Mike Kudzel
speaker
62 appearances
1 recordings
1 series
first heard May 2025
last heard May 2025
Mike Kudzel’s voice in public audio — every appearance, attributed to the second.
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Appearances
And he's been like, oh, maybe this could be a little cash experiment.
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 U.S. dollars.
So U.S. Treasuries, liquid. In fact, the most liquid single market in the world, which means there's always someone there willing to trade with you.
So Ishwar says you need checks and balances, but you also need rule of law.
So we need 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 one more thing, ideally, you want a currency from a country with a strong and growing economy because it's a better bet.
And for decades, that ideal reserve currency has been the dollar. The dollar has checked all those boxes.
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.
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.
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 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.
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?
Barry wrote this book about the dollar called Exorbitant Privilege.
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.
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.
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. In 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.
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?
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%.
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