OPINION:
President Trump has threatened punitive tariffs on BRIC nations — originally, Brazil, Russia, India, China and South Africa and now joined by several other emerging economies — for exploring alternatives to the dollar for international payments.
Historically, U.S. Treasurys have provided foreign central banks, businesses and investors with a stable, secure store of value, which has permitted the dollar to become the dominant international medium of exchange.
When a Chilean firm imports clothing from Vietnam, it must convert pesos to dong, but the market for those currencies is thin. Instead, the Chilean firm uses pesos to buy dollars and then exchanges those for dong.
Its Chilean bank likely employs the Society for Worldwide Interbank Financial Telecommunications (SWIFT) in Brussels to order transactions and an account with a U.S. bank to execute currency exchanges.
U.S. dollars constitute 58% of central banks’ foreign currency reserves and are used in at least one side of 88% of all foreign exchange transactions.
Access to the SWIFT messaging system, which the United States can influence, and the U.S. banking system controlled by the Treasury are essential.
Other nations and investors were happy with this as long they were confident that the United States would exercise its power responsibly and continue a legal system that protects against the arbitrary confiscation of assets and that the United States pursues monetary and fiscal policies that protect the value of its Treasurys from outsized inflation.
Enter stage right Washington’s increasing reliance on economic sanctions and blocking access to the payments system to achieve foreign policy objectives.
When Mr. Trump withdrew the United States from the agreement with Iran to curb the development of nuclear weapons and cut off its access to dollar payments for its oil, European governments, which strongly supported the pact, established INTEX as an alternative platform. Ultimately, it failed owing to the necessity of finding pairs of customers in Europe and Iran seeking currency exchanges in similar amounts.
Russia, China, the United Arab Emirates and a few other nations have tried an alternative vehicle, mBridge, for bilateral currency transactions, but duplicating the complexity of the SWIFT system and the absence of a store of value analog to U.S. Treasurys are considerable hurdles.
Now, Mr. Trump is brandishing big tariffs on Mexico and Canada and levies on all imports in violation of U.S. international obligations and threatening to deport 13 million irregular immigrants his predecessor effectively welcomed.
All this raises questions about the prudence of relying on the United States as the custodian of the primary artery of international commerce: the payments system.
Powered by the Trump 2017 Tax Cut and Jobs Act and President Biden’s executive orders expanding Obamacare subsidies, social programs and student loan forgiveness, and industrial policies for semiconductors, green power and electric vehicles, the federal deficit has grown from 2.9% in 2016 to nearly 7%.
The extension of the individual tax cut provisions of the Tax Cut and Jobs Act, which expire after this year, and enhancements promised by Mr. Trump could easily bring the deficit north of 8%.
The national debt is about $36 trillion and exceeds gross domestic product at $31 trillion. Interest payments exceed defense spending.
With the supply of new Treasury securities to finance the deficit growing so rapidly, the United States may find the world’s appetite for its debt has limits.
Investors could flee Treasurys, fearing the Federal Reserve could be forced to step in as a buyer of last resort to prevent rising interest rates from choking off growth, printing too much money and boosting inflation.
Washington wouldn’t formally default, but printing money to enable excessive deficit spending would effectively use inflation to lessen the real debt burden and value of Treasurys held by foreigners.
Already, we see signs of hesitancy.
Since September, the Federal Reserve has lowered the overnight lending rate for banks by 1 percentage point, but the market rate for 10-year Treasurys has risen substantially.
A new round of spending and tax cuts, including renewal of the individual taxpayer provisions of the Tax Cut and Jobs Act, could ignite a run on Treasurys.
The search for an alternative to the dollar would then get serious.
An alternative, independent international messaging system and a large pool of sovereign bonds for exporters, importers and investors to store value would be required.
Resurrecting Libra, as Meta proposed in 2021, could create a more inflation-proof alternative to the dollar. It would be a digital currency backed by a basket of leading currencies, and the central bank of a neutral nation with a reliable legal system, such as Switzerland, could create an analog.
The central bank could offer commercial bank accounts denominated in Libra and encourage foreign governments and businesses to issue bonds denominated in Libra.
That would create a store of value free of the risks from American fiscal profligacy and the whims of national political leaders.
• Peter Morici is an economist, an emeritus business professor at the University of Maryland and a national columnist.
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