Review: Our Dollar, Your Problem, by Kenneth Rogoff (Yale University Press, 2025)
In 1971, US President Richard Nixon shocked global financial markets by ending US dollar convertibility to gold, unanchoring exchange rates and ending the norms established at Bretton Woods in 1944. John Connally, Nixon’s Treasury Secretary, told stunned foreigners that this was "our dollar, but your problem". President Trump didn’t invent America First: it has long been in force.
Kenneth Rogoff, Harvard academic and chess grandmaster, takes this quote as the title of his latest book, a lucid and sometimes laconic narrative of international economics in the decades since.
The book has attracted attention because of the current public interest in the dollar’s role as global reserve currency. But its scope is much wider than that. Rogoff participated in many debates over the past four decades on international economics and fiscal policy. He bridged the gap between the academic world and policymaking with clear, rigorous and common-sense arguments. This book records his version of these debates — triumphs of prescience and perspicacity, plus a few slip-ups and revisions.
Rogoff cites two perhaps conflicting maxims. One is the old saw that "the questions never change — just the answers." The other is: "this time is different" (the ironic title of an earlier Rogoff book on government debt).
Macroeconomic thinking has indeed evolved, with new policy answers to old questions.
The dogmatic belief in neoliberalism and free markets, fashionable in the early 1980s, has softened. The initial enthusiasm for free-floating exchange rates, deregulated financial sectors and unconstrained international capital flows ignored the need to allow time for adaptation to the deregulated world. Floating exchange rates initially showed disruptive volatility. Newly deregulated financial sectors almost invariably experienced a crisis. International capital flows can be damagingly volatile, flowing in too fast and out even faster.
Views on fiscal policy have fluctuated, from the optimistic post-war Keynesian budget activism to the budget austerity seen in many countries after the 2008 financial crisis, then back again to the huge fiscal stimuluses during Covid.
In this policy evolution, Rogoff provided hard econometric evidence to help resolve issues. His 1983 paper with Ed Meese showed that the real-world behaviour of free-floating exchange rates did not fit textbook models. Contrary to the confident prediction of Milton Friedman and other free-marketeers that exchange rates would maintain stable equilibrium, rates over-reacted to news and were subject to fickle changes in confidence.
Rogoff...bridged the gap between the academic world and policymaking with clear, rigorous and common-sense arguments.
Over the years, Rogoff has made some good calls. His 1983 lesson on the inexplicable volatility of freely floating exchange rates fell on deaf ears. The conventional wisdom maintained that it was futile to try to influence exchange rates. But during the decades-long transition to financial deregulation, some central banks (including Australia’s) made substantial profits from exchange rate intervention.
This deregulatory transitional phase was particularly fraught for emerging countries, with the 1997-98 Asian crisis demonstrating that a combination of poorly regulated financial sectors and volatile international capital flows could result in hugely excessive fluctuations in exchange rates and consequent financial collapse.
Rogoff, as Chief Economist at the IMF in the years shortly after the crisis, supported the Fund’s vigorous advocacy for free-floating exchange rates and did nothing to shift the Fund towards the benefits of discrete management of both exchange rates and capital flows. Belatedly, both he and the Fund have come to accept that Asian economies have been successful in stabilising their exchange rates through foreign-exchange intervention, and that "capital flow management" has a place in the policy toolbox.
Also belatedly, he accepts that Japan got a raw deal in the 1985 Plaza Accord, with the resulting large appreciation of the yen contributing to Japan’s subsequent lost decades. He is still waiting for Japan’s huge government debt overhang to cause collapse.
He was always sceptical about the euro, but it has survived. He was prescient in calling the Chinese housing bubble and sees growth slowing further in China. Sensibly, he regards the still common view that interest rates are now "lower forever" as misguided.
He supports cryptocurrency and stable coins, even though he accepts that crypto has no legitimate use as a currency and facilitates a variety of anti-social and nefarious activity.
He has consistently been an outspoken critic of activist fiscal policy. If countries run big budget deficits and accumulate substantial government debt, this will cause problems sooner or later, no matter how confident countries are that "this time is different". Rogoff has no time for the argument that fiscal policy shifted too quickly towards austerity in the aftermath of the 2008 financial crisis. He shares the common view that the fiscal expansion after Covid was excessive and inflationary.
His active proselytising against government debt led to controversy over a 2010 paper (with Carmen Reinhart) arguing that when government debt reaches about 90 per cent of GDP, growth rates fall substantially. It turned out that the data were faulty; correction changed the conclusion. And the causation could be the other way: slow-growing countries need budget stimulus.
On the current arguments about the dollar’s international role, he shares the consensus: being the global currency has on balance been advantageous for America, and Trump’s America First policies will accelerate the longstanding gradual erosion of the dollar’s importance. But for Rogoff, it is the ongoing huge US budget deficit and debt build-up that is the greatest threat to the dollar’s international role.
