MW American families could be out more than $2,500 if the world ditches the dollar

By Peter Morici

Pay now or pay later: U.S. must defend its allies or the dollar could lose the reserve currency status that American consumers enjoy

The Trump administration must promote freer trade and invest in defending U.S. allies or suffer the consequences of a poorer U.S. economy.

The U.S. dollar's reserve currency status reflects both the world's confidence that the U.S. is a reliable store of value and the position of the U.S. as a global superpower.

Americans enjoy a higher standard of living owing to the U.S. dollar keeping this undisputed status. But now that China challenges the U.S. as the preeminent global economic and military superpower, the dollar and its benefits for Americans are at risk.

To counter this threat, U.S. President-elect Donald Trump should strengthen, not abandon President Joe Biden's industrial policies aimed at building America's manufacturing muscle. Trump should also recognize that the U.S. has unavoidable economic security interests in both Asia and Europe, which must be maintained in part through increased military spending that defends America's allies.

The U.S. leads in many cutting-edge technologies such as artificial intelligence (AI), chip design and medicine, but has fallen behind China in electric vehicles, batteries and the green-industry supply chain.

Moreover, the most advanced semiconductors that run AI software are designed by Nvidia $(NVDA)$, Qualcomm $(QCOM)$ and other U.S. companies - but are made in Taiwan using critical equipment that is manufactured in Europe by just one company - ASML Holding $(ASML)$.

A strong U.S. military is essential to keep both the dollar and the U.S. technology sector strong. The U.S. must secure the global supply chain and establish a leading role for U.S.-based chip fabrication so that AI can help America prosper and grow.

The U.S. can't be a major player in Asia and Europe and have a role in the Middle East without substantially increasing defense spending.

Certainly, Europe should do more to provide for its own defense, but Europe's immediate capabilities are not fully up to the task and significant American support is needed.

The U.S. can't be a major player in Asia and Europe and have a role in the Middle East without substantially increasing defense spending. Trump and Republicans in Congress will be challenged to square all that with their tax cut promises.

Multinational companies rightly worry that China is too politically erratic to be a reliable export platform. They're increasingly bringing production to India and Southeast Asia. To enjoy the widest possible markets for expensive to develop advanced technologies, the U.S. must secure access to these fast-growing developing markets.

Trump's proposed tariffs on China would create opportunities for other Asian nations to sell to U.S. markets, but across-the-board tariffs would only turn these potential partners to China.

Read: A trade war may not go Trump's way. China has his number.

Similarly, if the United States fails to adequately invest in military resources in the Pacific, fails to support Ukraine and continues a weak response to Iranian-sponsored Middle East terrorism, Asian nations can be expected to cut deals with China as best they can, for simple reasons of national survival.

A combination of China's economic strength and American strategic weakness and protectionism could undermine the reserve currency status of the dollar. The loss of the dollar's status could reduce American living standards by about 3% of U.S. GDP - currently about $2,600 per U.S. household. Roughly, that's equal to the efficiency benefits the U.S. receives from trade - about 1% of GDP - plus the estimated cost for adequately funding the U.S. military.

Americans have become smug that the dollar's international commercial role cannot easily be replaced.

Americans have become smug that the dollar's international commercial role cannot easily be replaced by the Chinese yuan $(USDCNY.FOREX)$ or another major currency. But with the U.S. federal deficit currently at 7% of GDP and likely to rise with at least some additional defense spending and Trump's tax cuts, inflation risks could erode confidence in the U.S. among those holding international bonds. Moreover, a weaker American military wouldn't inspire other central banks to stay with the dollar.

In fact, the world's next reserve currency - the dollar's replacement - might not even be a national one.

For example, Meta Platform's $(META)$ Libra -a digital currency based on the euro $(EURUSD.FOREX)$, the U.S. dollar and the British pound $(GBPUSD.FOREX)$ - was abandoned owing to U.S. government concerns about money laundering. Yet as with the SWIFT system, these reservations could be overcome if a trusted nation like Switzerland created a digital currency convertible to a weighted average of the euro, dollar, pound, yen $(USDJPY.FOREX)$ and yuan and enabled a similarly denominated bond market.

The kicker is that Trump's apparent interest in making the U.S. the world's cryptocurrency capital further legitimizes those types of synthetic assets and makes such an outcome more feasible.

It's that old story - pay now or pay later. The Trump administration must promote freer trade and invest in defending U.S. allies or suffer the consequences of a poorer U.S. economy.

Peter Morici is an economist and emeritus business professor at the University of Maryland, and a national columnist.

More: Trump's Tariffs could damage the dollar. It's a steep price to pay.

Also read: Trump's tax plans: Housing credits 'in play,' plus buzz over a short extension for expiring cuts

-Peter Morici

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December 03, 2024 13:22 ET (18:22 GMT)

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