The buck stops here? The threats to dollar primacy

0:02The Economist

0:10Hello and welcome to The Intelligence from The Economist. I'm your host, Jason Palmer. Every weekday, we provide a fresh perspective on the events shaping your world.

0:24For years, the discussion about Francis Hardright centered on Marine Le Pen. But for some time, she has been cultivating a protege, a young man with a polished social media presence named Jordan Bardella. We ask what makes him tick. And one of the things Hong Kong is famous for, it would like to do away with, cranky cab drivers. As part of a tourism push, they're being told to smile and be nice, or else.

1:00But first...

1:30Don't worry, we're not here to pick through another word salad about tariffs and discuss how counterproductive they are and how the pain will disproportionately fall on the Americans who are allegedly being saved by them and how economies around the world are being rattled by the capricious ways they've been applied and repealed and delayed. I'm here with our economics editor, Henry Kerr, to talk about something far worse than all of that. so there's been this generalized sell-off in american assets that suggests maybe there is some threat to the status of the u.s dollar as the world's reserve currency which means potentially a lot of financial disruption for america and for the world if the worst case scenario was to materialize well let's start with what gives you that sense how are things unfolding at this point that gives you that worry.

2:22Since President Trump announced the so-called reciprocal tariffs at the start of April, there have been big falls in equity markets. Everyone knows about that. The more alarming signal that's happened is this simultaneous sell-off in bonds and in the dollar. Now, normally when there's a sell-off in bonds, what that means is your bond yields, the return you get owning a bond are going up. So normally what happens when bond yields go up is that the dollar goes up too because investors can get more by buying the dollar and holding those bonds. When your bond yields go up but the dollar goes down, it means that there's this generalised sell-off, a flight from those assets, which suggests investors are somewhat fearful.

3:04It's the kind of dynamic you see more in emerging markets. It's the kind of dynamic you saw in Britain after the disastrous mini-budget under Liz Truss's premiership in 2022. too. And that's what's sending this signal that maybe there's this risk premium now on US assets. And what's also going on at the same time as the trade war is that Congress is preparing to loosen the purse strings as it renews the Trump tax cuts from the first term and potentially tries to add to them. And it's passed this budget framework, which is very aggressive in terms of the fiscal loosening that could go on, potentially more than the Trump tax cuts, the COVID stimulus and Biden stimulus combined, according to the Committee for a Responsible Federal Budget.

3:50So this big fiscal loosening is also enough to catch the attention of bond markets and dollar investors, I think. And it's that that's worrying. But surely it's also worrying people in the Trump administration, economic advisors, or is it not? So clearly the administration will be watching the financial markets and they have proved responsive already this month, turning around on some of the tariffs in response to what's going on. But what's pretty remarkable is that you have senior figures in the administration who aren't that keen on the dollar's reserve currency status. Stephen Moran, who is the chairman of the Council of Economic Advisors, has made this argument that the strong dollar is a tax on manufacturing workers because it makes US exports more expensive.

4:38JD Vance has said that in the past as well. So there is this idea out there in MAGA circles that the reserve currency status is something that brings big costs. And saying these kinds of things in public is a pretty bold thing to do because for decades the US government has been careful to say that it welcomes a strong dollar, that it is a safe harbour for international investors. But now the administration itself has actually cast a bit of doubt on that. Okay, and seems to be fairly untroubled by the kerfuffle that that has raised. But like, let's game this out. Suppose the incipient signs that we see now pick up and this goes in the nightmare scenario.

5:19What happens? How does it play out? So I think the first thing that happens is that bond yields continue to rise as foreigners who own$8.5 trillion of US Treasuries If those investors start offloading bonds, bond yields go up. Now, that very quickly feeds back into America's budget because America has a lot of debt. Its debts are worth about 100 % of its GDP. So you can think about it as a one percentage point increase in bond yields and the interest costs you have to pay eventually lead to an additional 1 % of GDP in taxes or spending cuts in order to pay those interest costs. Eventually, that would force Congress to act in order to steady the ship.

6:05And it would be something comparable, perhaps, to what happened in the global financial crisis, where Congress had to very quickly pass measures to stabilise the financial system. They would have to do the same to try and stabilise the bond market. But the question is, can America's political system, with all the stress it's under, cope with that? Would it be capable of correcting the fiscal picture rapidly with the rapid negotiations that would require? Would it be able to, if necessary, find a two-thirds majority in Congress to potentially override a presidential veto if President Trump didn't like the kind of cuts to social security and so on that would be necessary?

6:45Because it's a big adjustment. The US is going into this position having exploited its status as the reserve currency to a great extent. It's run up those high debts, but it's also been running a deficit of 7 % of GDP, which is a pretty extraordinary deficit to run when the economy is strong. That's the kind of deficit you usually see in an economic crisis. So it's starting from this position where the budget is way out of whack. It's destabilizing things further. And that just means that the course correction is pretty large and would be a big political lift in that moment of crisis if it came about.

7:16And it sounds as if that if it came about, it's not even clear that the administration that Congress could pull it together to stop the slide, maybe doesn't want to stop the slide? Well, I think they'd want to stop the slide. The question is, can the American political system reach that kind of compromise in its current condition, given what's happened in terms of polarization, given the Trump administration's attitude to the economy? I think there's lots of question marks there. And the other thing that would need to happen is that the Federal Reserve would be wanting to intervene to stabilize things in the bond markets, almost certainly.

7:51But it's one thing to do that in the pandemic or the global financial crisis when there's no real inflationary danger. But the other thing that's going on at the moment, in part because of tariffs, is that inflation is rising. Consumers' inflation expectations have shot up. And there's been pressure on the Fed from the Trump administration. President Trump would like them to lower interest rates. He gets to nominate a new Fed chairman to replace Jerome Powell next year. So you have the Fed that's in this somewhat compromised position and would, as well as wanting to stop any bond market crisis if one happened, be desperate not to give the impression that it was bailing out Congress and financing this big deficit when the bond markets wouldn't.

8:35So it would not be, I think, fully able to calm global financial markets in the way it normally would until Congress had righted the fiscal ship, which, as I say, might be politically difficult. Okay, you've painted a potentially very grim picture. Let's keep gaming it out. Suppose then the run on the dollar happens, the dollar stops being the world's reserve currency. What could take its place? Who are the contenders for a replacement or are there any? Well, the really interesting thing is that over the past few decades when people have debated this, the question has always been, will the Chinese RMB displace the dollar as the world's reserve currency.

9:13That's, in my view, always been quite unlikely given it does not have the confidence of investors or the legal setup necessary to take over a reserve currency status. What you do have though is you have lots of alternatives to the dollar, none of which provides the same degree of safety and liquidity and size of economy that America can offer, but provides some of those things in some combination. So you've got the euro, which obviously has a big economy behind it, but doesn't have as deep capital markets. You have the Nordic countries. They're perceived as pretty stable, but they're obviously very small.

9:54You have Japan. It has big debts of its own, and there are some question marks there. Then you have non-sovereign assets. You have gold, which is a traditional haven, and you have maybe, maybe cryptocurrency. But you are looking at a world, I think, where people are seeking out what the reserve asset is going to be, and nobody's quite sure. So it's not that you don't have alternatives, but you don't have this focal point that you currently have on the dollar. And that's potentially quite unhelpful and an unstable world. So we've been talking about this as the place that we might end up if things go in that kind of mechanistic way you describe.

10:30But I wonder if the whole system, as you say, is predicated on this sort of trust in the system, on the certainty that this and that won't happen. is the damage already done? If the administration walks things back, makes fiscal corrections, calms everyone's nerves, is some of the damage already done because investors can no longer be sure that this kind of tumult isn't just around the corner all the time? So I think the dollar's position is so strong, its dominance of trade, its dominance of derivatives trading, of currency trading, of central bank holdings across the board, that if the Trump administration pursued a sort of stabilisation agenda and rolled back the trade war and there was a fiscal correction in Congress, the dollar's position would be secure in the short term.

11:14I do think that they have now cast doubt on things to a degree that it wouldn't be quite as secure as it was a month ago. And that risk, perhaps a small risk premium, even on the debt and the dollar, is always going to be there. So I think there's a permanent cost that's been incurred here. but we're not in the crisis yet there's definitely the opportunity to correct course here still henry thanks very much for your time thanks jason

11:57Jordan! Jordan! Jordan! Jordan! Jordan! Crowds gather around Jordan Bardella and chant his name as he prepares to speak at a political rally. My dear compatriots. Marine Le Pen, who's the leader of the hard-right National Rally Party, spotted him young and promoted him fast. He's now just 29 years old, but he's already president of her party. Sophie Better is our Paris bureau chief. A couple of weeks ago, Jordan Bardella was being lined up as a potential future prime minister in 2027 under a President Le Pen. That was the idea. But on March 31st, things changed abruptly when a Paris court convicted her of misusing public funds and barred her from running for office for five years with immediate effect.

12:47The party insists that Marine Le Pen is still its presidential candidate. But unless her appeal is successful, Jordan Bardella could end up running instead. Vive la République et vive la France!

13:27area with a lot of social issues. And that is a complete contrast with Marine Le Pen, who grew up in a mansion on a very leafy street on the western edge of Paris. So while he heard the banter of drug dealers outside his flat when he came home, she grew up hearing the sounds of birdsong. Jordan Bardella has held no job outside politics. He dropped out of university and went straight to work for the party, he secured his first local party post when he was aged just 18. His home life is not quite as harsh as some accounts make out. It's quite convenient for him to overplay it. In fact, the young Jordan Bardella attended a local private Catholic school.

14:09It wasn't a grand place, but it was a disciplined place and it was away from the turbulence of the state schools in his neighbourhood. Nonetheless, Jordan Bardella's upbringing does give him a sort of grounding and a credibility among French voters. And that is now matched by a very high popularity.

14:33Badella has two million TikTok followers, and he has perfected the normal guy routine in the clips that he posts.

14:48These cover everything from tasting chocolate, drinking wine, signing copies of books for kids or for giggling teenagers, or eating the Haribo multicolored sweets from little packets. Last year, Jordan Bardella published his autobiography. It ran to 324 pages to cover his 29 years. He comes across as a teenager as actually fairly geeky and antisocial and certainly shy. He spent hours as an online gamer playing Call of Duty. But he's emerged since then to become this fairly smooth, well-coached TV performer who has a very strong following, particularly among young people. He was first drawn to the party by Marine Le Pen and the way she transformed what was an extremist movement into a patriotic nationalist party aspiring to government.

15:40And when he was just 23 years old, Le Pen picked him to lead the party into European Parliament elections and he became the party's official head in 2022. This was a very fast promotion to the top at a very young age and one party insider told me that he considers him ruthless.

16:06Reading his autobiography doesn't give that much of a sense of what he really believes in, apart from the right to keep out foreigners, his dislike of globalization, of excess regulation, of the European Union, of President Emmanuel Macron, and of all things woke. On most policy matters, Jordan Bardella is closely aligned with Marine Le Pen. He's tough, like she is on immigration, fairly relaxed on social moors. But when it comes to Russia and Ukraine, There are some nuances. Marine Le Pen tends to fault Macron for exaggerating the Russian threat. But Bardella is more apt to criticise Putin. And Bardella has recently began to make his own mark.

16:52Last month, it was interesting that he visited Israel.

16:58The national rally has a history in the past under Jean-Marie Le Pen of anti-Semitism. And it was in a way, I think, a gesture of solidarity, in an attempt to turn the page on the party's anti-Semitic past. Marine Le Pen insists that she is still the candidate and she will run for the presidency in 2027. The Court of Appeal will rule in her case by next summer. For the moment, Jordan Bardella defends Le Pen. He says he owes her everything and he swears loyalty. Marine Le Pen a été jugée avec cette violence et cette brutalité, It was interesting that straight after her conviction and her sentencing, he was one of the most severe critics of the judge's decision, saying that, quote, democracy was executed.

17:50If Marine Le Pen's ban is confirmed, the weight of a presidential challenge would be heavy. He's extremely inexperienced. He has plenty of critics within the party who think he's been promoted too fast. But Bardella will doubtless now begin to think about that prospect, without, of course, giving away any hint of portraying the woman who made him what he is today.

18:27I was wondering, I'm a journalist for a paper called The Economist. I'm writing a story about taxi drivers in Hong Kong. Is it all right if I ask you a couple of questions about your work? Emma Irving is an Asian news editor for The Economist and is based in Hong Kong. On the whole, taxi drivers in Hong Kong are famously rude. If you ask for an alternative route or you try and pay by card rather than cash, you can often get quite a prickly reaction. But all of that might be about to change because the government is worried that cantankerous cabbies are putting tourists off when they arrive in the city.

19:05So officials have launched a program that is encouraging cabbies to be on their best behavior. How do cabbies fit into this broader program you're talking about? Well, it's part of this really big$16 billion blueprint that's going to try and get tourists back to the city. That's because their numbers have dropped. So there were 45 million tourists last year, but there were actually 65 million in 2018. So the government's trying to encourage people to come back by doing things like introducing new giant pandas to the city and trying to get people to go to things like horse racing. But it's also encouraged cabbies to, quote, smile more and introduce a penalty system that actually will punish them for bad behaviour with fines or even with a ban.

19:51And it's also trying to get cabbies to come into the 21st century to match the rest of Hong Kong's sleek transport system by ensuring that they'll do things like accept digital payments and install surveillance cameras so they can check that they're behaving well. And how do you think the city's cantankerous cabbies are going to respond to this stick? Unsurprisingly, I don't think that they're going to be thrilled about it. The cabbies do have quite a tough time. So most of them are over the age of 60. The workforce is ageing. There's growing competition from apps like Uber and their pay is dwindling.

20:29One cabbie that I spoke to recently said that 40 years ago when he started work he had enough to provide for his family but now that was actually a real struggle for him. Their average take-home pay is equivalent to around 29 ,000 US dollars a year which is not much to live on in Hong Kong because it's a really expensive city. And one of the other issues is that the taxi licenses are really expensive. They're capped by the government and they're traded on this loosely regulated market and then rented out to the drivers who are self-employed. The cabbie that I spoke to said that his taxi license costs him around$120 a day.

21:07So that means that he actually only earns about$75 after he's done a 12-hour shift. And the government reckons that by bringing cabbies into line in those ways is actually going to bring in more tourists? Well, yeah, it might do. And that's partly because the cantankerous cabbies are almost definitely putting some tourists off. Stories of their bad behaviour have gone viral on some Chinese social media apps, with people complaining like they've been massively overcharged by sort of 220%, or they've been taken to a totally different place to the one that they wanted to go to. And that really matters to the government because actually mainland tourists now make up the vast majority of visitors to Hong Kong.

21:4734 million of the total 45 million tourists last year came from the mainland. And along the way there, you mentioned one of the things that's troubling taxi drivers is competition from Uber. How does that fit into all of this regulation push? So one of the biggest issues for Hong Kong's taxi drivers is they face increasing competition from Uber. Hong Kong doesn't actually have any regulations specifically for ride hailing apps, but it's nevertheless really popular. So Uber reckons that about half of the city's residents now use it. And that has made cabbies really miffed to the point where some have been going undercover to try and expose Uber drivers and then report them to the police.

22:27Some feel that the authorities aren't that keen to crack down on Uber use because it's seen as quite modern and appealing to tourists. and they actually threatened a widespread strike unless the government promised a better enforced regulation, which it then said that it would do. And so as a Hong Kong resident, Emma, do you think all of this is necessary? Do you think this is getting the regulation right? Do you think it's going to do what the government wants it to? Well, I've certainly met my fair share of grumpy taxi drivers in the city and it would be good for the city's economy to have more tourists coming back.

23:02And I think it could be good as projecting a more positive overall image of Hong Kong. But I don't think that it will be the thing that turns the city's fortunes around and suddenly encourages lots of tourists to flood back in. Emma, thanks very much for your time. Thank you very much for having me.

23:36That's all for this episode of The Intelligence. We'll see you back here tomorrow.