Scaling up the madness
At least inertia is on our side
Welcome to Known Unknowns, a newsletter that aims to scale.
Are the dollar’s days numbered?
The dollar has been the world’s reserve currency for all, or most, of our lifetimes. The financial system is built around it; it is how we trade and is the currency in many transactions worldwide. Issuing the reserve currency ensures US interest rates stay low (though they were relatively high in the ’80s and ’90s). The world and our economy are built around the dollar, so every few years, many people decide that the dollar’s days as the reserve currency are numbered.
I agree there is a finite number of days left of dollar dominance. But I think that number of days is very large. I don’t know how large, but it is very big. Last week, I explained in City Journal why the dollar is not going anywhere anytime soon. True, the sanctions on Russia have reminded countries all over the world how vulnerable they are to the US so long as they hold so many dollars and dollar assets. And China is pushing hard to become the reserve currency. Its central bank is offering renminbi swap lines, and the government is doing all sorts of development work and offering bailouts. Though I am not sure China truly wants to own the world’s reserve currency. You can’t do much export-led growth when you are in that position or control your currency, and the Chinese government does not seem to want any of that. Financial markets don’t either. A manipulated currency can’t be the reserve currency. It is way too risky, politically and economically, which is probably why the renminbi makes up just 2% of global exchange reserves while the dollar makes up more than 60%.
And let’s get real, crypto is not a contender either. It is too volatile and not really backed by anything. The dollar is not truly a fiat currency because it is supported by the goods and services of the US government. Moreover, there are too few euros and no euro bonds.
So, the dollar is not going anywhere because there is no viable alternative. We don’t deserve this exorbitant privilege between our spending and laid-back approach to inflation, but it is not going anywhere. However, nothing lasts forever, so we should get our act together.
No more “Buy the world a Coke”
Besides, sanctions aren’t just done by governments anymore. Individual companies also feel compelled to pull out of countries that don’t reflect their values. Welcome to the stakeholder capitalism/ESG world. I think it is remarkable that Coke and Pepsi pulled out of Russia. They were there during the Cold War (well, they were there on and off, and their rivalry in the Soviet Union is fascinating). Coke was even at the 1980 Moscow games. Remember the “Buy the world a Coke?” idea that we are all united by our love of sugar water no matter the government we live under? No more.
Yes, Coke made a half-hearted effort to stop doing business with apartheid South Africa. But this feels different. I am still enough of a neo-liberal to think trade and shared experiences unite us and are a force for good. It still has a good track record.
I also may be influenced by the time I spent in Eastern Europe in the 1990s. Back then, young people from all over eastern Europe and the former Soviet Union came to Prague to meet Americans and Western Europeans and get to know us (before they turned cynical). They all spoke so fondly about the little snippets of Western culture they got in the 1980s and how it planted the idea in their heard that there was another, better alternative. It may be different now, but I am not sure cutting off the entire Russian population from our goods is helpful.
There is always something inherently hypocritical and arbitrary about these decisions. Russia is a small market. Would Coke do the same in China? It creates another source of risk and confusion.
It is important to distinguish between when a government halts economic activity and when individual companies do it. Government sanctions may have a spotty history of doing anything effective; at least when the government sanctions a country, it is part of a deliberate, thoughtful geopolitical strategy. The decision-makers are accountable to all voters.
Economic diplomacy in the private sector, sometimes driven by social media mob or activist employees, makes the world less stable and is a very different economic order.
Wealth tax proposal
I have so many questions about the White House’s new plan for a wealth tax. What assets will it apply to? How will wealth be measured, and who will do it? Do you get credit when you take a loss? And why is it called a billionaires’ tax when it applies to anyone with $100 million?
And what’s up with the White House when it comes to economic policy? I doubt this plan will go anywhere, even if they are counting on $360 billion in revenue from it. Trying to tax the rich is good politics, I guess. But is it good economics, is arousing more populism good for society? So many questions, and no good answers, probably because none exist.
Does this scale?
I reviewed John List’s new book in the Wall Street Journal. I highly recommend it, not so much as a business book but more as a meditation on how we use data. His book is about why certain things scale (examples of things that scale: iPhones, Netflix, Christianity) and how to enhance the odds your idea or product will scale.
He brings up many issues that I wish policymakers would take to heart. There is a fashion these days to think everything scales. If we increase minimum wages by $1 and nothing happens to labor demand, that does not mean we should double minimum wages. If giving people money directly rather than through arcane development programs in Kenya is more effective, that does not imply a UBI will work in California. Or, if you do a medium amount of QE and fiscal stimulus following a financial crisis and it’s not inflationary, that doesn’t mean you can quadruple all of that after you shut the economy down. People have problems generalizing lately and take small-scale experiments as proof of a larger concept. List’s book is a refreshing rejoinder on our rush to scale.
In other news
Some very good ideas about time zones
Until next time, Pension Geeks!