Asia’s central bankers never quite got over that day a decade ago when history’s biggest trade nearly went awry.
In August 2011, Standard & Poor’s did what Asian officials hoped it never would: yank away Washington’s AAA credit rating. Suddenly, lending more than $3.5 trillion to Washington, by way of U.S. government debt, seemed like a terrible idea.
Luckily for Asia, S&P was an outlier. Neither Moody’s Investors Service nor Fitch Ratings followed its move to downgrade the world’s biggest economy. S&P acted out of concern about Republicans and Democrats squabbling over the ceiling on the Treasury Department’s ability to borrow. Moody’s and Fitch let America’s AAA status ride.
Then came Donald Trump, whose political wreckage leaves new U.S. President Joe Biden with a giant trust dilemma.
Trump entered the White House in 2017 with policy priorities that were more the stuff of Argentina than a Group of Seven power. For years before entering office, Trump complained about exchange rates he believed Asia used to steal U.S. jobs. On the campaign trail, he’d hinted at defaulting on U.S. debt.
“I would borrow, knowing that if the economy crashed, you could make a deal,” Trump told CNBC in May 2016. “And if the economy was good, it was good. So therefore, you can’t lose.”
In the first year of his presidency, Trump formally ended America’s 23-year-old “strong dollar” policy. Early and often afterward, he went after the Chinese yuan and Japanese yen exchange rates via Twitter. In 2019, we learned that Trump’s advisers had even discussed whether to “cancel” parts of the roughly $1.1 trillion of U.S. Treasury securities Beijing holds.
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The $28 trillion national debt burden Biden inherited on Jan. 20, meantime, will soon swell further as additional fiscal stimulus packages are deployed to support growth. That might be less problematic if not for 27 million Covid-19 cases Biden inherits from the last administration.
Only time will tell if Moody or Fitch raises concern about Washington’s debt trajectory. But currency traders have been downgrading the dollar for a good year now. The yen, for example, is down 10% over the last year. The gain in the yuan versus the dollar isn’t far behind that. It now falls to Biden’s team to make sure that increase doesn’t accelerate.
In 1971, Nixon-era Treasury Secretary John Connally famously said the “dollar is our currency, but it’s your problem.” This seems even truer now after Trump’s chaotic reign. One of Biden’s most immediate challenges is staving off a dollar crash. Extreme volatility in the globe’s reserve currency would shoulder-check markets from New York to Johannesburg to Seoul.
Thankfully, Janet Yellen, Biden’s Treasury secretary, is now on the job. From her time as Fed chair from 2014 to 2018, Yellen knows a thing or two about shaky markets. As she moves into Connally’s old office, Yellen won’t have a moment to waste restoring trust with America’s bankers, the biggest here in Asia.
Yet the Biden-Yellen collaboration faces a problem than neither Richard Nixon’s Treasury nor Trump’s did: genuine competition for reserve-currency status from a financial superpower on the ascendency.
We’re talking China, of course. The yuan promises to be the rival the U.S. hasn’t had in decades. This is President Xi Jinping’s long game. Since 2012, Beijing worked steadily to internationalize the yuan. It’s not just about ending dollar hegemony, but efficiency. Why price oil, steel, lumber, soybeans and blue-fin tuna in dollars when China does most of the buying?
In late 2020, Xi was delighted by news that state oil colossus Saudi Aramco might begin floating yuan-denominated bonds rather than dollar bonds. Should this pivot catch on, the U.S. Treasury auctions could suddenly experience demand troubles.
Even worse if Washington’s bankers here in Asia lose faith in the linchpin of global trade and finance. The good news is that Biden and Yellen are on the job and have a plan to defeat Covid-19 and right the economy.
As analyst Tom Holland of Gavekal Research notes, the “early uptick in the dollar” in January was in part driven by hopes that “unified Democratic Party control of the White House and both chambers of Congress reduces political uncertainty and points to more powerful stimulus efforts, favoring faster relative growth in the U.S.”
At the same time, Holland notes, there might be a sense that “the rise in U.S. yields might accelerate on expectations of Fed tapering, supporting the dollar” as bigger stimulus moves gain economic traction.
Perhaps, though the bad news is that Washington’s top bankers have had a very trying four years, never mind the six before when S&P shocked Asia central banks and Trump arrived in the White House.
Biden and Yellen can’t expect much patience from those holding Washington’s mortgage. Those days are gone.