Olivier Fines, CFA, and Mark Higgins, CFA: The Role of the U.S. Dollar as a Global Reserve Currency

Summary

Enterprising Investor Podcast Summary Episode: Olivier Fines, CFA, and Mark Higgins, CFA: The Role of the U.S. Dollar as a Global Reserve Currency

Release Date: December 17, 2024
Host: Mike Wahlberg
Guests: Olivier Fines, CFA (CFA Institute’s Head of Advocacy and Capital Markets Policy Research for EMEA) and Mark Higgins, CFA (Author of Investing in US Financial History: Understanding the Past to Forecast the Future)

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1. Introduction

In this episode of Enterprising Investor, host Mike Wahlberg engages in an insightful discussion with Olivier Fines and Mark Higgins about the sustainability of U.S. debt and the enduring role of the U.S. dollar as the global reserve currency. Drawing from their expertise and a recent CFA Institute report titled "The Dollar's Exorbitant Privilege," the conversation delves into historical contexts, current economic sentiments, and future projections.

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2. Defining the Global Reserve Currency

Olivier Fines begins by clarifying the concept of a global reserve currency:

“[01:44] Olivier Fines: ... the dollar has constituted the largest part of central bank reserves around the world.”

A reserve currency is held by central banks to stabilize their own currencies by engaging in foreign exchange transactions. The dominance of the U.S. dollar in these reserves underscores its critical role in global financial stability.

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3. The Exorbitant Privilege of the U.S. Dollar

Fines introduces the notion of the "exorbitant privilege," a term historically coined during the Bretton Woods era:

“[02:55] Olivier Fines: ... the rest of the world continues to buy U.S. debt, thereby conferring the U.S. the privilege of having the capacity to fund its deficit at very low interest rates.”

This privilege allows the U.S. to sustain higher levels of debt due to the constant global demand for dollar-denominated assets, enabling lower borrowing costs compared to other nations.

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4. Survey Findings on U.S. Debt and Reserve Currency Status

The conversation shifts to the CFA Institute's Global Survey on U.S. Debt and the Role of the U.S. Dollar, co-authored by Fines. Key findings include:

• Perception of Debt Sustainability: A majority of survey participants believe that the current U.S. debt levels are unsustainable.

• Confidence in Dollar's Reserve Status: Contrarily, most respondents do not foresee the dollar losing its status as the global reserve currency.

Fines highlights a regional dichotomy:

“[05:13] Olivier Fines: ... emerging markets have an interestingly more sanguine view of US Public finances sustainability. ... the view that the US Dollar will lose partially or materially its reserve currency status over the next five to 15 years.”

This indicates varying perceptions between developed and emerging economies regarding both U.S. debt and the dollar's future.

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5. Historical Perspectives on Reserve Currencies

Mark Higgins provides a historical lens, examining past reserve currencies and the conditions under which they changed:

“[10:37] Mark Higgins: ... reserve dominant reserve currencies don't change often. ... the Dutch lost their status when they lost the Fourth Anglo Dutch War ... the British lost the pound sterling after being seriously damaged by World War I and II.”

Higgins emphasizes that shifts in reserve currencies typically follow major shocks or geopolitical upheavals, suggesting that the dollar's dominance is deeply entrenched unless disrupted by significant events.

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6. Political Challenges in Addressing U.S. Debt

The discussion addresses the political inertia surrounding debt reduction:

“[13:39] Mike Wahlberg: ... the cost of financing goes up along with it.”

“[15:51] Olivier Fines: ... it's difficult to see what sort of political incentive there could be ...”

Both guests agree that entrenched political incentives prioritize short-term gains over long-term fiscal responsibility. Higgins points out:

“[16:58] Mark Higgins: ... Politicians are motivated by short term incentives to get reelected, which structurally makes it very difficult to address long term problems that are going to require short term pain.”

This creates a barrier to implementing necessary fiscal reforms to manage debt sustainably.

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7. Future of the U.S. Dollar and Global Reserve Currency

The conversation explores potential scenarios for the dollar's future:

“[26:58] Olivier Fines: ... the concept of a multipolar currency system ... multiple blocks that are well integrated ...”

Respondents anticipate a move towards a multipolar currency system rather than a single alternative like the Yuan. This would involve multiple currencies gaining prominence, reducing the dollar's singular dominance. Additionally, digital and private currencies are considered potential challengers:

“[26:58] Olivier Fines: ... digital currency, private digital currencies was the second most chosen option ...”

Higgins concurs, noting the unpredictability of such transitions:

“[30:04] Mark Higgins: ... history would suggest that it's going to be a shock that causes a transition. ... it's just so hard to predict what's going to replace it.”

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8. Cost of Capital and Credit Ratings

The impact of credit rating downgrades on U.S. Treasury costs is discussed:

“[23:31] Mike Wahlberg: ... U.S. treasury ... downgrade from Fitch back in 2011 ...”

Higgins explains that while rating downgrades are significant, the market's perception plays a more crucial role:

“[24:02] Olivier Fines: ... the market means a lot more than a pitch rating.”

Historical resilience of the dollar and U.S. debt markets suggests that downgrades alone may not alter the dollar's reserve status.

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9. Risks of Inflationary Policies

The idea of "monetizing the debt" through inflation is critiqued:

“[23:01] Mark Higgins: ... that is a dangerous game to play.”

Fines adds nuance to the discussion, explaining that relying on inflation to reduce debt can lead to uncontrollable economic consequences:

“[23:25] Mike Wahlberg: ... cost of financing goes up along with it.”

Both experts caution against inflationary strategies, highlighting the instability they can introduce.

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10. Historical Principles on Debt Management

Drawing from Alexander Hamilton’s principles, the podcast underscores the importance of managing debt responsibly:

“[30:04] Mark Higgins: ... 'public danger requires borrowing, and debt should be extinguished once the danger subsides.'”

Higgins laments the departure from these principles, noting that the U.S. has accumulated chronic deficits without a clear path to repayment, which threatens the longstanding fiscal discipline that underpinned the dollar's supremacy.

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11. Conclusion and Final Thoughts

The episode concludes with a reflection on the delicate balance between maintaining the dollar's reserve status and managing national debt responsibly. The guests emphasize the need for proactive fiscal policies and caution against complacency, suggesting that without meaningful reforms, the U.S. may face challenges to its economic standing and the dollar's global role.

Final Quote:

“[32:31] Mark Higgins: ... 'the creation of debt should always be accompanied with the means of extinguishment. That is what we're violating right now.'”

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Key Takeaways:

• The U.S. dollar's dominance as the global reserve currency is deeply rooted but faces sustainability challenges due to rising national debt.
• Political and structural barriers hinder effective debt management, risking abrupt shifts in the global financial landscape.
• Historical precedents suggest that significant shocks are typically required to alter the status of reserve currencies.
• Future shifts may lean towards a multipolar currency system, though the exact trajectory remains uncertain.

For investment professionals and policymakers, understanding these dynamics is crucial for navigating the evolving global economic environment.

Transcript

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[Mike Wahlberg]

Welcome to the Enterprising Investor, the flagship investment podcast for CFA Institute. I'm Mike Wahlberg and I'm pleased to welcome a couple of alumni to the show today. Olivier Fines, CFA Institute's Head of Advocacy and Capital Markets Policy research for emea, and Mark Higgins, author of Investing in US Financial History of Understanding the Past to Forecast the Future. The topic of today's episode is a CFA Research and Policy center report that Olivier co authored titled the Dollar's Exorbitant Privilege CFA Institute Global Survey on the US Debt and the Role of the US Dollar. I'm looking forward to hearing both about the findings of the Institute survey as well as what we can learn from history in thinking about the future of both the US debt and its effect on the US's role as the global reserve currency. So welcome to the show guys.

[Olivier Fines]

Thank you very much.

[Mark Higgins]

Yeah, thank you for having us.

[Mike Wahlberg]

So maybe it'd be a good idea, I think, to just start with a definition today, because given our discussion today centers around the sustainability of US debt and the impact that may have on the US dollar's role as the global reserve currency. Olivier, maybe you could start us off by just talking about what does it mean to be the global reserve currency?

[Olivier Fines]

Right? Well, that is obviously the right question to start this discussion with. In general, we refer to the term reserve as essentially the reserves held by central banks around the world. Right? So, and the purpose for holding reserves is a mechanism to stabilize or orientate the value of your own jurisdiction's currency by selling and buying currencies against against your own. So if I want to orientate the value of my currency higher, I would essentially buy my currency and sell country's currency. For that to work, I need to hold reserves in order to effectuate those foreign exchange transactions. So essentially we're talking about central bank reserves, and for a long time now, the dollar has constituted the largest part of central bank reserves around the world.

[Mike Wahlberg]

So having those US dollars in reserve for all of these countries around the world, what's the impact of that on US economy, industry, the strength of the US dollar?

[Olivier Fines]

Well, that is one of the points that we make in the report, it's actually the origin of the problem, which is why we call the report the dollar's exorbitant privilege, which is actually a term coined back in the 60s and the 70s under the Bretton woods system, which is that because the Bretton woods meant that the dollar was convertible in gold, it conferred to the dol enormous privilege of essentially having the rest of the world fund its endless deficits because they had themselves to held dollars in their coffers. The funny development, at least from my perspective, and this is where a market also bring in his historical perspective, is that even after Bretton woods stopped, the dollar continued to enjoy its exorbitant privilege whereby the rest of the world continues to buy U.S. debt, thereby conferring the U.S. the privilege of having the capacity to fund its deficit at very low interest rates. That's what we mean by the privilege conferred to the dollar. And it could be interesting to hear Mark on that concept. He might have a different perspective on this.

[Mark Higgins]

No, I mean I think that's pretty accurate. We'll get into some of the history of the debt specifically, but that's pretty accurate. I mean the US became the dominant reserve currency after World War II and under, under the Bretton woods agreement and has really been the dominant since.

[Mike Wahlberg]

So with the cheap financing and the world helping facilitate that, obviously the. Well, it seems like the US has gotten somewhat addicted to deficits and debt accumulation. So these are kind of the twin focuses of the report, which is. You know what you. Maybe I'll get to talk us through it a bit, Olivier, but just at a high level. You surveyed a few thousand market maker people in our industry, both their views on the sustainability of US debt levels, what they, what the government might do to tackle those if it's a problem, and then also their view on the sustainability of the US dollar as the, as a continued global reserve currency. So maybe you could talk us through a bit on the, on the findings in the survey and report.

[Olivier Fines]

Well, we approached this work probably a year ago from the concept that we refer to as de dollarization, which is an elusive trend that people have been talking about now for decades and probably since the end of Bretton woods, the idea has been, well, with the dollar no longer being convertible in gold, if the US continues to run such aggravated levels of deficit, this should normally, and I'm going to use these terms carefully, normally lead to a depreciation in the desirability to hold dollars. Okay. And we have not seen such an effect on trends since the dollar has continued to enjoy A preponderant importance in transactions in foreign exchange flows. It continues to be the dominant reserve. It continues to be the dominant form to denominate funding, whether it's debt or equity. So we haven't seen the supposed effect on the dollar from the US public finances getting worsening actually over the years. So we did this survey and this research which we wanted to publish before the US presidential election back in November, precisely because we thought this topic should be front of mind of main policymaker in the region, as opposed to continuing to be an elusive concept, we thought it should be right at the core of policy decisions for the next administration. It is interesting that since we've released this, I'm not going to say it's directly the effect from our research, but clearly the topic has picked up an interest in the public discourse we've seen. We've all are getting perhaps amused by the discussions around. The Department of Government Efficiency has announced plans, significant plans to reduce spending. The question will be very much is it possible? And where should such spending cuts take place? So in the survey we've discussed such a question. You might want to get back to this later on, but essentially we've picked up on two dichotomies in this survey and one of them I'm sure Mark will have a lot to say about, but essentially a large majority of our members do not think that the current level of U.S. spending and finances is sustainable. In other words, it's a rejection of the notion that this can carry on forever. Yet when you ask those same people whether they think the dollar will lose its reserve currency status, it's the opposite result. A majority do not think that the US will lose its reserve currency status. We call that the Tina effect. There is no alternative. Right? And if you remember good old Chuck Prince back in 2009 during the subprime crisis when he was asked about why Citi was continuing to propose such complex products as CDOs and so on, his answer at the time had been, well, so long as the market is playing music, I'm going to dance basically. And for the time being, there seems to be no real incentive coming from no particular angle that would act as a clear sign giving the US government its impetus or a need to start reducing its spending in in a significant fashion. So it'll be interesting to see what this new Doge department is able to do. Dichotomy, and I'll end on this quickly, is regional. It is interesting that the responses we got to such questions have differed quite significantly between emerging and Developed economies, the clearly emerging markets, developing markets have an interestingly more sanguine view of US Public finances sustainability. They seem to be less alarmed by the level of sustainability of public finances than the US Themselves. The US is actually where we saw the most pessimistic view on that, but also in emerging markets. This is where we found that respondents were most of the time of the view that the US Dollar will lose partially or materially its reserve currency status over the next five to 15 years. So lots of dichotomies in there. And again, I would be fascinated to know Mark's point of view on those questions from, from a historical perspective.

[Mike Wahlberg]

Yeah, Mark, you, you come at this with a unique view and having authored just an excellent book about the, the long history of the financial markets in, in the U.S. including the origination of, of government debt under Hamilton or this the setup under the Treasury. So curious to, to hear your thoughts on kind of where we are today versus, you know, where we've been.

[Mark Higgins]

Yeah. So you know, reserve. I, I mean I agree with everything that Olivia Olivier said and you know, the fact is reserve, dominant reserve currencies don't change often. So it's not surprising that it's going to take something relatively extreme to, to displace the dollar. But what, what has tended to happen in history when there are reserve currency changes is some kind of major shock. So the Dutch lost their status when they lost the Fourth Anglo Dutch War in the 1700s. The British lost theirs, the pound sterling when after what? Essentially bankrupted by. Not totally bankrupted, but you know, seriously damaged by World War I and World War II. And you know, I think people don't fear the imminent, and I think you're correct, the imminent replacement of the dollar. But the risk is that we're going to have some type of shock. And this is where history and who knows and what that shock will be. And this is where history can be a really good guide. And when people talk about the unsustainability of the debt, they're not framing it in the right way. It's the risk of a shock, not we're projecting this path and we can pinpoint where it's going to be lost. It's the risk of a shock. And this goes back to Hamilton. When Hamilton repaired the debt in 1790, he established two principles. One was you needed sound credit because in times of quote, public danger, you'll need to fund it even if you're a wealthy nation. And then he used language in order to render the public credit immortal. You should pay it back once the danger subsides. And we did that for about 150 years, then World War II. After World War II, we were emboldened by. We had 70% of the world's gold. We had the new dominant reserve currency. Our industrial infrastructure was actually significantly strengthened because nobody could touch us in World War II because we were separated by oceans and friendly nations to the north and south, while the rest of the developed world was pretty much destroyed. So this really is what emboldened us to shift our perspective away from Hamiltonian principles. And we just ran chronic deficits both in times of public danger and relatively tranquil times after the danger subsided. And that's been going on for 80 years. And that is really the story of the US use of public debt. I wish we could show on the screen. I do have a graphic that's in the book and I've published in papers with it as well that shows the deficits from 1792 all the way to 2023. And you could see you had the War of 1812, huge deficits, and then they're paid back. Civil War, huge deficits paid back. World War I, huge deficits paid back. And then World War II hits and it stops. And it's obvious. And when you read yourself to the present, that shift becomes obvious, but very few people are aware of it because we've been living this way for so long.

[Mike Wahlberg]

So has it just become politically untenable to cut programs? Or why do you think it is that it's had this strong march north in terms of the debt to gdp?

[Mark Higgins]

Yeah. Yes. I mean, that's a general, general answer. But the, the big problem is entitlements are the big source of the, the debt problem. And neither party wants to touch them, but eventually they're going to need to be touched. There's. I just did a. A recent call with David Walker, who's the former Comptroller General for the United States, and he is pounding the table on this in a bipartisan way. And at the end of the day, he frames it very well. If we continue our current course in speed. I forget the actual date, but within a decade or two, there needs to be a 21% cut. So we can go down that path and go over the cliff, or we can act now and slowly change things like a mortgage that, you know, it's going to be painful, but it'll be tolerable if we do it slowly. And, you know, thus far, politicians have been unwilling to touch it at all. And that is the big source one Misconception. Now there are savings in other places for sure, but one misperception is that we're wasting so much money on wars, and believe me, we have. But defense spending as a percentage of GDP has actually declined steadily over the last 40 years. That is not the problem. It, it is entitlements.

[Olivier Fines]

Do, do you mind if I leave? Mark? What, what would you say? It is difficult. And it's the same problem in Europe, by the way. It's difficult to see what sort of political incentive there could be out there for any politician that desires to have some sort of future or career to propose a program that deals with government spending. What's the political incentive there?

[Mark Higgins]

You nail the problem. Politicians are motivated by short term incentives to get reelected, which structurally makes it very difficult to address long term problems that are going to require short term pain. I mean, that is that in a democratic society that, that is one of the, you know, the challenges that you need to accept. And there's a, there's a great quote from Paul Volcker that really articulates this. I don't have it offhand, but that's essentially the problem. It's. Politicians have short term incentives and this is a long term problem. It also explains, by the way, how there's a great book by John Kogan, it's called the High Crisis at the High Cost of Good Intent. And it, it's a history of entitlements in America and there's a very. And other countries that addresses as well. There's a very predictable cycle. What happens is you ha. You start with a core like Social Security and usually around election cycles or during times of surplus, there are people on the fringes that aren't covered and there's an incentive to expand it.

[Olivier Fines]

Yes.

[Mark Higgins]

So, so the, the bubble just keeps getting slowly bigger and bigger and bigger and bigger. And you know, that's a typical cycle. And we've seen that with Social Security and Medicare and Medicaid and a lot of these programs.

[Olivier Fines]

Because if I'm gonna interrupt again your well crafted program. Mike, but you said something recently during another conversation we had, Mark, you said something along the lines of the fallacy of thinking you can grow your way out of this.

[Mark Higgins]

Yeah.

[Olivier Fines]

Would you mind clarifying?

[Mark Higgins]

So sometimes I don't, I haven't heard it harped on a lot recently, but after World War II, a lot of the reduction in the debt to GDP was a function of the economy was growing so fast. But that was a very different. It was a legitimately anomalous time. We had huge Advantages in terms of our industrial infrastructure, our R and D as well. We were extremely wealthy because we had, you know, we had 70% of the world's gold. We had the reserve currency plus the, I think it was the 1920s to, to 1970s. Roughly that period we just had this extraordinary burst of productivity growth. Some of that was related to, you know, the necessity of World War II, but some of it was just related to the impact of the inventions. I mean, think about air conditioning, what that can do to the production. You can operate factories, you know, all the time. Electricity, automobiles, home appliances. Think about, you know, washing your laundry by hand. Those, those productivity enhancements. We underestimate the impact. And it's not that technology has not improved productivity, it has, but it's just, it hasn't been as dramatic. I mean, it's just not in the data. There's a great quote from Robert, I forget his solo, I think is his last name that talks about just, you know, we tend to overestimate the productivity impact of technology. And the quote is, I have it right in front of me. He's talking about the computing age. What this means is that they, like everyone else, are somewhat embarrassed by the fact that what everyone feels to have been a technological revolution, a drastic change in our productive lives, has been accompanied everywhere, including Japan, by a slowing of productivity growth. Not a step up. You can see the computer age everywhere but in the productivity statistics. So, you know, the argument that we can outgrow the debt is weaker than I think people anticipate. Unless there's some type of miraculous boom from AI, which is possible. I'm going to take the under on that. At least not at least in the short term. You know, it's, it's. We, we probably don't have the same conditions that we did after World War II to outgrow the debt.

[Mike Wahlberg]

And I guess the other lever to other than cutting expenditures is of course to raise taxes. That was one of the options. And Olivier, in your report that survey respondents were offered and it wasn't the lowest, but it wasn't the highest, take up talk a bit about what you saw there.

[Olivier Fines]

Well, at the risk of being cynical, I'll say thankfully that was not the number one response chosen by members, but that is of course a matter of personal choice. But it is interesting you mentioned this because going back to what Mark was just saying, the top two measures chosen most often by the respondents to our survey were indeed in that order, number one, reductions in what we call non mandatory government spending, discretionary spending. Right. Which comprises defense, but also health and education spending. Essentially non mandatory means government programs that have to be decided every year. And so you could may, you could make the argument that this is where it makes most immediate sense to make cuts. Because by definition every budget you could, you could make changes. But nowadays it represents if I'm correct, less than 20 or around 25% overall budget, whereas mandatory spending is now if I'm also correct somewhere between 60 and 70% of the budget. It will be by definition very difficult to suggest changes to mandatory government spending, which was the second favorite choice expressed by the survey members in terms of how to reduce the debt to GDP ratio. And this takes us back to the point Mark made because you can also argue that one way to reduce the proportion of your spending to your GDP would be to grow the denominator of that equation. Right. Which is the GDP itself. And I think when you look at the earlier announced plans of the new US Administration, they're trying to play on both part of the, of the equation. So you want to reduce taxes and at the same time you want to put forward the conditions for accelerate accelerated GDP growth. The, the question will be whether that produces the effect that, that they would like. But at least they're announcing some desire terrain in spending and by some way shape or form. It is interesting as well that another approach here could be to monetize your way out of this. Right. Or to generate inflation which would naturally grow the GDP without having to actually act on the level of spending itself. That has been largely rejected as a.

[Mark Higgins]

That is a dangerous game to play.

[Olivier Fines]

Why don't you tell us why, Mark?

[Mark Higgins]

Well, you know, it can get out of control. I mean you could if, if you're trying to inflate the debt away, then you're increasing the debt at a rate higher than inflation. It's not going to do anything, first of all, and it's just a dangerous game. It can start feeding on itself and you know, inflation goes higher and the.

[Mike Wahlberg]

Cost of financing goes up along with it.

[Mark Higgins]

Yeah, that is a very dangerous game to play.

[Mike Wahlberg]

I actually wanted to ask about that as well. What you guys think about cost of capital for the U.S. treasury? I mean, we had a downgrade last year from Fitch back in 2011. Obviously S& P downgraded. I feel like the market kind of largely shrugged it off. But I don't know, what do you guys think?

[Mark Higgins]

Does it not matter the, the downgrade or.

[Mike Wahlberg]

Yeah, the downgrades.

[Mark Higgins]

I think the market means a lot more than a pitch rating. But you know, like I said it's.

[Olivier Fines]

It's the.

[Mark Higgins]

At least from my perspective and history has played out this way, the danger is the unanticipated shock. You know, it's not, it's not we should be fearful of we. What we don't know what than. Rather than what we do know. I'm sure the British did not. In 1913, they were sitting pretty and didn't predict that, you know, their privilege would be gone within 40 years from two world wars. Now, maybe the Dutch had a little better sense because they knew they were going to war, but these things are, are the shock is what we're exposing ourselves to and not being able to respond to it in a way that Hamilton designed.

[Mike Wahlberg]

Right.

[Olivier Fines]

The another way of describing this, Mike, is what we refer to as an inflection point. The problem that we're dealing with here is that so long as things seem to be okay, there is this perception in the market that this can go on forever without making drastic change. What Mark is saying is that once you pass an inflection point, the deceleration can be quite abrupt and quick and it's difficult to identify. That's what we've been struggling with as well here, identifying potential causes for an accelerated rate of de. Dollarization. It's difficult to identify a specific shock or announcement or development that will overnight or over a short period of time, suddenly create the conditions of an accelerated deceleration or an accelerate rate at which other nations are disposing of their dollar holdings. That. That is a little bit difficult to speculate over, I have to say.

[Mike Wahlberg]

The two factors that you identified in your report were the one we've been talking about the inability to service its debt, and then the other being, of course, geopolitical tensions, which Mark touched on there as well. One, one sort of anecdote that came to mind when I was reading that was just my recent conversation on this podcast with Stephanie Baker, who wrote a great book about, about Russia's efforts to finance its war, execute its war in, in Ukraine. And when they, you know, nations around the world went to seize the fashion Russian foreign reserves and they had almost nothing in US dollars, probably because they may perhaps anticipated that they might get seized, which was interesting. You know, you would think a great nation or size, a nation the size of Russia would have pretty significant US Dollar reserves, but no, they, they pulled them all out. Where they did still have a good chunk was in. Was in Euros. And I know in the report here that was the kind of the, the biggest potential replacement in terms of people's anticipations around that. But, but the other was just this idea of a multipolar system. What does that mean, Olivia? What would that look like?

[Olivier Fines]

Well, what I find interesting here is that indeed. So we researched this idea. Well, all right, so should the dollar be replaced? What would it be replaced with? Basically okay, and there's clearly here in our report some parallel established between monetary system but also just general geopolitics as you say yourself. Right. And when you read political commenting, we've reported on this trend towards what we call diverging worlds or de globalization as opposed to a continued convergence and a continued integration of the world. The answer that's been chosen most of the time by the survey respondents in our research here to the effect of what could replace the dollar was this concept of a multipolar currency system which completely aligns with this notion that we're now hearing. Instead of a unipolar world centered around an all powerful west almost, almost centralized around the US you might end up with a series of blocks out there, economically well integrated monetary well integrated that will tend to trade amongst themselves as opposed to necessarily depend on global flows which in turn have been using efficiently the dollar for so many years. So I was intrigued by that. I was not necessarily expecting this. I was also expecting maybe foolishly that some currencies like the Yuan would feature much higher in this pecking order. It was not the case. It seems even and even in there's little people of the view that the Yuan constitutes today a very viable alternative to the almighty dollar. What was also interesting is a digital currency, private digital currencies was the second most chosen option in there. So when you think about this concept that people are losing faith in systems and institutions, then maybe that faith will be displaced. And again I'm using those terms with a lot of prudence. Maybe this faith will displace in favor of a monetary system that is not dependent on political force. But again that's pure speculation, Mike. At this stage we don't know what seems to be earning people's favor is this concept of multiple blocks that are well integrated. But that means that you are going to have to be dealing with a series of currencies that have perhaps equal equal importance. I think this is a very interesting observation for prospective analysis.

[Mark Higgins]

Yeah, the. This is a hard one to answer, especially because history would suggest that it's going to be a shock that causes a trans. If a transition happens, it's going to be some kind of shock and it's hard to predict what, what's going to be what's going to be in the background to replace it. I mean could some type of multi currency system be set up and kind of waiting in the wings and, and I, maybe I it were. It's a very very difficult thing to predict. I think it's impossible to predict how this plays out because usually the shock is an unexpected war. At least the last two were could be a natural disaster, another Covid that's worse or you know, major earthquake, volcanic eruption, who knows? I mean people laugh about that. Volcanic eruption in 1815 changed the world so they didn't know it at the time but it did and you know it'll be something like that. So it's just so hard to predict what's going to replace it if that's really going to be the inflection. But I agree that that's, that's the possibility. I think, I think John Maynard Keynes proposed that at Bretton woods but Harry Dexter White would have none of it and the British didn't exactly have leverage then. So the US dollar became the dominant reserve.

[Mike Wahlberg]

And I guess the best way to prepare for the unpreparable is to have lots of dry powder or more dry powder I guess than the US is sitting on right now.

[Mark Higgins]

That is the Hamiltonian principle. I almost want to read the quote because it's so. Do you mind if I read it? We might not use it. The two quotes from Hamilton that really were his two principles for the debt. Because if you can work it in I think it's pretty powerful. Yeah. With regard to public danger, this is from the first report on the public credit which was published in 1790. Exigencies are to be expected to occur in the affairs of nations in which there will be a necessity for borrowing that loans in times of public danger, especially from foreign war, are found an indispensable resource even to the wealthiest of them. It is essential that the credit of a nation should be well established. That was in the opening and then toward the closing he said he Alexander Hamilton ardently wishes to see it incorporated as a fundamental maxim in the system of public credit of the United States that the creation of debt should always be accompanied with the means of extinguishment. This he regards as the true secret for rendering public credit immortal. That is what we're violating right now.

[Mike Wahlberg]

Well that's a great way to finish us off, Mark. I've been speaking today with Olivier Fines, CFA Institute's head of advocacy and capital markets policy research for EMEA and co author of a recent report out of the Institute that the Dollars Exorbitant Privilege CFA Institute Global Survey on the US Debt and the Role of the US Dollar, as well as Mark Higgins, author of Investing in US Financial History, Understanding the Past to Forecast the Future. Thanks to both of you guys for this great conversation today.

[Olivier Fines]

Thank you. It was a pleasure.

[Mark Higgins]

Thank you, Mike. Thank you, Olivier.

[Olivier Fines]

Thank you as well.

[Mike Wahlberg]

I'm Mike Wahlberg, and this is me, the enterprising Invest.