The demand for dollars was never more evident to me than in the course of the research on Venezuela that I conducted with my colleagues at the Open Money Initiative. We went into the research hoping to learn how tools and technologies like bitcoin were being used by Venezuelans facing the collapse of their own currencies. What we found over and over again was, instead, rampant demand for only one weapon in the face of hyperinflation: the U.S. dollar.
Jill Carlson, a CoinDesk columnist, is co-founder of the Open Money Initiative, a non-profit research organization working to guarantee the right to a free and open financial system. She is also an investor in early-stage startups with Slow Ventures.
We Americans love to complain about the economy, about policymakers, about bailouts, about the Fed. But whenever I travel abroad, I am struck by the immense privilege of having the US dollar as my native currency. I have yet to find a cabbie, a hotel clerk, or indeed a banker in any part of the world who will not gladly accept the greenback as a form of payment. In countries from Argentina to Zambia, I have found demand for dollars cash when I have come up short on the local currency.
We spoke to young entrepreneurs who leverage convoluted networks of friends and relatives to reach someone with a US bank account through whom they can keep some of their wealth in greenbacks. We spoke with some of these account holders, de facto informal bankers for entire communities, who have to maintain paper records detailing that their nephew’s girlfriend has $200 held in their account and that their ex-wife has $50 with them. We spoke with money changers in Venezuela who work tirelessly to meet demand for US dollars, even smuggling hordes of cash across the border.
This demand for U.S. dollars is not only present in extreme circumstances, as in Venezuela, nor only at the level of the individual. It is most notable at the nation state level. Since World War II, the U.S. has enjoyed the role of supplying the world’s reserve currency. This meant something different in 1944 than it does today, but the result is what matters here: the U.S. dollar is the standard unit of account for currencies and commodities globally. When central banks around the world seek to manage the strength of their local currencies, they do so relative to the dollar, buying or selling USD. When India imports oil from Iraq, that oil is priced in U.S. dollars. Dollars are everywhere.
Thanks to these dynamics, many countries and international institutions also borrow in dollars. When Brazil or Indonesia or Ukraine borrows money from investors and creditors, they often do so in dollars as opposed to reais or rupiahs or hryvnias. This generally enables countries to borrow at a lower interest rate than they would otherwise be able to access.
The images of deflation are fewer and less likely to strike fear into our hearts, but they should.
This also means, however, that these countries have a structural and ongoing demand for dollars as that is the currency they will have to use to pay off the interest and the principal on this debt. Countries and global corporations issuing dollar-denominated debt are exposed to currency risk: if the U.S. dollar appreciates materially relative to their local currencies (which represents the majority of the cash inflows), then these borrowers can find themselves in trouble. For this reason, most countries maintain dollar reserves. But these are not always sufficient to cover all of their dollar-denominated obligations, spurring further dollar demand.
Last month, as the global implications of the COVID-19 pandemic became increasingly clear, the value of the dollar spiked. Hedge funds, retail investors, international borrowers, and everyone in between made a dash for cash. As the world hurried to liquidate stocks and sell credit, it sought to liquidate these assets for one thing: US dollars. In trading, a sale is never just a sale. It is also the purchase of something else. In this case, everyone was selling everything for dollars. In a world that already has high demand for dollars, due to both psychological and structural forces, the implications of strong dollar appreciation are enormous.
The Federal Reserve, which is tasked with managing the supply of dollars in the world, did the only thing it could do in the face of this: turn on the taps. Over the course of just a few weeks, the U.S. central bank cut its target interest rate to zero, pledged unlimited asset purchases, and implemented a slew of other measures that were absolutely unprecedented, even relative to the measures it took in the wake of the 2008 crisis. These actions have been memorialized, and criticized, in the form of the popular meme: money printer go brrr.
The idea behind the criticism is that the U.S. is abusing what Ray Dalio, in a Reddit AMA, recently called “the world’s most important asset”: the printing press of the world’s reserve currency. Critics implicitly liken the Fed’s unprecedented easy monetary policies (policies that seek to weaken the US dollar) to the policies of Weimar Germany or Maduro’s Venezuela. They fear out-of-control inflation and an absence of political will to ever turn off the presses.
Those fears may not be baseless over the long run, but even having spent a material part of my career researching inflationary crises, working in emerging markets, and holding bitcoin, I’m not currently worried about excessive money printing.
The fact is, we need the Federal Reserve’s money printer to BRRR right now. The U.S. dollar, over the last five years, has already maintained relative strength against global currencies. The economic crisis brought on by the outbreak and spread of COVID-19 has only further spurred this strength. What strength actually means here is a shortage of dollars relative to demand. If that demand is not met, then companies and countries around the world face a liquidity crisis. Dollar strength, if allowed to persist, can also result in long term deflation, which hurts economic growth at home.
Denouncing excessive borrowing and money printing is a tempting stance based on the salience of images of hyperinflation: wheelbarrows of cash and trillion-dollar bills. The images of deflation are fewer and less likely to strike fear into our hearts, but they should. Condemning money printing is also enticing as a superior moral stance. It seems to advocate responsibility, accountability and rationality. In a world that is inherently short of dollars and is only becoming more so, refusing to increase supply is anything but responsible and rational.
Someday, after a vaccine is found, when we are all once more commuting to work on the subway and toasting each other at bars, it will become important for the U.S. to find the political will to shut down its money printer. We will have to wind down that which, today, is necessary. We will have to hike interest rates. I am not confident that will happen. At that point, I will become concerned about dollar devaluation. But not today. Today we need to keep the dollars flowing.