Will the Dollar Be the Next COVID-19 Victim?

By Shlomo Maital


   Will the dollar be the next victim of COVID-19?   Bloomberg’s Stephen Roach, former Morgan Stanley chair and now a Yale U Professor, thinks it might. Here is why.

   Here in short is his argument: “Already stressed by the impact of the Covid-19 pandemic, U.S. living standards are about to be squeezed as never before. At the same time, the world is having serious doubts about the once widely accepted presumption of American exceptionalism. Currencies set the equilibrium between these two forces — domestic economic fundamentals and foreign perceptions of a nation’s strength or weakness. The balance is shifting, and a crash in the dollar could well be in the offing.”

   The dollar for 75 years, since 1945, has been a safe haven for investors – a port in a storm, for their money. This may no longer be true. As US deficits mount – so far this fiscal year alone, the federal deficit totals $738 billion, and will likely double, out of a $20 trillion GDP, or a 7% deficit.

     Since Americans save very little, US deficits have been funded by, among others, China, which has bought massive amounts of US Treasury bonds in the past. This is highly unlikely to continue, given the toxic atmosphere between Trump and Xi Jinping. So the only way the US will be able to finance its massive deficit spending, will be for the Federal Reserve to buy Treasury bonds, implying an enormous tsunami of cash flowing into the economy. Short-term, this may be OK; but long term, it could well undermine the value of the dollar, as the world becomes awash in them.

   The dollar problem predates the pandemic. Roach observes: “The seeds of this problem were sown by a profound shortfall in domestic U.S. savings that was glaringly apparent before the pandemic. In the first quarter of 2020, net national saving, which includes depreciation-adjusted saving of households, businesses and the government sector, fell to 1.4% of national income. This was the lowest reading since late 2011 and one-fifth the average of 7% from 1960 to 2005.”

   So – to simplify: If Americans do not save, and if the US government is dissaving, and borrowing like mad – who will lend it the money? Americans? No. Foreigners? Probably not. So if nobody is willing to lend to the US, except the Federal Reserve, the only alternative is to flood the world with cheap dollars. And that may spell doom for the global value of the dollar.

     This may be wrong. But it is worth thinking about – one more thing to worry about, because the global economy depends on the dollar as a main key currency.