America's economy continues to grow, the dollar's value continues to rise, and investors continue to delight in the froth. Even President Trump, who has in the past dismissed the value of a strong dollar, crowed recently that "our economy is doing better than ever. Money is pouring into our cherished DOLLAR like rarely before."
Good news, right?
Well ... it's complicated.
For one thing, this is not an unalloyed good for Americans. And for another, America's strong economy might be bad for a little thing I call the rest of planet Earth.
America is the only G7 nation on track to grow faster this year than last year. Most other major economies are slowing down. There are a lot of factors here: President Trump's burgeoning trade war, China's domestic economic challenges, and crises like Turkey's. But part of this global slowdown is due to the strengthening of the dollar itself.
The U.S. dollar is the world's premiere reserve currency. What this means in practice is that countries often use American currency to settle international transactions. If Turkey wants to buy oil from Canada, for example, they often won't use Turkish lira or Canadian dollars — they'll do the deal in U.S. dollars. Similarly, if banks or companies in most countries need to borrow from foreign investors, they'll borrow in U.S. dollars.
America's currency isn't the only one that serves this intermediary role, but it's by far the most common: roughly two-thirds of all foreign exchange reserves, as of 2017.
Most everyone just takes this fact in stride. The U.S. dollar having this role is just how things are done. But it can actually create enormous problems for other countries, because they have no say in the economic and policy choices that affect the U.S. dollar's value. Its fluctuations are out of their control.
If the U.S. dollar suddenly gets more expensive, other countries might suddenly find their exports or imports becoming more expensive. Or they may find their debts to foreign creditors are more difficult to pay off. And those shocks can ripple through the rest of their economy. Indeed, the foreign-denominated debt problem is basically what's dragging down Turkey right now.
This is also why America enjoys some pretty unique economic powers and privileges: It is the rare country that does control the currency it does all its international dealings in.
Of course, every country is different, with currencies of different strengths relative to the U.S. dollar. Advanced Western economies will almost certainly weather a stronger dollar much better than more vulnerable, still-developing nations like Turkey. But all else being equal, a stronger American dollar puts more stress on the rest of the global economic order.
In many ways, the world's relationship to the U.S. dollar is like eurozone countries' relationship to the euro. Eurozone countries still run their own domestic fiscal policy, but they can't run their own monetary policy. The currency is controlled by the eurozone's central financial authorities — which, as a practical political matter, has often meant German financial authorities. Eurozone countries have to just accept whatever happens with the euro, just like foreign countries have to just accept whatever happens with the U.S. dollar. Some countries (say, France) manage to do alright. But for others, like Italy or Greece, the setup has been either a major problem or an unmitigated disaster.
There's an irony here. Running trade surpluses with the U.S. is one key way other countries build up their supplies of U.S. dollars. It's not a straightforward situation: As the U.S. dollar gets stronger, doing trades in it becomes more expensive, but America's trade deficit also grows. And a weaker dollar would both be cheaper for the world to buy while closing the trade gap. It's really a giant complicated mess. But by tolerating persistent trade deficits, the U.S. has actually run its global currency fiefdom in a more humane fashion than Germany has run its continental currency fiefdom.
Even better: If the U.S. government wanted to offset the economic drag of persistent trade deficits, it could run bigger domestic federal deficits at home by investing in job creation and industrial expansion. And that would also give the rest of the world more opportunities to buy our dollars.
After World War II, the economist John Maynard Keynes proposed an international reserve currency that would've been collectively run by the international community. He lost that argument, and the world went with the Bretton Woods system instead. The latter pegged international currencies to the dollar, before it eventually came apart in the 1970s. But Bretton Woods' legacy is largely why the U.S. dollar now dominates as the world's reserve currency of choice.
In retrospect, both America and the world might have been better off going with Keynes' idea.