Kenneth Rogoff and Yu Yongding on Trump, the dollar and the rise of the yuan
The two economists reflect on how the Trump administration’s recent actions have harmed the US dollar – and handed China a golden opportunity
Welcome to Open Dialogue, a new series from the Post where we bring together leading voices to discuss the stories and subjects occupying international headlines.
In this inaugural edition, we invited prominent economists from both sides of the Pacific to reflect on the recent turmoil in global trade, the diminishing role of the US dollar and whether China’s yuan could – or should – take its place.
Professor Kenneth Rogoff of Harvard University has repeatedly warned the US dollar is approaching a crisis of legitimacy. Having written extensively on the global recession in the late 2000s, Rogoff has turned his focus to the US currency’s now more unstable place at the top of the world’s financial hierarchy. A former chief economist of the International Monetary Fund – and a chess grandmaster – he published Our Dollar, Your Problem in early May.
Dr Yu Yongding has been outspoken in his advocacy of a free-floating yuan and broad fiscal stimulus in China. He has also recommended Beijing gradually reduce its holdings of US Treasuries to a level that minimises potential losses. Previously an adviser to China’s central bank, he remains an influential voice in policy circles as a senior fellow of the Beijing-based governmental think tank, the Chinese Academy of Social Sciences.
What do you think about the future of the US dollar? Will it remain the dominant global currency?
Yu Yongding: It can be asserted that foreign investors’ demand for US assets, particularly Treasury bonds, will gradually decline, making it increasingly difficult for the US to sustain its balance of payments and maintain a strong dollar.
The US dollar is the world’s most important reserve currency. Other countries around the world need to hold a certain amount of US dollars to pay for imports, service debts, intervene in foreign exchange markets and meet unexpected needs. The US dollar is primarily invested by its holders in highly liquid short-term US Treasury bonds. In essence, the dollar is essentially an “IOU” issued by the US government, backed by its own credit.
However, foreign investors’ willingness to hold dollar-denominated assets will decline as the US’ net foreign debt accumulates, and foreign governments and investors will no longer believe that the US can realistically redeem its “dollar IOUs” – that is, genuinely fulfil its debt repayment obligations. This would trigger a rush to exchange dollar claims for hard assets like gold, potentially sparking balance-of-payments and dollar crises.
The weaponisation of the US dollar has further eroded this willingness, particularly US Treasury bonds. After the outbreak of the Ukraine war, the US and its allies immediately froze US$300 billion in foreign exchange reserves held by Russia’s central bank, so it is not alarmism that the US could very well sequester China’s overseas financial assets in the event of a Sino-US conflict.
Meanwhile, the Donald Trump administration’s tariff policies further fuelled foreign investors’ concerns – namely, that the US government might engineer dollar depreciation to reduce its trade deficit. These protectionist measures would inevitably drive up domestic inflation in the US, thereby effecting a real depreciation of the dollar.
Kenneth Rogoff: My book argues that the US dollar reached a level of dominance that’s almost unprecedented in the history of money, but it has been in gentle decline. I argue that it peaked in 2015.
It’s in decline for external reasons, which is that, particularly, China needs to break free from its close link to the dollar. The People’s Bank of China argued that internally, but China didn’t publicly.
But now it’s obvious that there’s no choice: the US is a strategic adversary, competitor, adversary, whatever you want to call it. China needs to worry about sanctions, information control and things beyond macroeconomics, which is mostly what Dr Yu talked about.
We defaulted on Russia. We don’t call it a default, because we have the courts, and we make the rules. They had US$300 billion and we took it away. What do you call it? I mean, if somebody did that to us, we would call it a default. It’s also about the weaponisation of the information flow. Our spying throws out our knowledge of the financial sector to the whole world.
The fall of Rome famously came from problems on the inside as much as foreign enemies on the outside. The US has a couple serious weaknesses. The one which is very difficult is the debt problem. The US is the world’s biggest debtor by far, it accounts for roughly half of all advanced country debt. That’s also true of corporate bonds. It accounts for roughly half of all the corporate bond debt of advanced countries.
This is a vulnerability, especially when interest rates rise. The US gambled on interest rates – always very low, real interest rates of zero or even negative rates – and now they’ve reached a more normal level. When you’re the world’s biggest debtor, and interest rates rise, you are the most vulnerable.
The Trump administration is wrestling with this because he wants the biggest, greatest tax cut ever. But I think with the debt level where it is in the United States, markets will not be so kind. I think interest rates are going to continue to rise. I don’t see the US getting its debt under control until there’s a more radical problem.
Another reason I think is very important is, the independence of the Federal Reserve may be lost with pressure from both the left and the right. That will weaken the dollar tremendously.
Both of you agreed that massive debt is one of the reasons for the seemingly inevitable decline of the US dollar. Why does the US have such a huge debt level?
YY: The cause of America’s trade imbalance lies in its domestic savings falling short of domestic investment – in other words, excessive consumption. Since the early 1970s, the US has consistently run substantial trade deficits. These trade deficits have served as the primary channel for dollar outflows. Beginning in 1982, as trade deficits surpassed investment income surpluses, the US transformed into a current account deficit nation and a net debtor country.
There are two crucial metrics for assessing external debt sustainability: the ratio of current account deficit to gross domestic product and the net foreign debt-to-GDP ratio.
The current account deficit represents new debt created during a given period, and the accumulation of current account deficits constitutes net foreign debt.
Yet investors typically prioritise the current account deficit over accumulated debt levels. Even when net foreign debt-to-GDP reaches historically unprecedented heights, market participants may maintain their positions provided the current account gap remains modest. This is because they focus more on short-term default risks, and there is no historical precedent to determine the critical tipping point for net foreign debt ratios for a country with a reserve currency.
Since the 2008-2009 financial crisis, countries’ demand for US dollars as a reserve currency has been rising due to its safe-haven status and the relatively higher returns on US assets. This has enabled the US to narrow and stabilise its current account deficit at around 2 per cent of GDP annually.
But its net foreign debt as a stock variable continues to accumulate. Assuming the US maintains the 2 per cent current account deficit-to-GDP ratio, the nation’s net foreign debt-to-GDP ratio will approach 100 per cent in the near future.
KR: I don’t blame Trump. I don’t blame Biden. I blame the American people. We are used to getting everything for free. We are used to having the world give us money to maintain this huge consumption level.
I don’t think Trump is always wrong. But his tariff policies have just been atrocious, bad economics. He says he wants to close the trade balance. He says he doesn’t want to be borrowing so much. But if he really felt that way, he should realise that the main driver of our deficit is the government deficit, which is over 6 per cent of GDP. Trade balance is less than that. If Trump cut government borrowing down to 2 per cent of GDP, I guarantee you, the trade balance would get much better.
I would say Dr Yu is overemphasising foreign debt compared to total debt. Our debt is very high, and we are very rich, so our wealth has been rising. A big part of why our net foreign debt is so high is that our stocks went up so much, and foreigners who invested in Meta and Apple and other big US tech companies did very well. That’s why the net foreign assets are very high.
But Dr Yu certainly makes a point that the greatest vulnerability is foreign lending. You can’t force foreign lenders to stay. Japan forces the domestic lenders to stay. That’s how Japan has avoided a debt crisis, although it had a growth crisis.
YY: Yes, indeed America’s wealth has been rising. But a net foreign debt as high as more than US$20 trillion and a net foreign debt-to-GDP ratio of more than 70 per cent inevitably raises concerns among foreign investors.
Do you foresee a crisis for the US dollar in the near future? Like the Nixon shock, is there going to be a Trump shock?
KR: My book argues that the odds of a dollar crisis – or an inflation crisis, I’m going to call it – in the next five to seven years are very high.
But my book was finished on the day of the election. I couldn’t touch it after that. I didn’t know who would win. I didn’t think it mattered, because I thought both parties were going to be reckless. Because Americans are reckless, you won’t win elections if you’re not.
So maybe now that I’ve watched a few months of Trump, I would say instead in the next four years, I expect to see a dollar crisis. Absolutely.
The title of my book [Our Dollar, Your Problem] comes from the Nixon shock. But I think Americans want to blame Trump for everything, and that’s wrong. The problem was coming. Trump is a catalyst, accelerating the crisis, but he didn’t cause it.
There was a retreat from US dollar reserves before Trump, but there was not a retreat from US assets, like stocks and others. Now I think everything became overvalued. This is a time when other stock markets will outperform.
YY: The high foreign debt level signifies a deterioration in the US’ debt servicing capacity. The higher the net foreign debt-to-GDP ratio, the weaker the debtor nation’s capacity to repay its obligations through goods, services and other forms of real resources, and it can theoretically induce a big, long-term crisis.
In the short term, the US has several options to meet its debt obligations: debt refinancing, quantitative easing, engineering inflation, dollar depreciation and boosting economic growth. Only the last option represents a sustainable solution to the debt problem, while the others merely buy time. All other options would ultimately lead to dollar depreciation and rising inflation – both constituting de facto defaults on US debt.
Speak more about Trump. What has the last month of his tariff war told us about where the US dollar is going?
KR: I think one of his good qualities is that he’s a pragmatist. He’s not an ideologue. And what was strange about the tariff policy was it was so obviously dumb. It was so obviously disastrous. He didn’t quickly change his mind, which he usually does. Particularly with what we saw with China the other day. Trump got nothing from China. China did everything he dared everyone to do: “Don’t you fight back; Don’t you argue.” China went toe to toe with Trump, and he pulled back.
We’ll see [what happens] in another 90 days. But it looks to me like he created a lot of chaos and retreated. But the good news is he retreated, and he’s backing away from this policy, but we will still have tariffs. I don’t know where they’ll land on China, but it appears they’ll probably land at 10 to 20 per cent at the end of the day, which is not insurmountable. We’re not going to have goods produced in the United States just because of a 10 or 20 per cent tariff on China.
I think what really got people worried was the feeling that Trump was incompetent. He did a pretty decent job with the economy in his first term until Covid-19 hit, and people thought Trump 2 would be like Trump 1, maybe with a little more noise. When he put out “Liberation Day”, people thought, “What’s going on?” It wasn’t just about tariffs. They didn’t trust him about anything.
Good news that he has retreated. But a lot of damage has already been done to the US’ standing in the world. I don’t think it can change. He has greatly undermined the standing of the US and the world as a trusted partner, as somewhere to put your money where you know you can keep it, who is going to behave responsibly.
He’s retreated from tariffs, but he’s still Trump. And even in four years, if there’s another president, I think we’ve seen that the president can behave very recklessly, and people just are never going to trust the United States quite as much.
It hurts the US dollar’s status a lot. It doesn’t happen overnight, but everyone’s looking to diversify, not just their reserve holdings, their financial systems. The dollar dominates not only trade and asset pricing, but provides outsize control of the global financial system. Everyone – not only China – Russia, Europe hate it. Now they’re thinking, “Whatever we’re getting from this, it’s too big a price to pay.”
I believe we’re going to move, over the next decade, to a more tripolar system, with the yuan playing a bigger role and with Europe expanding the footprint of the euro.
YY: Trump’s tariff policies have already weakened – and will continue to weaken – foreign investors’ willingness to hold dollar-denominated assets, particularly US Treasury bonds.
The simultaneous decline recently in both US Treasuries and the dollar indicates that markets are not only concerned about the sustainability of US government debt, but are also shifting their safe-haven demand toward non-dollar assets.
The Trump administration’s economic policy has been deeply shaped by the ideas of Stephen Miran. He wrote an essay last year arguing the dollar’s reserve status is a burden rather than a privilege, blaming it for deindustrialisation and unsustainable deficits. What do you think? Will this theory have a deeper impact?
KR: Stephen Miran is a very clever person. It’s a brilliant piece of rhetoric that he wrote. It was especially clever to call it the “Mar-a-Lago Accord”; that made Trump like it. If you’re a small African country, and you want to have good relations with the US, you should invest some of your reserves in Trump’s meme coins and rename your airport Trump Airport.
But Miran’s diagnosis of the problems in the US economy was maybe 5 per cent right, 95 per cent wrong. He said that the deindustrialisation of the United States was because we were a reserve currency, making the dollar strong. First of all, it’s just not true that being the reserve currency makes the dollar strong. It is the reason the dollar has been weak, in the 1980s and from 2005 to 2006. All the time, the dollar has been the reserve currency, and it is a roller coaster – sometimes it’s high, sometimes it’s low.
It is true that the US is a very financialized economy. So is the United Kingdom. The pound is not the reserve currency. It also runs deficits. But you know, if you’re very good at trade, it is about comparative advantage. Trump has this vision that the United States should do everything. And that’s silly.
Of course, let’s say if I were China, India, Brazil, or any other country looking at the Miran plan, the scariest part of it is he wants to default on our debt. My estimation is that China has US$2 trillion in its reserves; one trillion that it reports, another trillion that are held indirectly. Miran wants to say, we’re going to take this away from you and give you a 100-year debt that pays no interest and is not tradeable. Of course, that’s a default that will blow up the international financial system.
YY: It is not hard to see that Miran’s overall approach is fundamentally flawed. Policies formulated based on this line of thinking will not only fail to reduce the US trade deficit but will further undermine the dollar’s status as the global reserve currency, which is already teetering on the edge of a cliff. Foreign investors, already uneasy about the possibility of the US effectively defaulting through dollar devaluation and inflation, are now becoming aware that the Trump administration is steering the dollar toward depreciation.
At the same time, the primary objective of US tariff policy is to raise the prices of imported goods, thereby eroding their competitiveness against American products. An inevitable consequence of this policy is an increase in US inflation. Trump’s tariffs have already weakened – and will continue to weaken – foreign investors’ willingness to hold dollar-denominated assets, particularly US Treasury bonds.
How should China react to keep its economy and overseas assets safe? Should China dump US assets?
YY: There have been some rumours about China selling Treasury bonds recently. Former US treasury secretary Janet Yellen has said she believes China would not dump US Treasuries, as doing so would not only drive up the value of the yuan but also pose risks to the global financial stability. The current Treasury Secretary, Scott Bessent, has said there is no evidence suggesting China is weaponising its US Treasury holdings.
How to handle US Treasury assets in the short term is not merely an economic or financial issue, nor solely a geopolitical matter – it represents a highly technical challenge about which outsiders can hardly offer informed commentary.
Given the potential risks associated with US Treasury bonds, China should reduce its holdings. The optimal approach for Beijing would be a gradual and orderly reduction.
The best way to achieve this would be to increase imports – particularly of hi-tech capital goods and strategic materials – thereby utilising excess foreign exchange reserves.
This implies that China needs to reduce its trade surplus, or even maintain a trade deficit for a certain period. However, the goal conflicts with the objective of maintaining relatively high economic growth at 5 to 6 per cent. The only way to resolve this contradiction is to expand domestic demand, which could offset the negative impact on economic growth caused by declining trade surpluses or even trade deficits.
China’s foreign exchange reserves have been gradually declining since 2014, yet they remain substantial at US$3.3 trillion, including around US$800 billion in Treasury bonds. According to conventional international standards, a country’s foreign exchange reserves should cover three months of imports plus 100 per cent of its short-term external debt. China’s reserves far exceed what is required by this benchmark.
Due to prolonged trade surpluses, China has developed corresponding industrial structures, with numerous enterprises heavily reliant on exports. Given path dependency and network effects, transitioning businesses from external to domestic circulation, adjusting product mixes, and shifting export destinations will prove difficult, time-consuming, and costly. Yet such restructuring is inevitable.
China must avoid employing tax rebates, subsidies or yuan devaluation to mitigate tariff impacts and sustain export levels. Extraordinary export tax rebates aimed at preserving exports constitute severe market distortions – effectively subsidising foreign consumers while taxing domestic taxpayers.
Though such measures may temporarily ease corporate pains, they ultimately obstruct the strategic shift from external market dependence – particularly on the US – toward domestic markets. This approach would also undermine dollar reserve reduction objectives.
The Chinese government needs to provide adequate funds to assist enterprises to speed up structural transformation in accordance with the new growth paradigm of “dual circulation”.
KR: I discussed this during a seminar at the People’s Bank of China in 2005. At the end of the seminar Governor Zhou [Xiaochuan] asked me, “Do you have any advice for us?”
I said, “Well, you don’t officially report it, but I believe that most of your reserves are in dollars. Do you think that’s smart?” First of all, I thought the dollar was very overvalued at that time and I thought it would come down.
And I said, “Do you trust that the Americans aren’t going to use this against you at some point?” Of course, I’m an American, but he was asking me, and of course, that’s true. So I think China knows this, everybody knows this. You can’t move quickly, but I think everyone is moving.
From a macroeconomic point of view, it does not make sense for China to be so tightly linked to the dollar. China is a big economy with its own business cycles. There’s no reason to be so tightly linked to the dollar. Once China is no longer so tightly linked to the dollar, there’s no need to carry so many dollar reserves. China has overinvested in dollar reserves, and probably should diversify. It doesn’t have to be political economy.
However, as your question indicates, this coincides with the political economy of the situation where you, at some points, can use this against China. To diversify, China needs to develop its own international payments mechanisms, its own international banking system. And I think it’s working pretty hard to do that, but it takes a long time.
Does the Trump tariff policy present an opportunity for yuan internationalisation? What should China do to seize such an opportunity? How can the yuan become internationally recognised, with capital controls in place and delaying convertibility?
YY: In the field of international finance, China has always had three major priorities: first, participating in the reform of the international monetary and financial system; second, promoting monetary and financial cooperation in the Asian region; and third, achieving the internationalisation of the yuan.
Due to the so-called network effect, existing reserve currencies are difficult to replace with a new one – unless the issuing country of the current reserve currency shoots itself in the foot. The weaponisation of the US dollar has significantly harmed the United States and greatly undermined the credibility of the dollar. This creates a rare historical opportunity for the internationalisation of the yuan.
Naturally, China should seize this moment to advance yuan internationalisation as much as possible. By leveraging available opportunities, the yuan can serve as a denomination currency, settlement currency, investment currency and reserve currency in international trade and financial transactions.
It should be noted that the increase in cross-border yuan payments under the capital and financial accounts reflects progress in its internationalisation, but its significance should not be overstated. The rise in cross-border payments indicates an increased role of the yuan as a settlement tool for financial transactions. The more critical issue is how to encourage foreign investors to hold yuan assets as reserve currency.
If there is no significant increase in yuan assets held by foreign investors over the long term, it would be difficult to claim that substantial progress has truly been made. The increase in cross-border transaction volumes could also be the result of heightened arbitrage and speculative activities.
The success of yuan internationalisation ultimately depends on China’s sustained and stable economic growth, the continuous improvement of its economic system and the deepening of legal reforms. Moreover, the progress of yuan internationalisation will also be constrained by changes in geopolitics.
Therefore, yuan internationalisation must adhere to the principles of market-driven development and gradual progress. Its advancement should depend on the progress of capital account liberalisation, rather than being used as a tool to force the liberalisation of capital accounts.
The People’s Bank of China should also maintain a policy of “benign neglect” toward exchange rate fluctuations and avoid excessive concern over currency depreciation or appreciation – unless there is clear evidence of speculative attacks by international capital against the yuan.
KR: And if you go back to the 1960s, the Europeans were very nervous about the United States, not just in 1971. Just like China today, Germany was trying to diversify, and all the European countries were using Germany the way Asia uses China: they were starting to make loans in marks. They were starting to have a banking system in marks. And they were actually somewhat prepared in 1971 for the Nixon shock.
I would say the first place to start for China is to make it much, much easier for foreigners to hold Chinese government debt. I should be able to buy Chinese government debt as easily as I can buy Treasury bills. That’s the first market to develop. There’s no reason to be afraid of having foreigners hold Chinese debt.
China, of course, is taking many steps in this direction already. And Trump has lit a fire under these efforts, so to speak.
This is not something that can be done quickly and dramatically. It’s going to take certainly five years to really be prepared. There’s long been a debate in China about how fast the yuan should be internationalised, and I think that debate should be over, that it’s time to internationalise in the sense of having your own financial system that, let’s say, Ethiopia could use, or Myanmar, or any country to trade with China without ever touching the US bank. China needs to move to that situation.
In terms of loosening capital control, it doesn’t happen all at once. And let’s remember the United States was an international currency in the 50s, and we still had a lot of capital controls in the 1950s. You need to be strategic in what you open.
And I would make it very easy for anyone, a grandmother in Argentina, to hold Chinese government debt denominated in yuan. China has a central bank digital currency, let other countries hold it eventually, one at a time. So you work in steps. The big mistake that Japan made in the 1980s was they opened up everything, and then they had a financial crisis.
Once China is no longer trying to peg to the dollar, which should just go, China should have a much, much looser peg to the dollar, and eventually be like the Euro, just a floating currency. And once you do that, then you can let Chinese people hold more foreign assets. There’s no reason to have such restrictions. If you’re letting Americans hold Chinese debt, let Chinese people hold US dollars. They need to think through what steps are most needed to internationalise the currency. And it’s just wrong to think you need to do everything. You don’t.
It was a surprise that the Chinese leadership was so slow to move away from pegging so much to the dollar. So the future absolutely will have more trade in yuan. As soon as 10 years from now, that’s where the world will be: not everything in yuan, but much more being used not just regionally in Asia, also by Latin America, by Africa. China is a big trading partner for many, many countries in the world.
Given what is going on with Trump’s tariffs, to make a chess analogy, you want to stay calm when you’re facing an opponent who’s reckless and not being careful. You don’t want to do anything in a quick or panicked fashion. So of course, this is an opportunity for China. Ten years from now, they could be saying to countries, “Why don’t you use our banking system instead of the US banking system?”
So this is a gift for China. It’s the biggest US policy mistake in 50 years. In my five decades as a professional economist, I’ve never seen such a blunder.
