The American administration has very well understood the faults of a reserve currency, but it obviously underestimates the advantages. Stephen Miran, the best known of Donald Trump’s unknown advisers, highlights the Triffin dilemma to justify the deleterious effects produced by the status of reserve on the economy of a country.
Indeed, the other countries are thus encouraged to have the dollar in the form of a sovereign American debt, which exaggerates the value of the currency and the obligations. These two effects would then encourage the country to go into debt too much and to import too much, hence structural budgetary and commercial deficits (otherwise called twin deficits). But research also highlights another major, particularly favorable effect. This is the role of refuge value of the dollar mainly in the form of a sovereign debt, in the event of financial stress or a major crisis.
The phenomenon is well known to the financial markets. In the event of a sudden increase and the magnitude of uncertainty, investors sell their most risky financial assets, such as credit and credit obligations, and buy less risky assets: sovereign debt. This phenomenon is called a movement of flight to quality (flight to quality). Investors then prolong the line to the end: they favor American sovereign debt, because they are denominated in dollars, reserve currency.
In the same register, gold is also acclaimed by investors as a refuge value. Concretely, empirical studies highlight the existence of a refuge premium on the dollar (safety dollar premium), either, and it’s the same thing, on American sovereign debt (safe harbor premium).
However, this last effect proposed by the status of reserve currency is undoubtedly not taken into account by the American administration in its charge. Which is a major error. Because it is precisely this effect of security cushion played by the status of reserve currency which has probably saved many times the American economy of much more severe crisis: crisis of the bubble of technological values in 2000, crisis of debt of subprime In 2007, sovereign debt crisis in 2011.
-Curiously, there are a number of studies estimating the unfavorable economic impact linked to the reserve value status of a currency. But few consider its favorable impact played during the crisis phases. Concretely, if the dollar and the sovereign debt had not benefited from the status of refuge value, the American crises would have caused much stronger capital outings, exaggerating the drop in risky assets and limiting the drop in interest rates. These two effects would have worsened crises. But in economics as in history, counterfeiting reasoning motivating uchronic scenarios are difficult to assess.
However, the status of refuge value is a proven empirical fact. One can wonder about the rational foundation of such a fact, but not about its reality. In the event of a crisis, investors have the reflex to invest in American sovereign debt. The latter then operates as a form of insurance for any risk. We can even dare the reference to the famous sleep virtues of opium invoked by the aspiring doctor of Molière, to whom the scientist asked why the sleeping opium.
With a little imagination, we can consider that the dollar and refuge value also offers some soothing sleep virtues particularly welcome for the investor in the event of a crisis. The American sovereign debt would have prophylactic properties, in a way. Obviously, all this is false. But it works. And that’s the most important thing, it works even if you don’t believe it.
However, the new US government has chosen to do without the dollar and sovereign debt virtues. First by multiplying the measures or threats anticipating a lower dollar, hence tariff climbing. But also by inviting holders of American sovereign debt to exchange it for a much longer maturity debt, 100 years. In both cases, the status of refuge value is default, the same one guaranteeing the lack of uncertainty of the American asset in the event of a crisis.
Are we at the dawn of a dollar dollar value refuge? Is this the end of its sleeping virtues? Is the American government aware that it may be about to saw the branch on which its economy and its finance rest? The status of refuge value is perhaps a myth, but we do not play with myths. Moreover, the markets were well responsible for reminding this to the person concerned.
