Trump’s 'stunning failure' threatens power of US dollar: Nobel economist

During World War 2 in 1944, the Bretton Woods Agreement made the U.S. dollar the world's reserve currency. And 82 years later, it still enjoys that status. But liberal economist Paul Krugman, in a late June Substack column, lays out some problems the U.S. dollar is facing during Donald Trump's second presidency.

"We are now four months into a war that was supposed to last a couple of weeks," Krugman argues. "There is no end in sight as strikes and counterstrikes continue despite Trump's farcical proclamations of American victory and Iranian surrender. Sixteen months into his presidency, Trump has squandered all of America's credibility with the rest of the world. So let me add one more item to the tally of destruction: the supremacy of the dollar, the pre-eminent tool in America's toolbox of global financial power, has been seriously damaged by the rise of alternative payment systems — a rise that was greatly hastened by the Iran war."

Krugman explains exactly what he means when he speaks of the U.S. dollar's "supremacy" being "seriously damaged." And he cites Trump's "stunning failure" with the Iran war as a key factor.

"Let me be clear that I don’t mean that the dollar is close to losing its dominant role in global business," Krugman writes. "And I am definitely not claiming that the dollar's weakened status will make the United States substantially poorer. Instead, what I am talking about is the loss of a non-military tool of coercion — the power to punish that the dominant role of the dollar in international financial transactions gave the United States. That power is now greatly diminished because Trump's Iran war demonstrated to other nations that they can bypass the dollar-centered world payments system — largely thanks to China."

Krugman notes that the U.S. dollar's "importance in international financial transactions far outweighs the U.S. economy's global importance."

"America is by no means a dominant force in world trade or world GDP," Krugman observes. "There are, in fact, three roughly comparable-sized economic superpowers in today’s world: China, the United States, and the European Union. However, the U.S. dollar does play a dominant role in world finance…. Why does everyone use dollars? Because so many other people and businesses use dollars, which makes markets in dollars far more liquid and efficient than markets in any other currency…. What dollar dominance does do…. is give America a powerful economic weapon against other nations."

Krugman continues, "Transactions that involve dollar payments normally require transferring money between U.S. banks — which means that they are visible to and can be blocked by U.S. authorities…. The Iran debacle has demonstrated that using dollars and retaining access to the U.S. banking system, while convenient, aren't necessary. Iran's ability to withstand American pressure has demonstrated that U.S. sanctions are a lot less effective than in the past given that rogue actors can use the yuan and CIPS as a work-around. And as the Gulf States' actions show, even countries that are U.S. allies are now considering signing onto the Chinese payment system."