The End of Dollar’s Exorbitant Privilege and Bitcoin’s Speculative Bubble

Stephen Roach is a Senior Fellow at Yale’s Jackson Institute for Global Affairs and a Senior Lecturer at Yale’s School of Management, where his research and teaching focus on the impacts of Asia on the global economy. One of Wall Street’s most influential economists, Prof. Roach spent more than 30 years at Morgan Stanley, where he was the Chairman of Morgan Stanley Asia and the bank’s Chief Economist. He has written extensively on globalization, trade policy, and international finance.

Last October, Prof. Roach published an article in the Financial Times titled “The end of the dollar’s exorbitant privilege.” He argues that the dollar could fall as much as 35 percent by the end of 2021. In this interview, Prof. Roach walks us through the reasoning behind his arguments and discusses the economic and political significance of a dollar crash, mainly pointing to two metrics – a decline in domestic savings and an increase in the current account deficit. Domestic savings was at 1.4% of national income in Q1 2020, compared to the 45-year average of ~7%. The current account deficit plunged to -3.5% of GDP in the second quarter, the sharpest quarterly decline on record, and the massive stimulus package will further blow up the deficit. 

What are the implications of such a dramatic dollar crash in valuation, both in the U.S. and abroad? How have the current monetary and fiscal policy regimes exacerbated this issue? And is there anything the U.S. can do to prevent the fall of the dollar? 

We also touch on another important market trend: the rise of Bitcoin. Despite the cryptocurrency’s increasing popularity and legitimacy among institutional investors and corporations – most notably Elon Musk and Tesla – Prof. Roach is skeptical about its potential as a global currency. We discuss the implications of Bitcoin’s rise and the difficulty of valuing an asset with no traditional fundamentals. 

On one hand, Tiger argues that Bitcoin has never been supported by fundamentals but always by narratives and people’s faith in it. As long as the faith for Bitcoin is strong enough, as long as people’s doubt on the dollar and other forms of assets are strong enough, and as long as the hunt for yield continues, Bitcoin’s price will just keep shooting up. 

Prof. Roach counter-argues that by definition speculative bubbles do not go on forever; they always burst. When an asset turns into a speculative bubble, that means people are buying the asset just under the expectation that the prices will keep going up. So by definition, it’s an investor play on price appreciation that is detached from the fundamental value of the asset. That detachment can go on for a lot longer than we think, but ultimately it reasserts itself when the price point involved, for reasons that are very different for each asset, gets so far detached that just the slightest, inconsequential shifts can lead to the bursting of the bubble. 

Lastly, having spent the bulk of his career on Wall Street, Prof. Roach critiques the Fed’s monetary policy in the past few decades and reflects on his own forecasting career. He addresses the impact of the Fed’s rapid balance sheet expansion, which some argue is inflating prices of financial assets held by the private sector and, in doing so, primarily benefiting the wealthy. Do there exist more equitable ways of stimulating the economy besides Quantitative Easing (QE)? And, if so, what can the Fed do to implement them? We also discuss the potential for a repeat of the “Taper Tantrum” of 2013, in which the Fed’s announcement that it would slow its QE triggered a rapid increase in ten-year rates. How can the Fed better communicate its mandates to the markets without making the signal itself the market mover? 

This is a far-reaching conversation beyond mere topics of the dollar dominance, Bitcoin, and the GameStop saga. It’s about piecing together the large macro-financial trends we’ve witnessed in the past few decades and trying to make sense of what might come next. 

Stephen Roach