Last week I was advised by a friend to change the name of this blog. ‘Exorbitant privilege’, he said, was evidently a thing of the past. The reserve status of the dollar was under pressure, with developments reminiscent of an emerging market – falling currency, bond and stock prices. How worried should we be about the dollar? Worry is inherent to finance, and it goes up and down. Sometimes it becomes hysteria. And when fear becomes very high, it is hard to see anything but the fear. President Trump has engaged in ill-advised policies. They are so ill-advised (or at least ill-implemented) that his Treasury Secretary was out ‘reaffirming our commitment to international institutions’ yesterday. The financial system has reminded us, the Treasury Secretary and the president, that free-rein does not exist even for a political colossus. The ‘exorbitant privilege’ is much, much bigger than a president. There is no immediate challenge to the dollar – not because it is guided by wise councillors, but because it is quite able to rebuke those councillors and change policy.
The interview with Treasury Secretary Bessent by Tim Adams was notable on several levels. He exceptionally nervous throughout. Perhaps that was because, as he said, he was in a ‘room full of trained economists’, or perhaps it was because some of what he said about recent Trump announcements may not land well with his boss (‘it is not what a trained diplomat would have done’).
But I have an idea his nervousness was also because he was on stage attempting to mollify not just the room but the entire financial universe sensitised to any comment that could be misinterpreted. The interview was Bessent’s mea culpa – and don’t expect anything similar from the president. It was also a long acknowlegement to the question posed ; ‘do you see the dollar as having an exorbitant privilege?’. The rest of the interview could be taken as saying ‘we don’t want this exorbitant privilege, but no-one else is willing or able to take it from us.” Which is a profound comment. The dollar system continues not because of the wise council of an administration, but because no other system offers such ability publicly to admonish and adjust policy so fast to suit the flows of capital. That’s a humbling position to be for ambitious politicians like president Trump and as Bessent says, ‘I’m not sure that anyone else wants it.’
It was notable that Bessent reaffirmed the US commitment to ‘international institutions’. As the interview was conducted by the IIF in Washington during the week of the IMF Spring conference this was a clear statement that the US would not withdraw from international bodies (IMF & World Bank) as suggested by Project2025. That will be music to some ears. In reality, it is too early to be confident. The report ordered by the president is not due till early August, and what Mr Bessent says in public in April is not necessarily what will be recommended in late summer. Though the interview seems to signal a genuine change of direction.
One of Bessent’s primary messages was the need to control government spending and to contain the deficit to ‘something with a 3 in front of it.’ Following last week’s bond selloff it is the job of the Treasury Secretary to instill confidence. And again, this emphasis on US rates highlights the ‘exorbitant responsibility’ of the dollar system which is so sensitive to outside pressure. Below I give some reasons to be optimistic about Treasury bonds – and inter alia, the dollar.