we try not to. Yeah, we've certainly used those beep words. Mike told me the tipping point was when the 30-year Treasury hit one of those round numbers that just freak people out. That was kind of a moment like,
Okay, things are definitely disrupted here. And the speed at which it's happening is picking up. And that's, but he was like, oh, that's a little bit interesting. Interesting in a bad way. Yes. And Mike is like, okay, this is new. This is...
Map it all height. We were also trying to figure out what's so what does it what does it mean? Like what's next when that when that happens? Like, OK, so now what? And the reality is we're looking for a regime break. A regime break, like maybe the end of the reign of the dollar, the era in which people all over the world turned to U.S. treasuries and dollars for safety in times of crisis.
This could be the end of something not just for money managers like Mike, but for everyone. Dollars are the common financial language. Central banks everywhere hold dollars as a way to safely store their wealth. Countries and businesses and people use it to trade. The dollar is the world's money. For the past 80 years, the dollar has been the reserve currency of the world.
And the question Mike and a lot of other people have been starting to ask is, what if that's changing? What if the world stops seeing the dollar as the safest? It's not our base case, but that question entering the conversation is...
Interesting. Interesting in a bad way. Yes. Hello and welcome to Planet Money. I'm Greg Rosalski. And I'm Mary Childs. And like Mike, we have some questions. Because the things we talk about at Planet Money, the world of economics and finance, that world is approaching its own kind of regime break.
The regime we have been under was built on some basic ideas. Things like, you know, a dominant dollar is definitely good for Americans. Global trade makes the world richer. It's in America's interest to be the world's cop.
Federally funded research pays off, you know, that kind of thing. But the people who originally built this world, they're long gone. And the Trump administration, with actions and statements, has been challenging some of these ideas about what's best for our country and its place in the world. So this is something we're going to keep covering over the next few months, an occasional series. Let's call it Pax Americana.
about that post-war balance that had put the U.S. at the center of the economic solar system and how that might be changing. Today in the show, a story about a potentially interesting question. Is the U.S. dollar's reign ending? If so, what will replace it? And what does that mean for the yous and mees around the world?
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So a reserve currency is one that countries around the world hold in reserve, in the vaults of their central banks and in bank accounts of their central banks. They can hold any currency or they can hold some of this and some of that. The idea is they need to keep their trillions of money somewhere safe to store value until the day when they need to spend it.
And they store other countries' money because they have a lot of their own, and their own currencies are not always that stable. Having other currencies gives them a buffer. One way a central bank stores another currency is by buying that country's debt.
Because for all intents and purposes, if you're holding U.S. treasuries, you're holding dollars. Same for Japanese government debt. You're holding Japanese yen, etc. And there's one currency that central banks store more than any other currency. The U.S. dollar. To understand why, we called Ishwar Prasad, a professor at Cornell University. Thank you for joining me today. Of course. I'm glad the timing worked out. And this is one of my pet subjects, so it's good. Good.
Currencies are his thing because Ishwar spent 17 years at the International Monetary Fund, which lends dollars to developing economies. So a lot of his life has been watching dollars flow all around the world.
And he has seen the dollar's dominance on a more micro level. Like sometimes when he's been traveling, he has found himself without the local currency. And he's been like, oh, maybe this could be a little cash experiment. I've been able to pay for cab rides in places like India, China, even in Italy, the land of the euro, because everybody is willing to accept dollars.
That last one, Italy, actually happened recently on a family vacation. My family knew this was coming and of course were hugely embarrassed by the whole thing. But I told the limo driver, I'll give you dollars instead of euros. And the limo driver was quite happy to accept dollars. If I tried this experiment in the US with euros or Japanese yen or British pound sterling, I can tell you fairly confidently that they probably wouldn't take it.
Ishwara's experiment works because when people trade across borders, they usually use the dollar. Around 90% of all foreign exchange transactions, they involve dollars. That's people, businesses, central banks. U.S. dollars make up the majority of reserve currencies held by central banks. At its peak, 73% of all central bank reserves were...
were U.S. dollars. And those central banks choose American currency because, Ishwar told us, it has four crucial features, four things you really need in a reserve currency. One is liquidity, meaning that they should be able to buy and sell that asset easily and in large quantities without disrupting the market. So there needs to be a lot of it, and a lot of it changing hands all the time. If you think about the Swiss franc, for instance, they
It's not a very big market. You know, Switzerland is a small economy. And if you try to buy, say, 50 or 100 billion dollars worth of Swiss government bonds and then try to sell them at one shot, it's going to destroy the market. You sell 100 billion dollars worth of U.S. treasuries. You know, this is a 33 trillion dollar market. It's not going to register as more than a ripple. So U.S. treasuries? Liquid. Inflation.
In fact, the most liquid single market in the world, which means there's always someone there willing to trade with you. Second, you need safety, meaning that the value of those assets is going to be preserved more or less. So you don't want a reserve currency from a country that's got like wild inflation or deflation or these economies about to like fall apart. You want that currency to be stable, to hold value.
But there's one other very important thing. A reserve currency issuer needs to have the trust of foreign investors. So you need good institutions. And what are those institutions? One is checks and balances. So you know that a government won't do anything crazy with its policies. Crazy like borrowing more money than it could ever pay back. So Ishwar says you need checks and balances, but you also need rule of law.
which means that the government will not change the rules at an instant and say that we're not going to pay back foreign investors. And you need an independent central bank so that you know the value of the currency is going to be preserved and the central bank will not let inflation run amok. Because if inflation runs amok, your dollar tomorrow can buy less than it can today. So we need liquidity.
liquidity, big, deep, liquid markets. We need safety, a store of value. And we need to trust the country whose currency it is, that their institutions are strong and reliable, independent, that they play by the rules. And we're
And one more thing, ideally, you want a currency from a country with a strong and growing economy. Because it's a better bet. The last thing you want to hold is a currency dropping in value. So those are all of the key attributes of a reserve currency. If one were looking for an ideal reserve currency, this is what you would want to have. And for decades, that ideal reserve currency has been the dollar. The dollar has checked all those boxes.
But it wasn't always that way. Before the dollar was the reserve currency, there was the British pound sterling. Pound sterling is the only other example of a dominant reserve currency in modern financial history. The British Empire was running trade all around the world. Reserve currencies are often associated with empire, with military dominance. And Britain was dominant.
But the pound's dominance started to wane after World War I. And then during World War II, there was an actual moment that the dollar became the money of the world. It was a conscious decision. A bunch of people in a room making a choice. A room in a big hotel in a little place called Brenton Woods, New Hampshire.
Delegates from 44 allied and associate countries arrived for the opening of the United Nations Monetary and Financial Conference. Regular Planet Money listeners will know this story. The delegates at this meeting arrived on a big train, wearing double-breasted suits. They got their pocket squares, normal 1940s stuff.
These meetings are designed to promote trade in the post-war world and to create a foundation for lasting peace. At the meeting, those representatives tinkered out articles of agreement for a new global economic structure. International trade had broken down. So to reduce chaos between currencies and restart global trade, they needed some standard, like a common language. They needed their money to talk to each other.
So in that room, they decided that basically every currency would have to be pegged to U.S. dollars. Everything had to be convertible to dollars. And the world agreed to it because the U.S. had become the center of the capitalist world. Biggest military, biggest economy, and it was growing. And people trusted American institutions.
And since those delegates in their suits met up in New Hampshire, the dollar has become globally indispensable. The more people have used it, the stronger it's gotten. And the stronger it's gotten, the more people have used it. So the dollar has been at the center of this economic solar system absolutely on purpose because the U.S. built it that way. But now economists and policymakers are debating if the reserve currency status is a good thing or if it's too much. So which is it?
Is it a privilege or a burden? And if it's not the dollar in the world's pocket, what is it? That's after the break.
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There's a phrase everyone uses to describe the luxury of your money being THE money used around the world.
The phrase is exorbitant privilege. It actually comes from a French finance minister who coined it back in the 1960s. And when you're thinking about reserve currencies and the exorbitant privilege, there's kind of one person you got to call. Barry Eichengreen at UC Berkeley. I've been predicting the gradual loss of the dollar's exceptional status for 15 plus years. Barry wrote this book about the dollar called Exorbitant.
Exorbitant privilege. That book came out in 2011, so I'll keep predicting it until I'm right. As Barry sees it, the United States has benefited from the reserve currency status of the dollar in four main ways. Number one, U.S. banks and firms and U.S. tourists have the convenience of being able to do cross-border business in their own native countries.
Currency. Like Ishwar in his taxi experiments and like businesses that don't have to exchange their dollars for other currencies all the time in order to buy and sell things because all that costs time and money. So there's convenience value.
Number two, there has been traditionally insurance value. Insurance value. When things hit the fan in the global economy, investors flock to buy U.S. treasuries. It's called the flight to safety. And the dollar gets stronger instead of collapsing. So when Lehman Brothers failed in 2008, you know, we did that. We caused the bad thing. The dollar exchange rate didn't collapse. It strengthened because everybody...
rushed into dollars, valuing their liquidity and safety. Number three, the U.S. government can borrow at lower interest rates than otherwise. Foreigners want to buy U.S. debt. That means the U.S. gets to borrow for cheaper than we would otherwise. It's kind of like the U.S. has this special low-interest credit card that other countries don't have.
And we can spend on things like infrastructure and Medicare and the military, even when we don't have that money sitting in the bank. And number four, it gives us a financial weapon.
to use, hopefully judiciously. The fact that the U.S. dollar is at the center of the global financial system means the U.S. has this unmatched power to sanction other countries. We can stop dollars from flowing to foreign banks. We can freeze or seize their dollar assets. And we do. So, Taberi, those are the four big things that make the dollar's reserve currency status a privilege. An exorbitant privilege.
But there have been some economists, including in Trump's orbit, who have argued that the reserve currency status of the dollar, it's more like a burden. They're focused on the costs of having the dollar as a reserve currency. One effect of your currency being the reserve currency is your currency is stronger than it would be otherwise.
And the Trump administration, they're like, a strong dollar is great for U.S. consumers. Imports are cheaper. Travel abroad is cheaper. But it is not great for exporters, for manufacturing in this country. Another problem with the dollar being the reserve currency, it means every other country is using it for their own purposes. So the U.S. has less control over the dollar's value.
And this is really clear during recessions, when there's that flight to safety and the dollar strengthens. If you're a business selling stuff to the world and you're struggling because there's a recession, you're actually double struggling because your products are getting more and more expensive abroad. So we asked Barry...
How bad is this? Like, if you subtract the downside from the upside, what does that leave us with? Like, a lot of privilege left over or none? There's debate amongst economists. We debate everything, of course, but there's debate amongst economists about whether the
Benefits on net are small, medium-sized, or large. But I think there is a broad-based consensus that we're better off having the dollar playing this exceptional role. So most economists agree, we are better off overall. But better off or not, the dollar's status is very gradually, glacially, Barry says, eroding. Central banks have been buying other currencies to at least rely on the dollar less.
When the dollar made up 73% of the world's central bank reserves, that was the peak. That was more than 20 years ago. And since then, the dollar's share has been slowly drifting lower and lower. It is now down to 58%. Part of that drift is America's adversaries, they don't really love this role for the dollar. So they've been looking for alternatives. So, okay, if the U.S. dollar were to stop being the world's reserve currency...
What happens? Like if I'm a central banker shopping for a new reserve currency, what are my best options? I asked each bar. This is my little list. China, Europe, Germany, France, question mark, question mark. Oh, I forgot the UK entirely. Sorry. Whoops. Japanese yen.
And then there are like kind of littler guys like Australia, South Korea, Canada. And then there's gold and Bitcoin. Does that sound like the menu of options to you? That is about right. I actually went through every single one of those possibilities with Ishwar. What about our old favorite, our old friend, the pound sterling? Yeah, it's a potential rival. Yeah, potential, but Brexit, when the UK left the European Union. The British economy has really struggled since then. Yeah.
Slow economic growth. Let's go to Japan. What are we looking at?
I mean, this is a very rich economy, but they're just not growing very much. Same problem, not much growth. Plus, Japan's population shape is all wrong. From an economics perspective, they have too many old people drawing down their pensions and not generating money. And they really need exports to grow. Which means they need a weaker yen. So for them, they don't really want it. They don't want to be the resort of currency. So I asked about Australia.
And it turns out, yeah, the Aussie dollar is on the rise. And so is the Canadian dollar and the South Korean won and even the Indian rupee. Collectively, it's a lot. But individually, each of these reserve currencies doesn't amount to very much. OK. OK. So it's like a Franken reserve currency. Yeah, it's yeah, I wouldn't put that negative spin on it. Oh, dear. OK, fine.
I'm feeling more pessimistic than I expected. But we still had some major contenders to go through. Like the euro. The euro launched in 1999. Today, it unites 20 countries with one common currency. It has pretty big financial markets, so why not the euro? Liquid, safe. Why not the euro? Well, Ishwar says... To put it mildly, it's a mess.
All those countries have their own governments with their own budgets and policies for taxing and spending. And sometimes that doesn't work out so well. Ishwar remembers the Eurozone debt crisis 15 years ago when suddenly Greece realized its books were not accurate and it did not have the money that it thought it did. In fact, it didn't have any money at all. And everyone freaked out. What we learned is that the Greek government bond is not exactly as safe as a German bond.
And if you only look at the ones that are considered safe, suddenly the market is really small. Too small. Okay, so not the euro. What about the other obvious candidate, the other biggest economy in the world?
Interestingly, China has been actively trying to become a bigger player in the reserve currency world to get more of the world to use its renminbi. Most of China's trade with other countries was still being conducted in U.S. dollars. And the Chinese said, why the heck are we still relying so much on dollars? Why don't we and other countries get with the program and start using our currency, the renminbi, more?
So they opened new relationships with other countries. Like in 2010, China, for the first time, traded directly with Russia without converting anything into dollars. Then China started trading directly with Japan. No dollars. The renminbi went from being no percent of global foreign exchange reserves to 2.2 percent. Not huge. And that percentage has not been growing. People are worried about the state of the Chinese economy and its growth prospects.
And they don't necessarily trust the Chinese government. That's probably the biggest impediment for China. Trust. Central bankers and foreign investors around the world worry that China will change its rules and they won't be able to get their money out, despite China's promises. So.
Okay. Wow. We have found functionally no viable candidates. No, but of course we have to talk about gold and Bitcoin, which are on your list. Okay. Let's do gold. I love gold. Who doesn't? I have some right here. I got a bit of gold the other day. Did you? Nice. Carrying it around with you. Store of value. That's what I'm talking about. The
The price of gold has been on an absolute tear lately. Gold is certainly something that over millennia has preserved its value. There is a problem with gold, though, which is that it is not very liquid. Yes, literally. Good one. But also just the market. There's not enough gold. The global economy is way bigger. Central banks need more in reserve than gold can provide. All right.
Come at me, Bitcoin. So from a central banker's perspective, Bitcoin doesn't look safe. Its value is very volatile and it's not liquid. So who is your top draft? Can you make a case for anybody? I wrote a book in 2014 called The Dollar Trap. And the point I made in that book is that there are no better alternatives.
Of all the shirts hanging in the closet, the dollar seems the least muddied and least stinky one by far. This is not to say it is pristine by any means, but when you look
Still, they are reaching for it less and less. And Ishwar says that trend will likely continue. The Trump administration's policies just accelerated it. And if the dollar is less dominant, that exorbitant privilege, it would slowly dissipate. Including that bit about our government being able to borrow cheaply and subsidize our lifestyles.
If the U.S. dollar were to lose its primacy, we as consumers and the U.S. government, we'd all have to tighten our belts and that would not be such a fun day. Is that day coming? That day has been anticipated for a long time. I don't think it's coming anytime soon and I'm not even sure it'll come within the foreseeable future at all. Okay, so we have until like aliens. For a while at least.
Which is good news for our Kevlar-wearing money manager Mike Epimco. Because in recent weeks, he has not fled U.S. assets. He actually ended up buying more U.S. treasuries, more dollars, and a little bit of debt from Japan, the U.K., and Australia. Just in case. ♪
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click the links in the show notes. This episode of Planet Money was produced by Emma Peasley with help from James Sneed and edited by Marianne McKeown. It was engineered by Kweisi Lee with fact-checking help from Sierra Juarez. Alex Goldmark is our executive producer. I'm Mary Childs. And I'm Greg Rusalski. This is NPR. Thanks for listening.
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