The Global Economy in Turbulent Times

CHAPTER 67 The Dollar Quagmire¹

Once in a while, we have good reason to feel unhappy with the United States dollar (US dollar). Like now. Many feel let down. Not only did the US bring down the global economy, whatever wealth there was left in US dollar was subject to significant diminution. After peaking in 2002, the trade-weighted US dollar has depreciated ever since. Sure, the US dollar has since been given a temporary lift on its safe-haven status. As things stand today, it’s just a matter of time before the US dollar, as it begins to further weaken, to once again take its toll against strong headwinds. So, we are all caught in a strange quagmire. Strange, because ever since I was little, the US dollar—known in Cantonese as mei-kum or American gold—is now anything but. A quagmire, on account of feeling caught in a trap: In good times, you feel safe holding onto mei-kum. When things turn sour, you can’t (as a group) get out of US dollar assets fast enough, without “cutting your nose to spite your face.” How did we get here? Some history is helpful.

US Dollar as Anchor and Reserves

After World War II (WWII), the US financial system was the only one kept intact. There was runaway inflation, widespread currency restrictions, rationing, and price control in Europe, Japan, and most other countries. The American economy was the strongest then, and US dollar was very much in demand. For the United States, winning the war didn’t hurt. And so, under the Bretton Woods Accord of 1944, ...