I’ve become at least somewhat jaded to transgressions of behavioral, political, and even constitutional norms since Donald Trump was inaugurated. Global markets have also generally shrugged off continuing efforts to use America’s considerable, if fading, financial might in Mr. Trump’s trade wars and personal vendettas. But, Wednesday’s insurrection shattered this uneasy calm, demolishing the “shining city on a hill” to which Ronald Reagan once compared America in which many around the world so fervently believed. There are many casualties of this quasi-coup, but the U.S. dollar may well be among them. It’s no more immortal than any other category-killer brand.
The real risk to the dollar comes to this fading category-killer, as to so many others, not from traditional providers, but instead via new digital technology. The usual competitors seeking to supplant the dollar’s reserve currency status may be major trading and financial-market nations with the clout to offer an alternative. But, while China is clearly seeking dominance for its currency as for so much else, it lacks the rule of law, ready convertibility, and the credibility necessary for reserve-currency status. The EU has a better shot and even the IMF’s occasional forays into currency alternatives are plausible, but it would take years before any and all of these fiat-currency alternatives to the dollar can reach scale.
But, as Amazon, Airbnb, Uber, and so many other tech category-killers have demonstrated, time is not on the side of aspiring fiat currencies. Thus, the most immediate and powerful challengers to the dollar come instead from cross-border digital currencies.
The class leader here is Diem, once Libra, via Facebook, a private sector digital currency that has stolen a giant leap on other digital-currency options. Its clout is clearly tremendous as evidenced not only by all of the efforts since its launch to strangle it, but also the latest, unequivocal statement from the President’s Working Group on Financial Markets.
Facebook is undeterred, but Diem still faces an array of regulatory and payment-system roadblocks. If central banks can mobilize their tribal instincts into a concerted effort and learn to go digital, they could well leverage fiat currency’s remaining power and pose a more formidable challenge to the U.S. dollar. In 2019, the head of the Bank of England called for a global central bank digital currency, making it clear that the U.S. had violated the critical criterion of a reserve currency: political neutrality. A global CBDC is still on the drawing board, as are national and regional CBDCs other than China’s, which is up and running with the efficiency only an autocratic regime can muster. Still, the technical underpinnings of CBDC are moving quickly and, combined with the Fed’s halting progress towards even a domestic instant-payment system, challenges to the dollar will arise not only for policy reasons, but also and likely more compellingly for payment-system ones.
In its granite cocoon of once indomitable power, the Fed is convinced that it can take its time first with instant payments and then with CBDC because no one can challenge the almighty dollar. Once this was true, but once I took taxis.