Renouncing Privileges
- 17 March 2025 (7 min read)
Gillian Tett reported in the Financial Times on an idea circulating in Washington that financial flows into the US could be taxed to raise revenue and/or to depreciate the US dollar. A similar solution was mentioned in Stephen Miran’s influential essay which we discussed three weeks ago. This would raise the funding cost of the US government and would ultimately express a renunciation of the “exorbitant privilege” which for decades has allowed the US to pursue largely unconstrained fiscal policies thanks to the dollar status as the world’s dominant reserve currency.
There is a precedent in the modern history of the US when the White House voluntarily affected the US dollar status by surprise: the “Nixon shock” of August 1971, when the President suspended the convertibility to gold. While it was a political success for Richard Nixon in the short-term, it ended up exacerbating the US inflation problem. Equally, we do not think that renouncing the “exorbitant privilege” would serve the US economic interests in the long-run – the evidence that a dollar overvaluation has “hollowed out” US productive forces is scarce in our view – but these debates fuel a “mood music” in Washington which in any case is contributing to the ongoing correction of the USD.
There is no off-the-shelf solution to reshape the international monetary system should the dollar status erode. In 2010 the IMF worked on some ideas, but expanding the role of the Special Drawing Rights would not be straightforward. In any case, cooperative solutions would require a level of support for multilateralism which is – for now at least – missing in the US administration. The Euro area’s preference for current account surpluses has for long impaired the Euro’s capacity to play a major role in the international monetary system. The change of fiscal stance in Berlin may change this. Yet, a lot would need to be done on capital market union – including the emergence of a larger pool of jointly-issued safe assets – to bring the European currency closer to the requirements of a dominants reserve currency in terms of market depth and liquidity. Streamlining the EU’s decision-making process would also probably be necessary. Raising the euro status is however no longer unthinkable.
Subscribe to updates
Have our latest insights delivered straight to your inbox
Disclaimer
This document is for informational purposes only and does not constitute investment research or financial analysis relating to transactions in financial instruments as per MIF Directive (2014/65/EU), nor does it constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy or sell any investments, products or services, and should not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalized recommendation to buy or sell securities.
It has been established on the basis of data, projections, forecasts, anticipations and hypothesis which are subjective. Its analysis and conclusions are the expression of an opinion, based on available data at a specific date.
All information in this document is established on data made public by official providers of economic and market statistics. AXA Investment Managers disclaims any and all liability relating to a decision based on or for reliance on this document. All exhibits included in this document, unless stated otherwise, are as of the publication date of this document.
Furthermore, due to the subjective nature of these opinions and analysis, these data, projections, forecasts, anticipations, hypothesis, etc. are not necessary used or followed by AXA IM’s portfolio management teams or its affiliates, who may act based on their own opinions. Any reproduction of this information, in whole or in part is, unless otherwise authorised by AXA IM, prohibited.
Neither MSCI nor any other party involved in or related to compiling, computing or creating the MSCI data makes any express or implied warranties or representations with respect to such data (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of such data. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any third party involved in or related to compiling, computing or creating the data have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages. No further distribution or dissemination of the MSCI data is permitted without MSCI’s express written consent.
Risk Warning
The value of investments, and the income from them, can fall as well as rise and investors may not get back the amount originally invested.