Ken Rogoff on Past, Present, and Future of U.S. Dollar Hegemony
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The ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough. Thank you. Let's close this door.

Today, we've got a very special interview. I am joined by renowned economist Ken Rogoff. He is the professor of public policy and economics at Harvard, and he is also the author of the book, Our Dollar, Your Problem: An Insider View of Seven Turbulent Decades of Global Finance and the Road Ahead. Ken,

Welcome to Monetary Matters. Good to talk to you, Jack, and thank you for having me. I want to start by asking you about the global imbalances that you have noticed throughout your career, and in particular, the ones that I think it's fair to say they were exacerbated in the early 2000s. So you were the chief economist at the IMF from 2001 and 2003, and your book is

complete with your observations about the growing imbalances in the global economy. So the trade deficit that the US has, or also a version of that is called the current account deficit, as well as the very large surplus from China, and then the very large fiscal deficit from the United States as well. So just what were these imbalances that you were observing in the early 2000s? A terrific place to start.

So right now, President Trump complains about our current account, our trade balance, the current account, as you said, it's like a slightly generalized version of that. It actually peaked, not now, it's gone up some, the Biden era went up, but it was much higher in the early 2000s. It might have peaked in 2006, 2007, pushing 7% of GDP back then.

And I was indeed writing about it. And what concerned me was that it had shot up. I didn't understand it. I had some views. When you're looking at, in general, at macroeconomic phenomenon, if something has been going on for a long time and nothing's much happening, probably nothing much is happening.

But when you see a sudden surge of money, for example, going into Argentina or going into the United States, you should look at it. And so I was worried about what happened if it reversed. And I have to say, when I was writing about it, certainly in the early years,

I didn't know what was causing it. I really didn't. I had some inkling that it might have to do with our financial system, but I don't think I realized just how nailed that was. And if I can diverge to just tell a small war story, I actually, Alan Greenspan was the chair of the Fed. And back then he was the maestro. Everybody just listened to his every word. He was a great man.

They should have listened to his every word. And I got to speak right after him once at a giant conference, and he was going on about the US current account. And he said, "No problem. I don't see, there's nothing to see here. Why is money rushing in? Because our financial system is so great." And I came on right afterwards.

It's not easy speaking right after the chair of the Federal Reserve. I tell about this a bit in the book. There are all these camera crews loudly closing up. I think there were 15 camera crews. Some of the people leave. They're clearly less engaged in whatever the heck I have to say than what he had to say.

But I said, I disagreed. I disagreed. I said, when something changes this fast, you need to worry. And that when it adjusts, it could be a problem. It was only later when I was doing my 2009 book with Carmen Reinhardt. We were working on that for seven years, but I don't think this point had unfolded just yet.

that we realized what was going on was financial regulation that was making money rush in. And if you were a developing economy and you did that, I worked at the IMF as chief economist for a couple of years, we'd be all over them. We'd say, well, you have a lot of money rushing in, what's going on? And often we'd say, you should tighten up your regulation a little bit. You can't usefully use it this fast. And that happened there.

I don't think that's going on here right now with what we're experiencing. So it did go up quite a bit under Biden. The current account went up to 4%. It had been maybe 2.5%. And part of that was just our economy was doing great and we were just consuming and consuming. And part of that went into imports. And part of it was other things. Was it a problem? Right now, until Trump came in,

I thought the economy was doing great. They had problems. He identifies some problems for sure, but we were the envy of the world. So it's not always a problem. I would say particularly when you see this with price changes, debt, anything you look for when you see a sudden change and we will have a smaller current account trade deficit when he's done with us because that's his target. But I think it'll be pretty painful.

So the trade deficit exploded while you were the chief economist at the IMF. You were concerned about that imbalance. A mainstream view at the time, as voiced by Alan Greenspan, was that these current account deficits, they don't really matter that much. They aren't a problem. And I should say the current account is goods plus services, as well as investment income. So the improvement, I think, Ken, in the

current account from the United States, i.e. the current account getting less negative, has been services going up. So the US is, I believe, a net exporter of services to the rest of the world. And oil. Fracking was a huge step. We used to be a big importer. Now we're not. So that was actually the biggest single thing. But you're absolutely right. We're a big exporter of services. And so just looking at goods is not looking at the whole story. We're

The United States economy is a very service-oriented economy, and we're pretty good at it. There are a lot of jobs there. Maybe they're not manufacturing jobs, but there are a lot of good jobs, and we're an exporter of services, as you say. So the current account is not just goods, things you can touch with your hands, but it is services. But I think what...

A propellant of the Trump, President Trump's electoral success in 2016 and 2024, I think it's fair to say is the perceived hollowing out of manufacturing in the United States. The people who would make those goods, particularly in the middle of the country. And if you look at manufacturing jobs, those have really gone down as the trade deficit of the U.S. gone down as well. A simplified way of saying this is that the jobs were shipped overseas. I just want to say, but our manufacturing output went up.

up as a share of GDP.

How do you square the circle? Because a lot of it's automation. Automation is a much bigger driver of what's pushing out manufacturing jobs than globalization. There's some very low level ones which aren't so much automation. I want to draw an analogy to agriculture. At one time, percent of Americans were working at agriculture and it was still pretty high at the time of the Great Depression. By the 1970s, it had fallen sharply.

And you'd see television ads just like what we're seeing now about manufacturers. We need the farmers, the soul of our economy. And if you look at the numbers now, I think it's where manufacturing is headed. We are huge producers of agricultural goods. We are exporters. In fact, Trump's tariff war is hurting our agricultural sector. But it's not a lot of jobs. It's only 2%, maybe going down to 1% of jobs.

And no matter what we do, manufacturing is headed that way. Its automation is a much bigger deal than globalization going forward. So you think the Trump administration's goal is somewhat running uphill of bringing the jobs back because a secular force is just the output per worker is gone way up. So it requires fewer workers. I understand that. Thank you for that point. But I would say

We've got to look through the Trump administration's eyes because they are running the global economy. They are trying to, they have erected very large tariffs in order to remedy this situation. And President Trump, I believe, views the existence of a trade deficit as proof of cheating. So Ken, now let's try and understand these two deficits.

One way is starting with the trade deficit and then getting to the fact that the rest of the world, with those surplus dollars, invested back into the country. So China exports way more goods than it imports. So it has way more dollars. And then it recycles those dollars back into the United States.

The other way of looking at it is in the reverse, that China is a big investor in the United States to keep this currency artificially low. And as a result of that, it's very competitive. And therefore, that is why it has a trade surplus with the US and the US has a trade deficit. Which way do you think is more helpful? And also share, I learned a lot from this book of

about China, share several of the things you learned while being in China with the IMF. And you were talking to Chinese officials at the highest level, including the leader of China. You explained it very well about the tension that was just very well put. We're running a trade deficit. But the flip side of that is there's excess money that the foreigners are saving that are coming back here. They match up.

And they're investing it in the United States. They're investing it in houses, they're investing in stocks, but they're also building factories, creating jobs. By and large, yeah, they own some more of the United States, but the United States has grown a lot more than that. We are our wealth has increased vastly.

There is an issue that, for example, this may sound far afield, but I'm going to make the point. Let's just say we discovered much more oil or we discovered rarers. We have rarers and we need to mine them. And it's really expensive to mine them. Money would rush in. It would create jobs. But that money rushing in is going to bid up our exchange rate. That's true.

And that's going to make us a little less competitive in other things. And so the fact that the Trump administration says, because we're the reserve currency and everybody wants to be in the United States, but particularly want to hold Treasury bills is what it really means. It's pushing up the dollar. And there's some truth to that, but I wouldn't push it too far. The simplest and most important point is

is there's just not a close correlation between these variables. The exchange rate bounces all over creation. We've had periods where our exchange rates have been weak, periods where our exchange rates have been strong, and we're kind of running a deficit the whole time. A second thing I would say would be that we really should, if we're thinking of what's causing the trade balance reversing the exchange rate from the exchange rate,

just as an accounting measure, the current account, I'm being precise, it's a little bit broader definition. It's government saving, we're basically spending minus taxes, net private saving, which is how much we save minus how much we invest. And right now, the trade deficit is about a third the government budget deficit,

And if I really cared about the trade deficit for real, if that was really what was on my mind, I'd be thinking about closing up our government budget deficit. It doesn't automatically imply the trade deficit is less, but pretty good bet that it would. There are a lot of complex things going on. As you said, he's running against a secular force of automation that's just going to push the jobs down.

It's attacking this problem with a sledgehammer. And yeah, maybe you're hitting at something you should, but you're hitting at a lot of things you shouldn't. This system is delicate. We have all these supply chains and things going on. If you wanted to fix things, I mentioned the budget deficit, you could also redistribute income more. I mean, he has ideas about that, by the way, to be fair.

But I don't think you're going to fix it by thinking that you're going to bring manufacturing jobs back. India doesn't think it can get into manufacturing jobs. They have really cheap labor. They just see. They think we missed it. They think China grew that way. We came on too late. Now it's all going to be automation. And they're trying to go in a services direction where we probably should be thinking about, too.

Okay, so one reason that the US has a trade deficit with China is the US dollar may be a little bit overvalued. You say that's a factor, but not a huge factor. And I should say you were bringing that up to the leader of China over 20 years ago. What is it about China? What is it about the US that...

that China just appears to be much more inclined to produce than to consume. And the US appears more inclined to consume than produce. And you could attribute it to cultural factors, the US, we'd love to spend in the United States, but wasn't that true in 1950? And we had a surplus then. So what are there? Is it policy things? Is it other financial things? Why do we have such a large trade deficit and appear to be so much quote unquote better at consuming than producing and the opposite in China? One thing is we're rich and they're not.

And so when you're rich, you might do things differently than if you're not. Another thing I mentioned, we run these giant government budget deficits, which serve a purpose. I'm not just categorically saying it's a bad idea because of this.

But if the government's running a big deficit like we do, the private sector has really got to be saving a lot to make up for that. And we don't tend to do that. It's very easy to get credit. We've been getting rich in many ways faster. You see a lot of countries run surpluses when they're developing. Japan did this. I actually call it the Tokyo consensus model is trying to do this.

And other Asian economies have imitated it. At the end, I think it's a sign of weakness, not a sign of strength. They don't have enough stuff to invest in. We have much more efficient capital markets. We have a much more dynamic economy. This is where people want to be. I don't want to sound like Alan Greenspan, who I just made up a story when he went over the top about that.

But it's a lot of complex forces. And I know in politics, you just want to choose one. Something I have to say is that most Americans have always liked tariffs. They might not after getting a taste of them. My mother, she knew I was a professional economist. She was a librarian, very supremely smart and educated woman.

I wasn't winning arguments with her about this. And when I've talked over the years to people high in the Trump administration complaining about their tariff policy, I think I win the arguments, but they don't think I win the arguments. And it's very popular. The average American, you go to them and you say, would you be willing to pay a little more to protect American jobs? What are you going to say? You're going to say, yes, of course I would do that.

The problem is when you crunch the numbers and look at how distortionary they are, it's a very expensive way to protect jobs. But I can just say one other thing. If he had just, if Trump had just come in and put on 10% tariffs,

It's a dirty little secret among economists that it wouldn't be a big deal. I mean, a bit of a shock, but it's like a tax. If he came in and put in a national sales tax, but then cut a lot of other taxes, there'd be winners, there'd be losers, there'd be a lot of whining and complaining, but it's not the end of the world.

So it's an open secret among economists that a 10% tariff wouldn't be that big a deal. For the US. For the US. That would be art of the deal with the markets and the economy, right? If to take a tariff at 145% and then by comparison, 10% seems so low. Yes, except that you're causing so much damage in the interim. And also, the problem is people wonder, will you keep your word? If we recall...

He isn't keeping his word with Mexico and Canada, and he negotiated the deal four years ago. So this isn't some real estate deal where it's just one property. This is the whole economy. Millions of decisions surround what are taxes going to be? What are tariffs going to be? If you give us predictability, if you give the private sector, I'm in a university, I don't have the right to say I'm in the private sector. If you're

If the private sector is given certainty, they know how to deal with it. They can do business, they do business in a lot crazier places, but it's very hard when

when you don't know what's around the corner. So I think a lot of measures of uncertainty that economists still have to be policy uncertainties, still have to be very high. George, at the end of the book, you write about how nothing of the history of the dollar has been guaranteed and that maybe the US dollar could have been dethroned by Russia and then by Japan and then by Europe and then by China, but it hasn't so far.

How much of the U.S. is reserve currency and how it's lasted for, I guess, close to 100 years has been because of the fact that we run current account deficits? And is it required that the reserve currency of the world run an account, the current account deficit? Because that's how if you want the rest of the world to hold your currency, they have to have your currency and they don't have your currency unless there's you're running a huge trade deficit with the rest of the world, a current account deficit.

Great question. So let me start with a small point, then I'll go to a larger one. I'm never claiming, at least in many cases, I'm not claiming they're going to overtake or dethrone the United States, but they're going to take a lot of market share.

And there have been periods where there have been multiple reserve currencies. And it's not just that the dollar's first, it's way first in most measures. I think it was declining before Trump by the measures I like best. I think it peaked in 2015. And that's something a lot of people don't realize. We'll come back to the current account surpluses.

The UK ran surpluses the whole time that it was the dominant currency and longer than we've been so far. And OK, they eventually had World War I and World War II, but it was working pretty well for them.

So you don't, what gives? Because people have to hold dollars. That's right. You made a point that after World War II, you said that we ran surpluses for a while. How's that possible? It's possible because they want treasury bills. That's really what they want. And a little bit of cash, but mostly treasury bills.

We can get them by selling us factories in Europe, by selling stocks in Europe, houses. You can trade other assets for the treasury bills. And pretty much we did that. My great aunt went to Italy and she wanted to design shoes and she found she could make them really cheaply in Italy. And that exactly translates into our investing there

And why was that possible? I'm not saying this is happening directly from my aunt, who was generally at least not that well off, but the Italians needed dollars. And so they'd be needing to sell stuff to get dollars back. So there's no equation. That said, we've been running the current account deficits and consuming with seemingly out ever having to pay the piper. That day may come to an end.

There are a lot of issues around that. But fundamentally, there's a lot of issues at stake. But you don't have to run deficits. That's a misconception. You don't have to run deficits to be the dominant currency. Hey, Monetary Matters listeners, tariffs are shaking global markets and gold is responding, hitting all-time highs as market uncertainty fuels a surge in demand for physical gold.

The VanEck Merck Gold ETF, ticker OUNZ, is the only ETF that lets investors convert their shares into physical gold delivered directly to you. Now that's a standout feature. Visit vanek.com slash OUNZJack to learn more about OUNZ today. Please click the link in the description to view the OUNZ prospectus. Thanks for listening. Let's get back to today's interview.

There are economists who say, why is it not just Trump, but why are the West going so hard on China and Asia for accumulating these reserves? That's just what Europe did after World War II. But you point out in the book that actually the US often had a surplus with Europe. So how do we get, okay, your aunt, she gets to make shoes in Italy for cheaper and that's good, but there isn't a huge imbalance there.

Why can't we do it that way instead of having these huge imbalances with Asia and in particular China? What's different now? I think there are a couple of factors. So one is, especially if you look at the last 25 years, the US has just ruled. It's incredible. Trump says, by the way, I'm not political and I think he says many things, does many things that are reasonable. I'm not just Trump trashing here, although on this issue,

I am. He says we had a terrible economy.

It was a terrible economy that was the envy of the world. Everybody's looking how amazing the United States is doing, and they wanted in. They wanted to buy some of our tech companies. They wanted to buy our houses. They wanted to buy Treasury bills. They wanted everything. The United States has historically been viewed as a safe haven, not just the Treasury bill. If you buy something in the United States, let's say

You have someone who's French and they buy a building in, I won't pick New York, I don't know it that well, but I'll pick Rochester where I grew up. They buy a building, they own it. There's no debate. They can go sell it. Nobody's going to take it from them. That is so not true in most countries. Even stock, you think you own the stock? There's all sorts of games that they play.

People think in a way the United States has been a safe haven. We have the rule of law, this very deep openness. And one of the things that threatens the whole thing is not just the tariffs, but this question, excuse me,

this question, are we undermining the rule of law? I don't want to get hysterical and say every time Trump does something, he's undermining the rule of law. And by the way, the Democrats wanted to get rid of the filibuster in the Senate. I don't know if all your listeners know about that, where many things you need 60% to pass a vote. And that's been a huge stabilizing influence in our political system.

Pretty much the Democrats announced had they won, they were going to do that. And there are other things they've done that I'm not saying they're as bad offenders as Trump. I don't want to make the same moral equivalence. But general foreigners have gotten more concerned about the rule of law here. It's not that they suddenly trust China or

the UK or France more, but they trust us less. I think that's a bell you can't unring with what's going on with the Trump administration. I think there's been permanent damage here, not the end of the world, but

I don't think that's easy to repair. And some progressive listener, I don't know if you have any, but if you do, maybe you are. I regard myself as a centrist might say, "Oh, but in 2029, we'll get a Ocasio-Cortez or Gavin Newsom or somebody more centrist. It's going to be great. They'll get rid of everything Trump did." But you can get somebody else four years later.

The world has seen what can happen. And I'll make a really far out prediction. I'm not sure you're much younger than me. I'm not sure Trump's going to be looked back on as the worst president by your generation in 15 years. I look at the growth of AI, which I'm a huge fan of. We met originally a little bit through chess. I'm a huge fan of AI. It's amazing what it's done. It's enriched my life.

But it's very disruptive. And I think the kind of political turmoil that Trump represents, I don't know why it wouldn't get worse. And we can see other things where people are trying to hold back time. It's very difficult to do. I think that the 2000, the time where you were the chief economist for the IMF, that roughy period, I think, was extremely disruptive. That is really when the trade balances were most disruptive.

out of whack. And I wonder, President Trump in his own way is attempting to restore these imbalances, although he might not put it that way.

You are well known for your concern over the large fiscal deficits that the United States has and the huge buildup in debt. Are you as concerned with the trade imbalances and the current account imbalances deficits as with the fiscal deficits? And if not, why not?

When the trade deficit represents financing our unsustainable fiscal deficit, it is aiding and abetting the problem. It's an accomplice to what's going on. When the trade deficit's because U.S. tech is just ruling the world, biotech,

and everyone wants in, then that's a different matter. And by the way, when they're buying equity, who cares? If they're wrong, the price goes down. Equity buying stock, even if they're building factories, it's not as risky for us. But certainly when they're buying debt, it's a problem. And I, by the way, have not really written so much about the United States debt. A lot of my work is about emerging markets and developing economies.

But what I have written about is that people who think that it's a free lunch, we're the United States, we can just do anything we want. That is stupefyingly naive. It comes from this era where interest rates were just rock bottom. It happened in the 30s, I think it was because of the financial crisis, but they thought it would last forever.

They thought you could just count on, you could borrow to the moon. So people, the right says, let's just cut taxes and cut taxes. And the left says, let's spend and spend, believing that interest rates would never rise. But that was very naive. They have risen now quite a bit. I think if we didn't have some recession risk, they'd be higher.

And that's really I think the rest of the world's already arrived at this situation or most of it that they're seeing they reaching the end of the line. Their debts are lower than ours, most of them, but they see resistance from the markets already.

The United States hasn't hugely seen that, but I think it's a risk that I see in my book, and I think it's accelerated now under Trump. Might have accelerated under Harris too. Again, there are these larger forces where Trump is reflecting them and not necessarily causing them

Although on the tariffs, I'm not quite sure what Harris would have done to cause that much disruption. That's tough to match. You've written a lot about currencies adjusting in order to meet imbalances.

How do you think these tariffs are going to impact the global currency order? You write a lot about how fixed exchange rates versus floating exchange rates in Europe, the Euro is there, but the Greek economy, very different from the German economy. So that has imbalances. So economists or a lot of economists like you, like that economies are floating against each other. And then when Republican people who were going to be appointed and are now appointed to be Trump administration officials were asked about tariffs,

they said, oh, tariffs are not going to be inflationary because the dollar will rise to adjust that and offset the inflationary impact.

Now, of course, we know we have observed that the US dollar has actually weakened. So how is this currency mix going to be impacted by tariffs and how are they going to impact inflation and in different trade deficits? So the Trump administration officials are quite right that it was just about the tariffs without the chaos and everything else going on, the rule of law actually pushes the dollar up.

I don't want to go into the economics of that, but basically it's part way picking up for the tariffs because when the dollar goes up, it makes US goods more expensive abroad and it makes foreign goods cheaper. So he puts on a tariff to make the foreign goods more expensive. But to the extent the dollar goes up, it makes other

things other countries produce less expensive. It goes part way. It would be inflationary even then, but not as inflationary. No. I mean, there's a lot of things going on with the dollar. I think one thing is just gravity.

The dollar got really high. That's what I was writing about in 2002. And I was worried about the situation and didn't, I admit, didn't understand as much as I think I understand today. The dollar was really high. It was very high in '85 too, for the record. And both times it came down. If you look at exchange rates, not the dollar, look at the yen, look at the Canadian dollar, the pound.

When they get way out of line, either really cheap or really expensive, that's the one time when there's some forecastability. And exchange rates are so volatile, it's very hard. And the dollar had gotten just phenomenally high. I think I wrote something a year ago saying Trump wants a weaker dollar. He's going to get it because gravity is going to give it to him.

I think that's probably the larger arc of what's going on with the dollar. It's true. Some of it's like he's accelerated it by not from the tariff, but from the, I would say people being concerned about his competence. I don't know another way to put it. The British had this prime minister a few years ago named Liz Truss, who had an idea for putting in a big tax cut and running a big deficit that

It wasn't completely out to lunch, not at all, but she didn't prepare anyone for it. And she just did it out of the blue. And the markets went crazy. That pound dropped, their interest rates skyrocketed. She was the shortest live prime minister in British history, I think. And the British joke that the rise in the interest rate in the pound was the moron premium. And there's

I don't necessarily want to use that word, although I think Trump himself wouldn't hesitate to. There's a bit of a moron premium here. It's not the tariffs, it's the chaos that's going on. So that said, he can right the ship if he would walk away from this. And a lot of people in the markets, and you're much closer to the markets,

tell me that everyone believes that. They just think he's going to find a retreat. He's a very clever politician. He'll say, this was my master plan. I got the greatest concessions from the Chinese, from the Canadians, from Africa. What a deal that I did. And actually, maybe nothing much happened. And he'll retreat and walk away. And what sort of concerns me about that view is

I don't know if you watched the previous Trump administration, but he's a very active man. He tweets at night, he changes his mind a lot. And is he really going to decide he doesn't want to use tariffs to bash people for freedom of speech? I'm not sure. I don't know we're getting to such a stable place, but we'll see.

And so do you think the Trump administration wants a weaker dollar and that a weaker dollar would accomplish the goal that President Trump has said he has of narrowing the trade deficit? It has that effect at the margin, but I don't think it's a dominant effect. At the end of the day, other things like what's he going to do with our budget deficit? Let's remember.

The trade deficit and a slightly generalized version you explained at the beginning, but the trade deficit, the sum of how much the government's saving and how much everyone else is saving. And when the government's dissaving massively,

It's a lot of pressure. So if he really, that was really his big goal, he'd squeeze out. Now, is he planning to close up government dissaving? I'm sure he'd tell you he's not, but I'm deeply skeptical. I've watched what I call Doge theater. It's, it's fun. There's not a lot you can do with 5% of the government to try to make the problems go away. The tariffs will raise some money, not as much as Trump says or as

Tara for a sputum Peter Navarro says who has a Harvard degree by the way um his heart I looked at his Harvard thesis was pretty decent I just want for the record I think it was correct to give him a PhD I think he did a fine job on his thesis and was it was it was an industrial organization that was a completely different topic

And but yeah, it's an effect. But I think if we don't change our saving balance, it's not going to be a big effect. And if you go back and look at the dollar, there are periods it's been low, there are periods it's been high. And we seem to be chugging along with the big deficit all the time. It's

They're definitely related, but I don't think it's going to solve the problem. I do think the dollar is going to come down, even if he got rid of the tariffs, even if no matter what he decided to do, I think there's a good chance the dollar will come down. But I don't think it's going to fix this problem all that much, might a little, but not how we'd like.

Ken, I think I saw a documentary about the drug trade. I promise I'll make this relevant. And it started by going on the streets and the police said, you've got to go to the border. The issue is not here. No matter how many drug offenders we find and people selling drugs,

The supply is there. Go to the source of the supply. And then they go to the border and they say, you got to go back to the cities because there's a huge demand for it. And so it's the documentarian. It's like a ping pong ball between supply and demand. And I feel that way as someone who's new into this, you're obviously a veteran. So you've learned to deal with the frustration, but of...

focusing on the current account deficit and then, oh, it's the fiscal deficit. Then you go look at fiscal deficit, it's the current account deficit. And if you actually want to change things, if you and I were running the global economy, heaven forbid, or we want to even see how things could be changed, where do you start? It seems like you're saying the fiscal deficit needs to be lowered. And as a result, the trade imbalance will solve itself.

I didn't know it would solve itself, but it definitely will do more than the tariffs will do. The fact is, these are reflections of underlying forces and lots of things. The current accounts, these massive expenditures minus these massive sales, there's a lot of moving parts and things going on. You want to get the fundamentals right. You want to have a growing economy. You'd like to have jobs, good jobs for people. You'd like to have good education.

And I think you need to be careful about things like financial market regulation. Too much is bad, but too little is also bad. You want to have sensible infrastructure investment. We need rural internet now. The Biden administration actually had a big push for this, spent a lot of money, but as you probably know, built exactly zero out of it.

So the problem is still there. You want to run your country. There's no single thing. But I would say if you were asking what these things are, when you go to the doctor, maybe you're too young, haven't gone enough. They take blood tests. They check your heart and this and that. I know what's going on, but if something's out of line, you look more. And I would say the trade deficits like that and even the fiscal deficit.

If it's way out of line, if it's changed a lot, it requires a deeper look. And certainly the fiscal deficit, it looks way out of line to me by historical standards. And we don't seem to have any appetite for reining it in. The trade deficit's high. It had come down under Trump and a lot of that, it'd come down under Obama first, but maybe even more under Trump. I'd actually have to fact check that. I'm not sure.

But it did go up under Biden. And I mean, it's a funny thing to focus on when the whole world is drooling over the US economy, just wishing they could be more like the United States and then suddenly saying, oh, it's terrible. We have to change it.

And one solution, I guess, we could be to have capital controls and just prevent so much money coming into the United States. What would the advantages and maybe costs of that be as you perceive them? You've written a lot about the capital controls within China, and also how sometimes it is necessary to have capital controls to control these imbalances.

Yeah. So particularly for countries that have very corrupt governments, corrupt financial sectors, underdeveloped financial sectors, you don't want too much money flowing in too fast. You can't trust it. I give lots of examples in the book. But the United States is better. And one of the reasons we've been so successful is

By and large, with some mistakes like the global financial crisis and the Greenspan event that I told about, we've made good use of it. The money's been pouring in and our economy has been growing, wealth has been growing, and not just for a year or two. It's not just a heroin shot in the arm. It's something that's been long lasting.

I think both the Democrats and Trump, I hesitate to call him a Republican, but both sides are saying, yeah, let's look at how we can do better. The answers to that have things to do like improving health care, improving education, early childhood care. There are a lot of ideas out there. They're not so much of let's not be so open to capital.

We may end up having capital controls at the end of this, because I think what Trump's going to find is that as he continues to careen about from one tariff level to another, disturb people about what he's going to do with the Fed, disturb people about what he's going to do with the rule of law, foreigners are going to get skittish. And it wouldn't shock me if, again, Trump is

prepared to be interventionist. He does what Nixon did 50 years ago and put in capital controls in order to try to tame things.

When you're so dependent, we just are so drunk on our financial system, putting in capital controls, it's going to wreak havoc. But I wouldn't be surprised if he tries it. While we're at it, I wouldn't be surprised if he tries price controls, which Harris got roundly condemned for mentioning it in the campaign. Ford did it, Nixon did it, we did it in World War II.

And again, Trump is not someone who says economists think it's a bad idea. He's saying, if they think it's a bad idea, I really want to listen to it. I think these things could happen. Before I read the book, I had the impression that most of the world has a floating exchange regime. And that is officially true, yes. But in the book, I learned that actually maybe 40 or even higher than 40% of countries that say that they are a, oh, we float, we float, actually are basically floating.

closeted indexers to the dollar. And is that also a source of imbalances of I'm just going to make up a country? For example, China, if they have a huge surplus with the US, the yuan should strengthen to make the Chinese manufacturing less competitive. But if they're always like indexing to the dollar, then that prevents that. It doesn't prevent their wages and prices from changing. So in fact, one of the real puzzles back in the early 2000s, and I think it's something people don't understand today,

is if you did China really did fix their exchange rate for a long time. They started officially losing it in 2005, but really happened in 2015 and more and more as we speak. Let's suppose you fix your exchange rate. Let's suppose we're on the gold standard. Okay. The other thing that can adjust is relative wages. So if China was really undervalued, if that was really true, their wages would eventually have been bid up because more demand I'm sorry,

They would have more demand for goods from China. The firms would be out there trying to hire workers. They would bid up wages. Sorry. Why didn't that happen? Why didn't that happen? It didn't happen because China had a huge percentage of its population, way over half living in total poverty out in the rural parts of China.

And they gradually, meaning 15 billion people a year, let them into the cities to work. So as soon as the workers are saying, we want higher wages, the firms would say, these guys seem to be willing to work for what we're paying. So why don't you take what we're paying? So the real force

that for a long time was holding down the value of the Chinese currency was this sea of basically unemployed people that were being brought into the economy. That's happened in many countries. That's not the exchange rate system. That's really something else.

Okay. But when you write in the book, when you're about to meet the leader of China and you could bring your kids and you needed to buy a nice suit and a nice fancy clothes for your kids, you were shocked at how cheap the prices were. Doesn't purchasing power parity indicate that the currency, it is extremely cheap to build in China?

I understand your point, but isn't the IMF for a long time, I think, has not played this role, but isn't the official role of the IMF when it started right after World War II is to, if there's a chronic surplus country and a chronic deficit country, to get them in the room and have them make a deal. I think you wrote in the book that was a politically impossible task, and the IMF has not played that role for a very long time. But isn't the idea of the IMF that you have

them do a deal that's true that's always been viewed as the vision it's very difficult to actually implement it but let me again i don't know where all your listeners are but are you talking to me from new york city by the way just i am yeah okay have you i don't want to i'm going to pick a city that's a lovely city has the most important chess center by maybe in the world

but is a little down and out compared to New York. Have you been to St. Louis? I haven't, but things are a lot cheaper there. Yes. Things are a lot cheaper. Like I went to St. Louis. I was speaking at a book talk 10 years ago. I visited the chess center too, but I'm having breakfast there. I can't believe it. I can't believe it. I'm paying...

$2.50 for this big spread, not at a dive, like whatever I walked into some restaurant, what I'm paying $7 or $10 for in New York. You can even look at things like McDonald's prices, Starbucks prices, Dunkin' Donuts prices. They're not the same everywhere. Why not? The rent is cheaper. The employees are cheaper. That's a big part of why in low-income countries, things

I think things are much cheaper. When that, I did have to, my son just had raggedy clothes and I was just afraid that somehow he might, I didn't think he was going to meet the leader of China, which he did, but I was afraid that what if it happened? So we scrambled, we had to go all over and I knew I was shopping at the most expensive stores in Beijing. And I'm not sure I'm getting the ratio right. And frankly,

I don't shop for men's suits very much, but back then, certainly, I've had to wear them much more in recent years.

It seemed like it was a quarter of the price or a third of the price. But if you think about it, when that gets to the United States, it has to get trucked to wherever it's going by a well-paid Teamster. It has to go in some store, and depending where it is, the rent's expensive. And believe me, the employees helping you out with the suit are

are paid like a ton more than in the other store and on. So some of it has to do with what we call the markups. But yes, I was shocked at how cheap it was. But I mean, if you visit developing economies and you're not going just to the city where all the tourists are, this is something you often see.

Great anecdote about when you meet the leader of China, people will have to buy the book to see what that anecdote is. Very funny. Ken, what would you say are the advantages of having the US dollar be the global reserve currency? What are the advantages to American citizens and what are the costs? I would have said the cleanest, absolute clearest advantage is

that we pay less in interest. Everybody, mortgages, car loans, student loans, because the world likes to hold dollars and it's a bigger market, not just for Uncle Sam, it's a bigger market for everyone. I'm sliding over a lot of technical details. And that savings is not so big. It's not like we're paying half as much, but the estimates run from half a percent to a percent. Now I have to be careful. That's controlling for how much you borrow.

So we actually pay higher rates than Germany, but they borrow much less than we do. So controlling for how much we borrow, we pay lower interest rates. There are many other advantages. Everybody's familiar with the sanctions. We're able to do that because the dollar, not just the Treasury bills, not just the dollar, but our banking system, because the dollar is so powerful, frankly, because our military is so powerful.

We control major parts of the global financial system. You haven't asked me about crypto. Less, less so there. And that gives us a lot of power to spy on people, to impose sanctions. So that's a benefit. And maybe another one is that when we have the next pandemic,

We spent much more than anybody else in the pandemic. And OK, it's a more complicated calculation, but at least at the outset of the financial crisis, we were spending a lot more than other countries were spending. And our interest rate didn't go up that much. We didn't seem to be paying a penalty that other countries felt they were seeing. Next time, if we've lost as a result of this secular decline in the dollar that I'm saying was there before Trump,

one or two legs down under Trump, we won't be able to borrow as much as cheaply. As we try to borrow way more than say England or Canada are borrowing as a share of our income, we will see more of an interest penalty quicker. And you'll feel that when it happens. Believe me, everybody else looking at the United States, we're always feeling really bad for ourselves in the United States.

But other countries are looking at it and say, I wish our government could do that. So we are able to borrow a lot more and spend a lot more. And you say fiscal deficits are not a free lunch. But maybe one way of saying your most recent answer is that in the U.S., because we have a global reserve currency, we don't feel the cost. It can seem like a free lunch for a very long time. Whereas if Brazil wants to borrow a bunch or Argentina, they pay the cost of that free lunch almost immediately.

Yeah, there were conflating a lot of things that interest rates were going down for everybody, for Brazil, for China, for everybody. That wasn't fully understood. I think it had a lot to do with the financial crisis. I did debates all over the world with leading economists who had other ideas. I thought they were going to come back. That's part of why it seemed like a free lunch.

But other countries in the same circumstances like us were able to do less. Now, as our debt gets higher, it does matter. Germany, I mentioned, pays a lower interest rate than the United States. They just did a massive stimulus when they acknowledged that the US isn't going to defend them anymore and they better light a fire under remilitarizing.

And they paid a penalty when they did that. But the target debt went from 60% to 80% of GDP, if I have it right. And their interest rate jumped maybe half a percent.

And so that's the kind of thing that might happen to us. Didn't last time, but our debt's much bigger, interest rates are much higher, maybe less competent government. And I think we're at risk of that. And even though the US has been a huge borrower and the rest of the world has been a huge creditor to the United States,

You write about how the US actually has historically earned more on its international holdings than the world earns on the US, even though the world owns a lot more of the US than the US owes the rest of the world. And you say that's because we take way more risk. Germany would buy the Ford Bond, whereas we would buy the Volkswagen stock. So ultimately, our stocks, we take way more risk.

Is that changing though now that the US interest rates are so high, Europe is cutting rates, Bank of Japan interest rates are actually going up, but they're very low, China interest rates very low as well. The US stocks have outperformed the foreign markets. So is that different? And is US income, are we actually now paying more in interest to the rest of the world than the rest of the world pays to us for the first time in a long time, even though for a long time we've owed more than we own?

complex, multifaceted question, not easy to give a glib answer. For one thing, when you talk about us investing in factories, that's the private sector, that's not the government. So it's the private sector, the financial individuals who are really the ones that are making money on this. And so that was true.

Very recently, the last few years, despite the fact we fundamentally hold a much riskier portfolio, you said it very well. They hold, I would say this is an approximation, but they hold roughly in the United States, 60% bonds and 40% stock. That might be a year out of date, but the basic idea. And we basically hold 60% stock and 40% bonds. I'm simplifying a lot of things here.

And when you do that because of equity, it pays a higher return. On average, you do better. The last few years until recently,

our stock market was just doing so well that even though they have only a percent of their assets in the US in equity, and we have 60% abroad in equity, they were making so much money that they actually were gaining every year beyond what they were putting into us. So I don't know if there's a debate around whether that'll last.

You're probably right what you said. I haven't seen the numbers that our net payments abroad will not look as favorable in this period. But there's a phrase people have saying, we've been banker to the world. Banks take in, they issue deposits and they do take risky stuff on their books. And we've done that. It's great business.

And by the way, if you put a lot of tariffs in, it interferes with that business. President Trump explicitly recognizes this, and so does Scott Besant, who's, I think, on the whole, pretty sensible Treasury Secretary. They said, "The financial sector is doing too well. The rest of America is not." The problem with that is

They're very connected, the financial sectors. You want to build factories? I'm sorry, you're going to have to go to the financial sector to get the financing. And some of that money might have been coming in from the outside. You're planning on doing exporting? We better hope the rest of the world's not putting tariffs on us. I could go on and on. So it's some of what they say makes sense.

The global finance has been really good for us. The government gets a lot of taxes from it. They use the tax to do all kinds of things. And to just say we can solve one thing without affecting everything is very unlikely.

So in 10 years, what do you think the dollar system looks like? How is it different from the dollar system we have now? So first of all, I'm going to tell you at the end where I think we'll get. But I think along the way, it's going to be very turbulent. And I think that has to do with a lot of factors. It's not just Trump. I believe had Harris been elected, I would be making, I know I would be making this. My book was essentially about

I was doing the last day of page proofs on election day. I couldn't change a thing. I didn't have a crystal ball in the election, I'll tell you that. I had no idea who was going to win. I think we're headed for a more volatile period having to do with our debt, having to do with the loss of this to respect the Federal Reserve, having to do with the fact that the rest of the world's chipping away at our

I think it peaked in 2015 and it's been coming down. I think we're headed towards a more tripolar system. The euro is going to get bigger. The renminbi is going to become more of a thing. The dollar will still be first, but in steady decline.

That's the norm in these things. We can go back to when the Dutch Gilder in 1600s took over from the Spanish Pesetas. The Pesetas were rolling around there for a long time when the U.S. took over from the U.K. It didn't happen overnight. It was 20 years. Frankly, many people thought this vision of the future I'm giving was where we would have been 20 years ago. The last 20 years ago has been a shock to most people.

economists. There may be some Monday morning quarterback saying, I knew that. I knew that. I'd like to see what they wrote in 2005. I don't think people knew that. And so it's pausing a second. The natural, if you lived in a kumbaya world where everyone loves everyone and everyone respects every law, everybody's super nice and nobody cheats, we just want one currency.

My intellectual grandfather, Robert Mundell, my thesis advisor's thesis advisor, he won a Nobel Prize, great man, little quirky on currencies. I talk about it in the book. And he came to me and he said, I think the optimal number of currencies is an odd number less than three. He would say that to me. And he's right. If we trusted everyone, we'd like that and we'd just have the dollar. But the thing is,

The Chinese don't trust us. Obviously, the Russians don't. Believe me, the Europeans don't trust us. And really hearkening back to my chess past where I was a wandering professional chess player in my teens, you learn that, yeah, people like your dollar, but they don't necessarily like you, the United States. And there are a lot of things about the system. The Europeans don't just quietly dislike it. They hate it.

And you could go to Latin America and some of it's hot air saying they want a different system, but they don't really have an idea. There's a lot of energy pushing away from just having one all seeing currency. And we've given it a big push towards that happening recently. But I think we were headed that way regardless.

If we had one world currency, so the dollar was the global dollar, and it wasn't just the Federal Reserve and US banks that could print it, but all central banks and all banks all around the world, would the US, the fact that we have a huge current account deficit, a huge trade deficit, would that mean that we would have deflation and a recession? Because basically, we don't have our house in order, and the recession is the way to get our house in order.

Let me frame the question a little differently. Back when we were on the gold standard, we weren't controlling things. The gold standard was a brief period and there are nut cases, maybe that's too tough a word, who think what a great idea, we should go back on the gold standard. The conservative media, the Wall Street Journal occasionally gives a voice to these people.

That's worse than the tariffs. The tariffs would seem lame, tame compared to if we went back on the gold standard. The trouble with the gold standard is, okay, it's great if you're going to keep your word.

But nobody does. We've certainly cheated again and again on the gold standard. We said the dollar was worth $20 an ounce. Just kidding. $35 an ounce. That's a devaluation. Nick, we said governments can use it. And then Nixon said, just kidding. I'm not going to give you dollars. He was the president in the early 70s.

That's where the title of my book comes from, that he sent his treasury secretary to tell people they were saying, we're holding out your dollars. We thought they were as good as gold. And what if you inflate them away? The treasury secretary is a Texan said, our dollar, it's your problem. If we were on a gold standard and just suppose it was working.

Back then, if you were borrowing too much, it would put upward pressure on your interest rates pretty quickly because everybody's got the same currency and it would put downward pressure on the interest rates of the surplus countries. So there's a whole debate about this. I don't want to get into it, but there's some natural equilibration going on there that doesn't happen in a flexible exchange rate regime.

The trouble with the world currency is basically we just don't live in this kind of futuristic world. I go into Star Trek quite a bit in the book.

And because if you think about what were they using for a currency, because they seem to live in a kumbaya world, or at least within the Federation, they were basically everyone was an incredible amount of peace. They were incredibly at peace. We didn't have a world government. Europe has trouble. They're much more homogenous. They have trouble agreeing upon who gets what and how do you spend. Can you imagine if we told

Okay, I'm sorry. They're next to our southern neighbors. Wonderful country, Mexico. We told the Mexica just set the Mexican central bank and the Canadian central bank. You can now print dollars, knock yourself out. What do you think that's going to look like for inflation? The Canadians might be one thing, but Mexico is a very low income country. They'd be well within their rights if they had that ability to say,

we're just going to go crazy with this. We're going to print a lot. So how do you control everyone? You need a governance system. The Europeans have done it. I'll be better than I dreamed they could, but it's hard. It's very challenging. So this whole idea of a world currency, and I talk about that a lot in the book because it has a romantic draw. So many great economists have proposed a world currency. It sounds

crazy. I said, Mundell, my intellectual grandfather wanted one, but actually there's this long list of great thinkers, Nobel prize winners that have proposed to world currency. And I explain why not in this world are we likely to see that.

So yeah, in the book, you talk about central bank digital currencies, crypto, all the potential threats to the dollar. I think maybe one of the greatest threats to the dollar in order to replace it could be the renminbi. I learned a lot from your chapters on China. Very clear, you are an expert on China. I imagine when you were the chief economist at the IMF, China was a big topic with all these imbalances we've been talking about. Final question is about China.

Number one, how do you think they weather the storm with these tariffs? Is it stimulus? Are they finally going to be stimulating consumption, even though they've been talking about that for decades now? And number two is their goal of renminbi internationalization or replacing the US dollar, basically. Is that still top of mind, do you think, for President Xi and the Beijing, the leaders in China? And is the renminbi the greatest threat to replacing the global reserve currency as the dollar?

So I first have to say, you have just asked me so many great questions. They are really hard questions that you're asking that sort of defy having short, simple answers, but I'm going to try to do my best. So I've said that I agree with some... I'm talking about economic policies when I say what Trump is doing. I'm not condoning trying to close down my university and other things like that. I teach at Harvard University.

Shouldn't have gone off on that tangent. But I don't agree with everything. But on economic policy, there's a lot. He's a pragmatist. There are a lot of reasonable things. This one is just dumb. The tariffs, the way he's doing it, if he did it, just a flat tax.

But is there a chance that I'm the one who looks dumb and he looks like a genius 10 years from now and said, what do you know? All the economists and if I'm lucky, they'll add my name as one of the people complaining about, they all said it was numbskull, dumb, incompetent, et cetera, et cetera. And you know what? China had been a threat to the United States. China was growing like gangbusters.

Trump hit them when they're down. He hit them when their economy was weak. He hit them when she was struggling and they never came back, which you did Japan, by the way. And I hope I'm around then. And if I prove wrong and that proves right, I promise you to come back on your podcast or you'll probably have moved on to next.

bigger things, but whatever one you do, I'll come back and say it was wrong. I think that is in the realm of not being crazy. China, in some ways, is a big threat to our way of life. And we want all their stuff. I'm a globalist. And so at the end of the day, I want to engage with China. I want a peaceful rise of China. But

It's not looking as peaceful as it did back when I was chief economist at the IMF, even back 10 years ago. I hope I'm wrong. I really hope I'm wrong and I do what I can to try to bridge the two cultures. But Trump could look like a genius at the end of this, where the historians rewrite the books and say he did a lot of chaotic things. He shouldn't have attacked Canada. He shouldn't have been toting a tariff on French wine.

If you look at the big picture, he got one really important thing, which was trying to hit China while it's down. So that's an interesting question. I think we have to open our minds to that just because we have a reflexive reaction that I would say many Harvard people do. I try not to myself. The reflexive reaction that if Trump did it, it's wrong. We just know it's wrong.

It's not always pleasant living through every speech and every moment, but it could be something different. Yeah. And sorry, just about renminbi internationalization. Is that still a goal? Oh, they're totally on. They started in 2015. But let me tell you, when they saw the sanctions that we did to Russia, which we're able to do because the renminbi is not sufficiently internationalized,

They have gotten going hard on that. I don't want to go into the details here. It takes years, but that train's left the station. They're moving on. It will happen. I don't know exactly how it will go. People say, who wants the renminbi? Well, you're not going to use it unless you're in China. Neither am I. But there are a lot of countries, not just Russia, Iran, North Korea, a lot of African countries, a lot of South Asian countries or just Asian countries, that

African countries, I mentioned, Latin America, they don't trust the United States. They would just rather deal with China. They understand China's business. They know what China wants. China controls their information. They'd rather China had it than Donald Trump. That's a very large grouping. So the idea that no one wants the renminbi, we'll wake up one day and see there are a lot of places

I thought you used to love the dollar. Don't you just want dollars? You'll be going in a market in some African city, a street market, and you'll pull out your dollars and what are those? Where are they? I don't know. We don't take those. Don't be surprised if that happens in pockets and that adds up to something in the end. Thank you, Professor Rogoff. A real pleasure to have you on Monetary Matters. People should check out your book, Our Dollar, Your Problem. I read the book. I really enjoyed it. I think it is

as easy to read as an economics book is without watering down the details. And it's very wide ranging, accessible, and the footnotes in particular are very thorough. And it's just a humbling exercise for me to just see how complicated this stuff really is, because it is not simple. And I think that often in economics, particularly in finance and markets, people throw around

quick and easy narratives. And I think it's very important to look at the actual data and realize how complicated things are. Thank you again, Professor. Thank you everyone for listening. A reminder to subscribe to the Monetary Matters YouTube channel and check us out on Apple Podcasts and Spotify. Leave a rating and review. It really helps the show. Thanks again. Until next time. Thank you. Thank you. Just close this door.