Washington Post columnist Fareed Zakaria writes that the dollar “gives Washington unrivaled economic and political muscle.” But that's like saying that rising usage of the meter as a measure of length would strengthen the French. Meaning it wouldn’t. A meter is a measure, as is a currency a measure.
Zakaria adds that “when Washington spends freely, it can be certain that its debt, usually in the form of T-bills, will be bought up by the rest of the world.” It may seem that way, but Zakaria would likely agree there's more to the story. In the 1970s, soaring yields on various Treasury bonds, notes and bills were evidence that the U.S. could borrow to spend not so “freely,” and only at nosebleed rates of interest.
More broadly, Zakaria arguably reverses causation. What makes it possible for the U.S. to “spend freely” isn’t the dollar; rather it’s the productivity of the American people. In other words, buyers of Treasuries know that Congress has arrogated to itself enormous amounts of the productive fruits of the world’s most enterprising people. What’s important here is that even if Treasury were issuing debt in pounds, euros, or yen, it could still run up tens of trillions worth of debt.
Zakaria is no doubt correct that the dollar is the world’s currency (more on this in a bit), but the latter does not give the U.S. the power to freeze other countries “out of large parts of the world economy." Not at all. To produce is to attract global production simply because there’s no accounting for the final destination of any good in the “closed economy” that is the world economy.
As for the U.S. being capable of blocking access to dollars circulated in sanctioned countries, no such capability exists. Money doesn’t instigate as much as it’s a consequence of production. That’s why the dollar facilitates exchange in “enemy” nations including Iran, North Korea and Venezuela. The dollars aren’t there because the Fed, the Treasury, or President Biden decreed them exchange mediums as much as market actors exchange products for products, money the lubricant of exchange. And since producers want equal value for what they bring to market, they prefer dollars as the measure enabling the exchange.
This is important in light of Vladimir Putin’s recent assertion (highlighted by Zakaria) after his recent talks with China’s Xi Jinping that “We are in favor of using the Chinese yuan for settlements between Russia and the countries of Asia, Africa, and Latin America.” On its face, this is actually a good thing. For the dollar. That is so because the dollar, despite its global usage, has demerits on the matter of price stability. Evidence supporting the previous claim is trillions in daily currency trading. If the dollar experiences more competition as an exchange-facilitating measure, it’s not unrealistic to say that dollar policy will improve in favor of greater stability.
In other words, presumed threats to the dollar could actually boost the U.S. Prosperous as we are, imagine how much greater our productivity would be if the dollar were to return to a low-entropy concept much as the minute, foot, tablespoon, and meter still are. Stable money reduces a major risk factor (devaluation) from the investment process without which there is no progress, which is why globalists (this adjective is meant as a compliment) like Zakaria should hope the Russians and Chinese bring more competition into the currency space.
Still, it’s worth stressing that just because Putin and Xi are “in favor of using the Chinese yuan for settlements” doesn’t mean it will be that way. Think about it. To presume that political or monetary types can decree a certain money form the currency of commerce is no different from saying political types can choose what goods and services will be exchanged. Except that they can’t. Producers of desirable market goods decide what they’ll take in return for what they produce, and for just that reason it’s producers who decide which money forms they’ll accept in return for their production.
The above yet again explains why the dollar is globally circulated. It’s not nor was it by decree. In reality, money in circulation is as exacting a market phenomenon as the goods and services that currencies facilitate the exchange of. In short, the dollar is the world’s currency not because the U.S. is the world’s most powerful country, but because the dollar is trusted as a measure around the world. If that ever changes, producers will jettison the dollar as they’ve long pushed aside other currencies no longer viewed as reliable exchange mediums.
