So one more question about Argentina when we move on to dollar dominance more broadly. But when I was at Treasury, many years ago, Marco, you were there, I was part of some meetings with a certain undersecretary of international affairs at Treasury, and they suggested using the exchange stabilization fund as seed money for dollarization in Argentina. You think that's even something being considered today, or would be on the table with your name? Nope. Nope. So let's move on then to dollar dominance more broadly since you answered that question for me. So you guys have a nice paper co-authored, and it's the reason we're here really together to talk today. It's called dollar dominance is here to stay for the foreseeable future. The real issue for global economy is how and why. And we'll provide a link to that in the show notes. Encourage our listeners to check it out. Let's begin our conversations about this paper by looking at its motivations. Then we'll get into some of the arguments and claims you make in it. But why this paper now, why so much interest now in dollarization? What's been happening that makes this a hot

topic? Well at one level, I'm having watched, seen this issue for decades and decades. I'm always fascinated at the fascination at this issue. But I kind of like it because as is evident here today, it gives Stephen I something to talk about which keeps us out of our wife's hair. The other answer is there are big shifts going on in the global order. You've got Russia's war on Ukraine. You have diversion of Russian energy exports to India and China. You have people asking questions well, given financial sanctions, how are countries going to pay for this? Are there alternatives to avoiding the use of the dollar given the potential presence of financial sanctions? China's talking about bolstering R&B internationalization. China's playing a rising role in the global economy. And let's not forget that US inflation has been high. And it's not as if our fiscal house is in order. So people have doubts about the US at times to say nothing of our politics. So it seems to me that there was a perfect storm last year for chattering about this issue. I think it's dying down partly because the data don't change and the dollar is remaining super strong. And when you look at China and the role of the R&B, it's still under a 3% of reserves. We'll come back to that. So basically, I think the subject is dying down for now. But we're still delighted to be here today to talk about

it. Absolutely. We love to talk. It keeps us young. I want to just add to, I mean, Mark hit the nail on the head with those points. I just want to add the word weaponization to the issue because I think that was a very prominent part of the discussion last year. Was the idea that the United States in particular is abusing its sanction power, okay, by weaponizing these economic and financial sanctions against bad actors like Russia, Iran, North Korea, et cetera. And so there was this widespread view that the US was going too far in this weaponization and that that was going to push countries away from using the dollar and motivate them to move to the R&B or maybe cryptocurrencies. And then that came on top of the other trends that Mark noted, which is China's interest in internationalizing its currency. Russia's movement away from the dollar. And also on top of that, there had been a lot of buzz that also is kind of quieting down about the idea that the dollar might be superseded by cryptocurrencies or central bank digital currencies. And it seems like all of these kinds of trends basically have come off the boil in terms of public interest.

I consider you to senior statesmen of dollar diplomacy, global dollar issues. And so as you alluded, Mark, you've seen this before, right? I mean, you've put many decades into this issue, you've looked at it. So what is it like for you to sit back and see this come up again and again? So I think previously, Steve, we talked about 2003 to maybe 2008. There was talk of the dollar being dethroned because of the huge current account deficits. That was the crisis, in fact, they were predicting before the great financial crisis emerged. There was the QE infinity, the debasement of the dollar back around the years after 2008, and nothing happened in as well. I mean, so what is it like to see this argument come up every few years and yet here we are still with the dollar?

Well, it just suggests that people around the world are a little bit uncomfortable with the hegemonic position of the United States and the hegemonic position of the dollar and as a related matter of the Federal Reserve. So it's naturally going to attract attention and that attention is going to come in waves prompted by particular developments in the early 2000s. It was the fall in the dollar in the context of our large current account deficits in the 2013, 1415s. It was our QE, the Fed's QE, and how that was spilling over to emerging markets. And then in the last couple of years, it was the weaponization of US sanctions in the context of those types of developments. So it happens and I expect it will continue to happen.

Okay, and we'll come back to the podcast and do another show when it happens again. Okay, let's go to your paper and the first section. You provide evidence that the dollar is still dominant. So walk us through that

evidence. First of all, I want to really thank Steve. He was the main mover and shaker behind this paper. He did much more work. I was a free or easy writer, so

thank you, Steve. He has too humble.

So the answer to the question is super easy. And I think it's super easy because of the great work of Steve's former colleagues at the Fed, Carol Bertot, Bastian von Beshwitz, and Stephanie Krakuro, and their paper on the international role of the dollar and a gentleman also named Colin Weiss at the Fed and his work on geopolitics in the dollar's reserve currency role. So if you look at a range of measures that they cite in global private finance and official reserves, it's pretty clear. So you look at the currency denomination of international trade. Well, basically the dollar is basically 75% or higher usage in regions around the world, except for Europe. It's noteworthy that the Chinese R&B now is roughly a quarter or more of trade denomination in Asia. You look at international bank loans. The dollar is about 60%, the Euro 20%, Euro sterling, and other 10%. International debt securities, the dollar is around 70%, the Euro 20. You look at foreign exchange transactions. So the BIS does a triennial survey. Now it's very weird. They basically, because foreign exchange transaction involves two currencies, like I sell you a dollar or you give me a euro, right? And so the BIS sums it up to 200%. And what you find is that the dollar is in the upper 80% percent. I, having been a mere treasury person and not a member of the Secret Temple Society of the BIS in central banks, am not smart enough to realize why these high priced economists in the BIS haven't learned how to divide by two and just tell us it's in the upper 40s, but it's okay. But Steve maybe knows the answer to that. And then the thing that's often widely cited, and this is official, it's not the private side, is basically the dollar's role in reserves. And the IMF keeps good data on that to spin remarkably enhanced since 2015. And if you look at that measure, the dollar is now 60% just a little tad below. And some people go, oh, in 2000, the dollar was 70 and now it's 60. So the dollar's role is coming off. But if you go back a few years before that, like 1995, the dollar's role was 60. So to me, the dollar's role is still very dominant. And let me just say a few other quick points. One is I do think market participants are looking at the margins for diversification alternatives, but they have an interest. And we may come back to this in open liquid capital markets. And so they look at frequently at Canadian dollars, Australian dollars, and Swiss francs, but those are small places. There's only so much you can get. But there is some movement there. And then the other one that everybody is talking to, and we'll definitely talk about this later, is the Chinese R&B. But the Chinese R&B share is now under 3%. Another observation I'd make is that the IMF data do not include gold holdings. There's definitely evidence that there's some central banks are shifting a little bit of their work in gold. And then just since I mentioned colon wise, I just say his paper basically says, three quarters of foreign government holdings of USAF assets are held by countries with some form of military tie or alliance to the US, and that US allies are more inclined to rely on the dollar and less prone to diversify given close ties with the US.

I would just add to what Mark noted that he cited all these areas in which the dollar, you know, is great dominance in terms of international financial holdings and transactions. That's all against the background of a US economy that only accounts for about 10% of GDP and 20% of global trade. Okay. So the point is that the dollar punches way above its weight relative to the weight

of the US economy in both global trade and global GDP. I think we're about 25% of global GDP using market exchange rates. And I think it's 15ish or no,

it's about 20 on PPP. All right. So let me go back to one of the set of statistics that you've brought up. As the BIS is a measure of bank loans, and I believe also like corporate debt. And I sometimes check in on that data. They can think they call it global liquidity indicator and where they sum all this up and they do it by currency. What's been fascinating to me is if you look at the amount of this debt, the bonds in bank debt that's issued in a currency and outside of the country itself, so dollar denominated liabilities being issued outside the US. It's like 13 trillion or so. And you look at other countries, it's much smaller, 4 trillion of a year. It drops dramatically. But it's not just the absolute size. There's a growing gap between the two, which suggests that this dollar dominance is deeply embedded and might be growing. The network effects are growing. You think that's a fair assessment that it's not just we're here, but it's getting stronger over time.

Well, I think that's what the data say. I will note that it's surprising that that should be the case because you would think that first of all, with the rise of China and its attempts to internationalize the RMB, with growing more sophisticated reserve management on the part of central banks that Mark alluded to where they're trying to diversify into other currencies. And now there's a lot of movement toward China rationalized cross-border payment flows and kind of like used technology instead of the dollar as a vehicle currency. All of these things should be cutting in to dollar dominance. And I think ultimately will, but it's not happening anytime soon. And it does look like the dominance of the dollar is actually being cemented in rather than a road away.

So it is surprising. And that's the next part of your paper. Dollar dominance is kind of here to stay for the time being at least, right? And what evidence, other evidence would you point to? For example, why should we not be concerned about China?

So to me, some people give the impression that dollar dominance was foreordained or a dictate from the heavens or Congress or whatnot. That's not the case. The dollar's dominance reflects organic properties, I would call them, of the United States.

So

we have a huge economy, the biggest in the world, market exchange rates. We've generally delivered decent macroeconomic performance. Very key. US capital markets are the most open, deep and liquid in the world. So they offer a wide array of instruments, the foreigners, treasuries, the world's risk-free asset, for example. Capital can come in and out. It's not going to impact prices, all that much transaction costs are low. The economy is open, the dollar is convertible. We have rule of law and decent investor protections. And then you alluded to it earlier. There's kind of what I call the network and inertia effects. So people around the world accept dollars. That's already built in. In the megabanks of the United States, basically power global payments, so they connect the world's financial systems via what I would call a hub and spoke network. And this reduces costs for everybody, so why change? If it ain't broke, don't fix it. So those are the inertia effects. So I think that is why the dollar is so strong. And these are properties we need to keep because of our own, our self-interest. Others can't match those. So you take the euro. It's a large economy. Why not the euro? But they don't have a deep liquid open European capital market. They have a German market, a French market, their efforts on capital markets. I haven't really taken it off. And then I think the other question is China. Could it become the major global financial and reserve currencies? Just tons of attention paid to this issue. In my view, it could rise to some degree, especially from its 3% or under reserve threshold in the foreseeable future. But the R&B isn't convertible. Capital controls abound. The economy faces massive headwinds. There's capital outflow these days. And those are huge issues confronting it. Now on the other hand, it's increasingly used for trade settlement, as I mentioned. China is reinforcing the R&B's rule around the world through swap lines. They're trying to build out this cross-border interbank payment system. The People's Bank will seek opportunities here and there to liberalize if it can. There are the questions about Russia leaning heavily on R&B usage to circumfetti Western sanctions. So again, those could support a larger global role. But I think the upside potential for the R&B is limited given that it just can't match the properties of our system and markets. Stablecoins and cryptocurrency, Steve mentioned. And I don't think they're going to erode dollar dominance either. Now it's possible that improving payment systems and all that could reduce the dollar's role as a vehicle currency. But it's unlikely that the dollar would be threatened. Crypto assets are highly volatile, unsuitable as a medium of exchange or a store of value. They lack illegal underpinnings and authorities are not going to tolerate their illicit use, tether and circle. These are stablecoins are tied to the dollar so that might even enhance the dollar's role. And then thinking back to what I was saying about China earlier and the properties, again, improving the usage of vehicles as a medium exchange is not going to change questions about the underlying properties such as trust and regime, rule of law, which are relevant for store of value considerations. So this gets to the question of Chinese central bank digital currency. I don't see digital currencies either as having or the advent of digital currencies in other places as having a major impact on the dollar's dominance.

So I obviously agree with everything Mark said. Yes. I'm going to be very interested in the paper. I just kind of wanted to step back a second. So I think we make a good case that for the foreseeable future, the dollar is not going to be replaced as the world's single dominant currency by some other country's currency. You could think of a couple of scenarios where the dollar does lose dominance. One of them, you know, that gets talked about with some frequency is the idea that with a world fragmenting into different regional blocks for geopolitical reasons and trade reasons, you could imagine that being accompanied by a fragmentation of dominant currencies. So that basically you have maybe the West with a dollar block and the East with an RMB block. That's a possibility. I don't think it's as strong a possibility as the dollar remaining dominant throughout, but it's a possibility. And it's the one that would not bring a lot of benefits to global prosperity. Another possibility that I think is even less likely but is greatly concerning to us, and I'm just leaping ahead to our punchline at the end, is the possibility that the United States' failure to resolve its political dysfunction and failure to get our fiscal house in order could actually lead to such economic destabilization that it would trigger a loss of the dollar. What would replace it is unclear, but that would be a deeply concerning issue. And in that issue, as we note, the loss of dollar dominance would be the least of our problems. Right.

Right. If we get to that point, there's bigger fester Fry in the Republic for sure. Right. So the United States of America itself is the biggest threat to dollar dominance. Exactly. That's a great perspective. We are our worst enemy when it comes to dollar dominance. Yes. But let me go back to this point you made. Even if we get to this place, given the lead, the first move or advantage, this is the magnitude difference between dollar-denominated assets and everybody else, it's unclear to me where you would run to if you wanted to get out of dollar-denominated assets. You'd have to have a massive issue in Suckripto, which that would raise questions about the whole point of crypto, right? Like this reminds me of Mark Carney's speech he gave at Jackson, who I think we talked about last time. He wanted a synthetic hegemonic currency, some kind of substitute to the dollar. He was criticizing the destabilizing role he thought dollars had and these problems. But even to create that, someone at the conference told me later, that is the most absurd idea because you'd have to add all this debt to something like balance sheets, which they'd have to create digital currency upon which you make a synthetic one. It was like there's just no way to get to that point. There'd have to be a massive issuance of some other asset or massive price change, quantity and price to get to a place where there'd be some other substitute for the dollar. Is that fair? Yes.

Now, I mean, it is possible. If the situation in the United States grew, let's say, much more dire than we can now imagine. And so that central banks and other countries wanted to move their assets elsewhere. They could sell off treasuries by German buns, by liabilities of many other advanced economy governments. The combination of actual trades along with price movements could reallocate their portfolios. I think it would be extremely messy. It would leave countries of China with enormous claims on the US, with a now highly devalued stock of assets. But I'm just saying, in principle, it would be possible. It would be

possible. So a couple more points on that. You also mentioned that in this world where we have a dollar block, a yuan block, two different major currencies, there is this critique that Ricardo Rice introduced me to. I think it's called the nurse critique that you would add. That actually would be more destabilizing because it's actually better to have one global medium of exchange than to have multiple because you could have panics where you run from one to the other. And so it's not clear that would be a better world at all as well as I think you mentioned your paper, the role the dollar has done in facilitating global growth, lifting billions of people out of poverty. Let me circle back to another point. And that is this increased use of financial sanctions, the weaponization. So I want to draw on a paper that you probably know these authors, but Michael Dooley, and he had a paper recently with some of his co-authors he's published with before. And the title is US sanctions reinforced the dollar's dominance. So he took the other argument. Let me just read the abstract. I want to get your response to it because it is truly a hot take on the weaponization of the dollar's role in the global economy. This is what it says. These sanctions on the use of Russia's international reserve assets seem likely to reduce the appeal of US dollar reserves as a shock absorber for international payments. But international reserves are also a means to reassure foreign investors that problematic countries will not confiscate their investment. The collateral motive for holding dollar reserves has been enhanced by the demonstration that the US is willing and able to sanction this behavior. The political risky countries now more than ever need to reassure foreign investors that their investments are safe from expropriation. We conclude the recent events will strengthen the role of the dollar as the key international reserve currency. So that was truly a unique perspective. I wonder what you

think. So dollar dominance does give the US leverage over other countries through financial sanctions. The topic of whether financial sanctions are going to impact the dollar or is a bit overdone. Let me draw a distinction. There's a distinction between whether the United States uses financial sanctions multilaterally in concert with its allies towards a strategic objective. As far as I'm concerned, has clearly been done with the blocking of Russian Central Bank and oligarch assets. In the other case, the United States going hog while using financial sanctions unilaterally abusing them at every turn. I don't think the former scenario, the multilateral scenario is going to hurt the dollar. I think that Biden administration has done a good job in working with allies and using sanctions. Now, you can say, well, beyond the G7 and Japan, Australia, New Zealand, et cetera, others such as China are going to fret. But as I noted earlier in citing the work of colonnoids, some three quarters of dollar safe assets are held by countries with some alliance ties to the US. More generally, I think in my interactions over the years with Chinese portfolio managers, the people at safe, they were professional, technical, and as we've said throughout this discussion, there really aren't that many great alternatives to the US markets. I think if we act responsibly, this is not a big issue. Let me be provocative. If the US does have leverage through the dollar, if we're not going to use it on Russia, when would we? But again, we need to act responsibly and recognize that thoughtless abuse, overuse, could be harmful to the dollar's global role. And I think former Secretary of the Treasury, Jack Lew, gave a good speech on this issue in 2016. So yeah,

that makes perfect sense to me, to Mike Dooley and colleagues article. I think he's actually been pushing this line even before Ukraine. I'd have to check, but it's part of the broader kind of intellectual effort that under the title, Bretton Woods, too, that they've been pushing for decades. Yes. The idea here is that countries will act prudently and responsibly because they fear, you know, they will fear US sanctions. And so therefore that incentivizes investors to invest in that country. I'm not convinced that's a particularly important benefit for anybody of our sanctions, but I do, Rhee with Mark, you know, that the use of our financial sanctions in coordination with allies against bad actors is an appropriate part of US policy. It's a desirable part of US policy and one that will not lose us many allies and will not lose us much support for a dominant

dollar.