Currencies threatening dollar dominance, the Mamdani economic experiment | The Dip Podcast

Key Concepts

• De-dollarization: The process by which countries reduce their reliance on the US dollar for international trade, finance, and as a reserve currency.
• Renminbi (RMB) / Yuan: China's currency, which is increasingly being promoted for global trade and finance.
• Euro: The currency of the Eurozone, currently the second most important global currency after the US dollar.
• Sanctions: Economic penalties imposed by governments, often leveraging the dollar's dominance in the global financial system.
• Tariffs: Taxes imposed on imported goods, which can influence currency exchange rates.
• Dollar Dominance: The widespread use and acceptance of the US dollar in global economic activities.
• Stablecoins: Cryptocurrencies designed to maintain a stable value, often pegged to a fiat currency like the US dollar.
• Rent Freeze: A policy to prevent rent increases for existing tenants.
• Housing Supply and Demand: Economic principles governing the availability and cost of housing.
• Public Housing: Government-funded housing initiatives.
• Transit Fees: Charges for using public transportation.
• Federalist System: A system of government where power is divided between a national government and state governments.

De-dollarization: A Global Shift?

The discussion centers on the concept of de-dollarization, defined as countries moving away from holding the US dollar in reserves or using it for trade. While the US dollar still overwhelmingly dominates global trade finance, with China's Renminbi (RMB) showing some recent uptick, the fear of de-dollarization is a significant topic.

Drivers of De-dollarization Concerns

• Weaponization of the Dollar and Sanctions: For at least a decade, concerns about financial sanctions and the US government's ability to leverage the dollar's preeminence to impose costs on countries like Russia and Iran have been a primary driver. The global economy's reliance on dollars means that the US financial system is the connective tissue for international trade and finance. This gives the US the power to restrict access to this system, making countries vulnerable to coercion.
• US Economic Policies: More recently, policies pursued by the Trump administration have raised questions about the downsides of dollar dependence. These include:
  • Federal Reserve Political Independence: Concerns about the Fed's autonomy.
  • Use of Tariffs: Tariffs are seen as a coercive economic tool.
  • Commitment to a Strong Dollar: Questions about the US's dedication to maintaining a strong dollar.
• "Sanctions Fatigue": The repeated use of sanctions has led to a growing complaint from countries about the dollar's power to enforce them.

Who is De-dollarizing and How?

• China: China is a major player, actively pushing its currency, the Renminbi, globally. Chinese banks, often loosely attached to the government, offer favorable terms for trade financing and investments if conducted in RMB. This movement is currently concentrated among Asian countries.
• Europe: The Euro is the second-largest global currency. However, unlike China's active strategy, Europe's push for Euro usage is more driven by market forces. Countries with close economic ties to the Eurozone find it cheaper to trade in Euros.
• Private Institutions and Individuals: De-dollarization is not limited to central banks. The rise of dollar-backed stablecoins is a significant development. In countries like Turkey, Nigeria, Argentina, and Brazil, individuals are buying these stablecoins as an accessible way to hold an asset that functions like a dollar, albeit slightly removed. This is seen by some at the US Federal Reserve as a way to strengthen the dollar internationally by facilitating global dollarization.

The Dollar's Enduring Strength and Potential Weaknesses

Despite these trends, the dollar's dominance is deeply entrenched due to:

• Global Availability and Cost: It is the most available and cheapest currency to use.
• Reputation: It has a nearly century-long reputation for stability.
• US Security Partnerships: The US is a crucial security partner for many large economies, incentivizing them to hold dollars. This close relationship reduces the perceived need for strategic autonomy in currency matters, particularly in Europe.

However, the political order that underpins the dollar system is perceived as becoming "wobbly."

The Impact of Trump Administration Policies

The Trump administration's policies, including tariffs and a perceived turning away from traditional foreign policy commitments, have contributed to a sense of insecurity. The "Mar-a-Lago Accord" concept, suggesting the US could use tariffs to force other countries to devalue the dollar, highlights this. The idea was that a weaker dollar would make US products cheaper, boosting manufacturing. While contested, the tariff regime did coincide with increased insecurity, leading to people selling dollars, causing the dollar to lose value against other currencies.

Historical Context and Current Significance

Talk of de-dollarization is not new, having surfaced during the 2008 financial crisis and the first Trump administration. However, the current moment might be different due to a growing skepticism among a segment of US political elites, particularly in the Republican party, about the benefits of dollar dominance. This shift in perspective could lead to policies that impact the dollar's use and appeal.

Potential Successors to the Dollar

• Euro: While a strong contender, there is a lack of political consensus in Europe to actively push the Euro as a global currency.
• Renminbi: China is actively promoting the RMB, but it is primarily used regionally. The RMB is not yet a "third currency" used by two countries not involving China. Paradoxically, China itself issues dollar-denominated bonds to capitalize on low borrowing costs, demonstrating the dollar's continued importance.

The Role of Military Power and Political Backing

While military power is sometimes cited as a factor in currency dominance, the discussion suggests that political backing and control over financial infrastructure are more critical. The US can exert influence through its financial system without direct military intervention.

The Tipping Point for Dollar Decline

The "tipping point" for a significant dollar decline is a key question. A rapid, sustained drop of 20-25% in the dollar's exchange rate could trigger alarm bells and prompt US officials to publicly reaffirm commitment to a strong dollar and implement policy measures. However, the US is not currently near such a scenario. The recent dollar drop is seen by some as a correction from an overvalued state.

Impact on Ordinary People

The weakening of dollar dominance could have complex effects:

• Long-Term Process: Any unraveling of dollar dominance is expected to be a decades-long process, leading to incremental changes.
• Emotional Shift: A fundamental change in trust in the dollar as a global medium of exchange could alter attitudes towards the world.
• Inflationary Pressures: Reduced foreign demand for US Treasuries could lead to higher yields, potentially increasing government borrowing costs. If the government intervenes to lower these yields, it could be inflationary. Higher import prices due to a weaker dollar could also contribute to inflation.
• Domestic Production: The extent of domestic production could mitigate inflationary effects.

New York City's Affordability Agenda

The podcast also delves into the economic policies of New York City's mayor-elect, Eric Adams, focusing on his promises of affordability.

Rent Freezes and Housing Market Dynamics

• Policy: Adams' campaign included promises like "freeze the rent."
• Economic Implications:
  • Benefits: Current tenants in rent-frozen apartments would pay lower rents.
  • Drawbacks: Economists warn that rent freezes reduce incentives for new housing construction, potentially leading to higher rents for those not covered by the freeze and fewer housing options for future tenants. This creates a "frozen bubble" for current residents while future residents face scarcity.
• Limited Scope: Only about 1 million apartments in NYC are rent-stabilized, meaning the impact of rent freezes would be limited to this segment. Traditional economic theory suggests that other housing segments would likely become more expensive due to reduced supply and profit margins for developers.

Strategies for Housing Affordability

To decrease housing prices, two main approaches are:

1. Decrease Demand: This can be achieved by improving public transit, making it easier to commute to NYC, thus potentially reducing the demand for living within the city.
2. Increase Supply: This involves removing regulations that hinder efficient and cost-effective construction of housing and apartment buildings.

Public Housing Initiatives

Adams has also called for a massive public housing buildout.

• Cost: This is expected to be significant, with estimates suggesting union labor could increase costs by 23% compared to non-union labor. Land scarcity in Manhattan further exacerbates costs.
• Investment: Such initiatives are likely to be unprofitable and require substantial investment from the city government.

Free Public Transportation

Another key policy is "Fast and Free City Buses."

• Arguments for Free Transit:
  • Potential Benefits: Could incentivize more people to use public transit.
  • Cost of Enforcement: Charging for transit requires investment in infrastructure and personnel to prevent fare evasion, which can be costly.
• Arguments Against Free Transit:
  • Misuse: Free transit might incentivize people to use it in ways it's not intended, such as for shelter.
  • Revenue Loss: The revenue generated from fares, which could be used for transit upgrades, would be lost.
• Experimentation: The podcast suggests that free transit is an area that deserves experimentation in the US, with the hope that pragmatic reassessment will occur if policies don't work. The federalist system allows states and cities to try different policies.

Funding for Policies: Taxation of the Wealthy

Adams proposes taxing the city's richest to fund his policies.

• Skepticism: Concerns are raised about whether there is enough revenue potential, given that New York is already a high-tax state.
• Evidence on Rich Moving: There is limited evidence that the wealthy flee cities in large numbers when taxes increase slightly. New York City's appeal for the wealthy (dining, entertainment, culture) is a strong retention factor.
• Tax Elasticity: While some wealthy individuals may leave, the increase in revenue from higher taxes on the remaining wealthy is generally expected to be significant, provided the tax rate isn't excessively high (e.g., 99-100%).
• 2% Tax on Millionaires: The feasibility of a 2% tax on New Yorkers earning over a million dollars is discussed, noting that it would likely require support from state lawmakers.

Challenges for Mayor Adams

• Intergovernmental Relations: As mayor of NYC, Adams must navigate the state's federalist structure and work with Albany, as a significant portion of the city's budget comes from state and federal transfers.
• Stakeholder Management: Implementing policies like affordable housing requires convincing various stakeholders (developers, bondholders, the governor) to cooperate.
• Balancing Ideals and Budgets: The core challenge is balancing progressive ideals with the practicalities of balancing budgets.
• Political Climate: The election of a more left-leaning mayor in a blue city within a blue state, while the governor is more centrist, creates an interesting dynamic for potential collaboration or conflict.

Conclusion

The discussion highlights the complex interplay of global economic forces, particularly the future of the US dollar, and the localized challenges of urban governance and affordability. While de-dollarization is a gradual process with deep roots, the current political and economic climate presents unique dynamics. In New York City, Mayor-elect Adams faces the task of delivering on ambitious affordability promises within a complex governmental structure, balancing progressive ideals with pragmatic economic realities. The success of his policies will depend on his ability to navigate these challenges and adapt to outcomes.