Krugman: "Dollar Apocalypse Theory Is Merely the Claim of Putin Sympathizers"

'What Is Driving the Dollar to Its End?' NYT Contribution

Paul Krugman, a Nobel laureate in economics, directly refuted the claim that the dollar bears a huge trade deficit every year as the price for maintaining its status as the global reserve currency. He also struck back at the dollar doom theory, which signifies the collapse of dollar hegemony, saying it was created by supporters of Russian President Vladimir Putin, who claim that the U.S. weaponizes the dollar according to political and diplomatic needs.

In a column titled "What Is Driving the Dollar to Its End?" published on June 2 (local time) in The New York Times (NYT), Professor Krugman stated, "The claim that the dollar endures a massive trade deficit to become the global reserve currency is not true."

This was aimed at the widespread assertion that the U.S. has long run trade deficits because it does not earn money through trade to maintain its status as the global reserve currency but rather spreads dollars for other countries.

He pointed out that claims about the U.S. dollar enjoying numerous economic benefits as the global reserve currency stem from such misunderstandings, noting that even prominent economists like Michael Pettis seem to believe these claims.

As evidence for his rebuttal, he cited the case of the United Kingdom. According to International Monetary Fund (IMF) data, the UK ran a current account deficit close to 4% of its gross domestic product (GDP) annually from 2010 to 2019, before the COVID-19 pandemic. This was twice the level of the U.S. during the same period.

However, the British pound had already lost its status as a global reserve currency to the dollar after World War I. Similarly, Australia and Canada ran deficits close to 3% of their GDP annually during the same period, but the Australian dollar and Canadian dollar remain far from being global reserve currencies, which aligns with the UK example.

Professor Krugman also challenged the claim that the perception of dollar bonds as safe assets allows the U.S. to borrow money more cheaply than other countries.

He noted that various factors influence interest rates and that, in reality, the U.S. borrowing costs are not noticeably lower than those of other advanced countries. Overall, he argued that the dollar’s dominance cannot be said to be worth more than just 1% of the U.S. GDP.

[Image source=AP Yonhap News]

Krugman’s column directly overturns the recent assessment that the 'de-dollarization' phenomenon, driven by deteriorating relations with Saudi Arabia and the rise of the Chinese yuan amid changing international circumstances, will bring terrible consequences to the U.S. economy.

He concluded that the claims of dollar doomers can be safely ignored. He pointed out that just as pulling one or two strands of a spider’s web does not unravel it, the desire of some countries to use currencies other than the dollar as a means of payment does not make the dollar doom theory feasible.

He explained that the various roles the dollar performs maintain its status, and these roles collectively form a strong spider web. Therefore, even if partial de-dollarization occurs, all other advantages of the dollar as a banking and borrowing currency will remain.

Furthermore, he highlighted the strengths of the dollar, including its universal use, the openness of the U.S. financial market unlike China’s, and the rule of law in the U.S., which means individuals do not need to fear asset seizure.

Finally, he delivered a sharp critique that the dollar doom theory originated from cryptocurrency enthusiasts and supporters of Russian President Vladimir Putin, who faced U.S. sanctions after Russia’s invasion of Ukraine.

This content was produced with the assistance of AI translation services.