This is an edited transcript of an episode of “The Ezra Klein Show.” You can listen to the conversation by following or subscribing to the show on the NYT Audio App, Apple, Spotify, Amazon Music, YouTube, iHeartRadio or wherever you get your podcasts.
For decades now, America has dominated the global financial system. Our currency is the currency that international trade runs on. Our financial plumbing is the plumbing that basically everybody, to some degree or another, uses.
This has been called our “exorbitant privilege.” Because of it, our borrowing costs are lower, we know things about the global economy nobody else knows and have access to information nobody else has access to. We can wrap sanctions around our enemies in a way no one else can.
The worry for a long time has been that the world will slip out of this system. There have been challengers: Japan in the 1980s, the European Union in the 2000s and now China.
But no one has really come anywhere near dislodging it. And that was partially because it’s hard to build something new. And partially because we were fairly, at least until recently, restrained in how we used it. We are, in a way, selling the world our currency and our financial system to make it easier for them to do their transactions. We don’t want to make it too hard to use something we’re selling.
The Trump administration is in a much more complicated relationship with this, to say the least. They’ve come to see dollar dominance — and its cousin, our military dominance — as a burden we bear on behalf of the rest of the world, and a burden other countries should be paying more for the privilege of using. They think that having dollar dominance has made the dollar too expensive — which has hurt manufacturing even if it has meant cheap consumer goods. And they think that it has given us a leverage that all the idiots who came before them haven’t used. But Trump and his administration are going to use it.
Kenneth Rogoff is the former chief economist at the International Monetary Fund. He’s a professor of economics at Harvard, and he has a new book coming out — very well timed — it drops on May 6 — called “Our Dollar, Your Problem.” It’s a history of dollar dominance — how we built it, the challenges to it, and a warning, written before the Trump administration, that the rest of the world was already beginning to look for exits from it.
But now the Trump administration has taken the stress the system has been under and has begun to put cracks in it. Rogoff doesn’t think we’re going to be able to unring that bell. But even bigger than that: The possibility that when you bring together our debt, pressure on the dollar, Trump’s behavior — that these things could create a genuine financial crisis, a debt crisis, an inflationary crisis. And Rogoff thinks we are way underrating the risk of it.
Ezra Klein: Ken Rogoff, welcome to the show.
Kenneth Rogoff: Thank you for having me, Ezra.
I want to get at the basics of how the dollar works in the international financial system. We sell dollars to other countries, and other countries buy them. Why?
The most important thing is the English language analogy: It’s something everyone understands. Partly they know what it is and partly they like it. It’s something they know and trust.
There are 150-plus currencies in the world. Just imagine two people trying to communicate with two currencies they never saw: Let’s just deal in dollars.
So that’s a big part of it. It’s like a common language.
How did we build that trust?
Part of how we built the trust early was the dollar was good as gold. It used to be that the dollar bill that you had in your pocket actually said how much it was worth in gold, and you could take it to various banks and get gold for it. And that actually continued for countries until just over 50 years ago.
And then we moved to its not being based on gold but rather its being based on trust in the United States — and in how we would manage the dollar.
Well, we did. But we didn’t tell anyone we were going to do that, and they weren’t very happy about it.
They were holding dollars because they were as good as gold, and they literally meant gold. And when President Nixon in 1971 decided: Hmm, I don’t want to do that anymore — it was just a shock. It was actually, I think, the biggest shock until recently.
But something you often run into when you start trying to study this is the intensity of the demand for dollar-backed assets. And one thing other countries don’t have is the depth of the assets we have to sell.
So it’s not just that the dollar and dollar-backed assets like Treasuries are basically, as you put it, the lingua franca of international finance. It’s also that there are enough of them to go around. There’s just not as much liquidity in, say, German currency —
“Liquidity” is an important word. It means: If you want to sell it, do you have to pay a big discount?
If you want to sell your house, you can sell it. But it’s not necessarily something you can sell quickly.
Say you’re from India, and you buy a Treasury bill. You can sell it to anyone in the world. They know what it is. There’s a price, usually not a very big discount from whatever the market price is. Their currency is the rupee. If you wanted to sell your rupee abroad, you’d pay a big discount.
So deep financial markets. Rule of law. There are other things — like open to trade because you can get your money in and out. We’ve had a very open system.
I want to be careful, though, about just saying: The more we print, the more the demand for it. Nothing could be further from the truth. As we have more and more debt, the interest rate we pay actually goes up after a while. So there’s a trade-off. Nevertheless, we pay a lower interest rate than we would if we were another country trying to do the same thing.
So this moves us into the question of what we get for this dominance. Why do we want other countries to buy dollars?
It’s free money to us. So when they are buying currency, which are the dollar bills in your pocket, that doesn’t pay any interest. And in a way, they’re making an interest-free loan to us.
There are different estimates of how much is abroad, but at least a trillion dollars are held abroad — interest-free loan.
Much more important is that when they make loans to us in dollars — and that’s the Treasury, could even be your mortgage getting repurchased somehow — because it’s in dollars, historically, it has paid a lower interest rate. You get a lower interest rate on your mortgage because someone in China likes dollars.
What are the estimates of how much lower borrowing costs and interest rates are in America because the whole world is working off our financial system?
A short answer is: For the government, half a percent to a percent is the range of the estimates. That doesn’t mean that we’re paying a lower rate than Germany because we borrow so much more than Germany. Be very careful about that. But given how much we’re borrowing, think half a percent to a percent.
You may ask: What does that matter? When you owe $36 trillion going on $37 trillion, that’s real money, each percent.
But it’s not just the government. It’s your mortgage, your car loan. It pushes down interest rates all over. Those things like your mortgage and your car loan can get repackaged in some complicated way, pushed out to Germany, to Japan, to someone else.
So it’s affecting everything. People like to have dollars because it’s the best-known currency.
Tell me about some of the other benefits. The dollar dominance gets called the exorbitant privilege.
Your book is so interesting to read in this moment because it comes from the perspective that this is this huge privilege America has that other countries in the world are growing tired of. And the question is: Can we maintain it?
And the book is coming out at this moment when the administration is more or less claiming it to be a burden that other countries in the world are free riding off and that we need to begin to pull it back.
So why, to the rest of the world, does this seem like a great benefit for us?
The phrase “exorbitant privilege” was coined by Valéry Giscard d’Estaing — literally pardon my French, I’m not saying his name correctly — who didn’t like the idea that the U.S. seemed to pay a lower interest rate. He didn’t like the idea that we seemed to be able to borrow so much in a crisis. And he didn’t like the idea that his country needed to hold dollars to fix its exchange rate — which they did. And that we were able to take that money and invest it in factories in Europe.
So it combined a lot of things. It’s used today often just to refer to how cheaply you can borrow.
During the pandemic, we borrowed twice as much as most other countries were borrowing. But everybody else looking at us was still thinking: Wow, we wish we could do that.
And we were able to do it because, for starters, our debt was very low at the beginning and the interest rate wasn’t suddenly going up. So they look at it, and when these crises happen, they’re trying — but we’re able to do so much. And as you lose your privilege and also your debt gets really high, you find that when you try to do it again: Not so much.
That’s really the risk. That’s definitely one of the benefits of being able to borrow a lot when you really, really need it.
You sometimes hear this described negatively as: It’s like the rest of the world are dope dealers to America — that dollar dominance has made us addicted to debt because we can do this.
Has this equilibrium — where the rest of the world has made it so much easier for us to borrow and cheaper for us to borrow — been good for us? Or, as you’ll sometimes hear from the more austerity-focused side of the debate, has it been a net negative because it has allowed us to be, in their view, irresponsible?
It’s purely good for us. But you have to be careful. For example, in the early 2000s, we made it a little too easy to come in here with your money and invest in ways that the government was backing. We deregulated too fast. It was sucking money in. So we didn’t just have the exorbitant privilege. We had: You come here and not a lot of regulation — it’s really cool. And that blew up into the financial crisis.
So you want to be careful between: Everyone loves us because we’re just so wonderful — and everyone loves us because we’re so stupid.
So then you get into this other question, which I always find a little bit unintuitive, which is that the heavy use of our dollar worldwide makes the things we buy cheaper and the things we sell more expensive. How does that work?
So it’s just not true.
This is just a thing that is believed. You hear it from the Trump administration — but it’s not true?
It’s just not true. I think they conflate the stock market and houses and things like that, which are sort of investments, with buying a car. Buying cars is cheaper here than in most countries just because it’s more competitive and stuff like that. They’re not the same thing.
I think a lot of the economists saying that are being a little incautious. So it’s really a completely separate issue of what the exchange rate is.
There have been times when the dollar is really cheap. Right now it’s really high. It has gone down, but it’s still really high. The forces that affect exchange rates and prices are complex — the interaction of demand and supply and tastes and stuff like that.
Let me narrow this down a bit. Because I am where your position is more than where theirs is — particularly on the idea that these things are complex.
One of my general critiques of the Trump administration is they want to make complex problems into simple problems. They want to take complex forces that we don’t even really fully know how to track and turn them into one thing that you can grab in your fist and squeeze.
The very specific claim being made repeatedly is that part of why America lost so much of its industrial base and so many of its manufacturing jobs is that because of all these financial flows and because we had so much money coming into American assets, our dollar became overvalued. We allowed other countries like China to keep their currencies somewhat down. And this led to American experts becoming noncompetitive and the American consumer having an appetite for these newly cheap goods flooding into the country.
So very specifically, the argument is that dollar dominance has hollowed out our industrial capacity and manufacturing jobs.
Do you buy that?
It’s ridiculous. Let me step back a second. You’re drilling in on this, but forgive me, there’s a certain romanticizing of manufacturing that you used to hear about agriculture. I’m quite a bit older than you, but —
You look great, though.
[Laughs.] Back in the 1970s, you had the same ads where you see the person working on the machine line or something but you saw them with farmers. They were constantly showing the farmers. We had to help the farmers.
And you know what? Those jobs went away even though we’re the agricultural powerhouse in the world. Because everything became mechanized. That’s a lot of what’s going on in manufacturing. What we blame on China — a lot of it just has to do with the way of the world.
These jobs are going away. It doesn’t matter. If we don’t trade with anyone, these jobs aren’t going to exist. And that’s just a false sale that’s being made about that.
It would be great to have middle-class jobs, but that kind of middle-class job just isn’t going to be there anymore.
To blame that on the fact that everybody is using the dollar all over the place is silly.
What is the argument being made for that? You’re just saying it’s ridiculous. And I’m not even saying you’re wrong. But I want to hear you make the argument you’re arguing against.
Why does Stephen Miran, the head of Donald Trump’s Council of Economic Advisers, think the dollar’s strength over time was a significant contributor to the hollowing out of our industrial base? A Harvard-educated economist at your school —
He is indeed. And he is very good.
First of all, if you’re in the Trump administration, you can have an opinion on many things, but you’re not allowed to have an opinion on this. Trump has this as a religious belief, and everyone is dancing around trying to provide a rationale for it.
I would say this same phenomenon of us buying more from China or Germany than they’re buying from us is: Their money is coming in, we’re investing it, we’re building stuff — not necessarily factories, but our biotech, medicine and services — and we’re paying less than we would otherwise. We’re getting a lot of benefits from it.
And incomes are just really low in China and India and many other places. And if you have openness to trade, you can argue about that. But it’s not because of the dollar. It’s because you have openness to trade.
If the dollar had been 30 percent cheaper for the past 40 years, would that have had any effect on manufacturing or employment at all?
It might have had some effect. It would probably affect the prices we have over time. If you push the exchange rate and make it too cheap, you’ll get inflation, wages would go up faster and eventually wouldn’t be cheaper.
So the argument that you can use your exchange rate to manipulate by making things cheaper fails to see that if your things are cheaper, things will push up the price to make it equal. Workers can demand more. It will still be competitive.
The reason China stayed in there so long is —
They were keeping their currency cheaper than it would have been otherwise.
They kept their currency cheaper. Mainly because they had a huge number of people earning zero out in the hinterlands. They were bringing 12 to 15 million people a year into their cities to work, and that supply kept wages down. It kept their prices down.
We could be on a gold standard — there’s no dollar to manipulate — and we would have lost our manufacturing through trade like that.
And by the way, most of our manufacturing jobs have been lost to automation, not trade.
This is the other side of this argument I think people actually underrate, and that I find that Trump people, like JD Vance, shift between very quickly.
Sometimes you’ll hear JD Vance make arguments about immigration, where he says that because we’ve had so much illegal immigration, we have not done as much automation and increased productivity as fast as you would have without it.
Which is fine. You can make that argument. I think in some ways it’s even true. But then on the other side, we’ll make this argument about manufacturing jobs.
You’re trying so hard to think about something sensible when I’m hearing polemics from them, like they know what they’re supposed to say, or finding arguments that can hold up for a second.
On immigration, by the way, I favor having a lot of legal immigration. That would be a very good idea. It’s certainly the case that when you have illegal immigration, it holds down the wages of low-income people. It’s very hard to be competitive as a construction worker — certain parts of construction work — or be a housekeeper, a child-care provider. It absolutely holds. If we didn’t have that, the wages would be higher. That has an effect.
But as far as motivating us to do automation — what industries is he thinking about that immigration has had an effect in the last few years? I’m sure he can find something, but I think it’s a stretch.
In the American political conversation recently, we treat financial dominance as a fake form of power.
A financialized economy is a soft, decadent economy. Unlike the Chinese economy, which really builds things.
But historically, if you control the money, you control the world. And there’s real power in having all the financial arteries connect back to your pumping system.
The fact that the dollar rules allows us to control the global financial system to a remarkable degree. It’s not just that the dollar rules — it’s also that we’re the military power. The combination of those two things gives us the ability and global negotiations for: How should the International Monetary Fund vote? How should the networks of transactions between countries go? Who should see the information?
We get such privileged access to information. It just all goes through us. And everyone hates it. Obviously, the Russians and Chinese hate it. But the Europeans also hate it. In fact, forget the Chinese. The Europeans have been trying to figure out a way to get away from this.
Look, to pick an example: in 1956, when the U.K. still thought it might come back. Remember: They had ruled the world. The sun never set on the British Empire. And we were trying to put them down. And there was the Suez crisis in Egypt. And we said: Well, you’re not doing what we want you to do. We’re going to call in your loan.
I’m exaggerating a bit, but it’s incredible power if you control funding. Sanctions are an obvious thing. We’ve been using that in lieu of military power — which, OK, we can debate how well that has worked. But believe me, they don’t like it.
Ten years ago, we were imposing sanctions on Iran. The Europeans didn’t agree with us. And we said: OK, you don’t agree with us? Forget about using our banking system.
Which just destroys them. Everyone has to use the U.S. banking system.
And you can go on and on. So they don’t like the power that it gives us in these subtle ways. And again, as an American, you don’t see it. Oh, I’m making the rules of the game. The game is great. I love everything about it.
But if you’re elsewhere, you feel it.
The dollar is something of a service we are selling to the rest of the world. And if you’re selling the rest of the world a service or a good, you have to keep your customers happy.
Now we kept them happy — which we tend to think about in terms of controlling inflation and being reliable.
But even going back before Donald Trump, we increasingly have used sanctions and other forms of financial power as noneconomic leverage — as leverage to get people to do other things that we want them to do: to sanction people we don’t like, to give us information that maybe they don’t want to give us.
As you write in the book, people were getting tired of this, even before Donald Trump. So could you talk a bit about that piece? Where were we on the eve of the Trump administration, and how were people feeling about the way we had changed the leverage that our financial system gives us?
Asia is a big part of the dollar bloc. They hold tons of reserves. Trillions and trillions of dollars of reserves are lent to us by Asia. They’re very important to us.
China is at the center of that. China has the most important trade, even more important than the United States, for many countries. China had been using the dollar.
The technocrats had been telling them for a long time: This is dumb. You shouldn’t be using the dollar.
And the leaders were like: No. We don’t want to change it.
But when the full-scale invasion of Ukraine happened, they saw what we did to Russia: We didn’t just sanction them. We took their central bank’s money. We are not calling it a default, but of course it is. We froze over $300 billion.
The Chinese are looking at that, and they’re also looking at the Russians having difficulty using Visa, Mastercard, the credit system — everything — using dollars.
They can’t change that overnight, but they’ve been taking one step after another. And they also used to peg their exchange rate and try to make the renminbi — that’s their currency — fixed against the dollar.
Well, that’s gone. And that’s also moving people away from holding dollar reserves as much. Because part of why you’re holding them was to protect against China.
But where I saw the biggest problem was not that the other countries wanted to change things. Where I saw the biggest problem was inside ourselves. Federal Reserve independence, which is the core of stabilizing the dollar and inflation. The view that debt is a free lunch. These, I think, ultimately were going to come to bite us anyway.
Say a couple of words about why Federal Reserve independence is important here.
I mentioned that it used to be as good as gold. You didn’t care if the Federal Reserve was independent. If you didn’t like what the Federal Reserve was doing, and you’re Japan, you just take your money and you get gold. You’re happy.
Nowadays, there’s nothing standing behind the dollar in its value, which is what you ultimately care about. That was the gold standard. What’s now standing behind the dollar is the Fed, our central bank, promising not to intentionally inflate too fast and actually to try to average around 2 percent.
I just have to mention, I wrote the first paper on central bank independence 45 years ago, when nobody had independent central banks. So I’m biased toward thinking it’s a great idea. It’s a relatively modern invention, and it has worked.
If you get rid of it, there’s always a temptation. Any president — again, Trump is the world’s crudest president in recent history. But what he’s saying is that he really wants the interest rate to be lower. That’s what he wants. And, believe me, Joe Biden wanted the interest rate to be lower. Obama did.
For your younger listeners — most of whom are probably younger than me — Nixon was brutal about this. You can actually listen to the Watergate tapes, and he’s cursing the head of the Fed. And that led to the biggest inflation we ever had. That was a real example of losing Federal Reserve independence.
This brings us to the Trump era. You have these pressures building up. You have the U.S. weaponizing its financial system in more and more explicit and aggressive ways.
You have growing U.S. debt. When interest rates are pretty low, that felt like not as big of a deal. But then postpandemic inflation, interest rates are a lot higher. So all of a sudden, the amount we’re going to be paying on our debt is up quite a bit.
Then you have Trump and the MAGA movement return to office in 2025. What has happened since then? If you were writing your book now, if it had a story, a chapter on the last three-ish months, what would that chapter say?
It’s still unfolding, but a short thing is the things I was predicting are happening on steroids: a much higher risk of inflation, undermining Federal Reserve independence, having a decline of the dollar.
I think that would have happened under a Harris presidency, but it wouldn’t have happened in three months. It would have unfolded over a longer period. There were larger forces.
Another way of putting it is: Trump didn’t have as strong a hand as he thought he had. He thought we were in just great shape and that he could do anything. And we weren’t.
I want to hold there for a second, as the person who appears to be trying to make the Trump administration’s arguments on this podcast.
He didn’t think we were in great shape. This is their whole argument: We’re in terrible shape —
He thought the dollar was in good shape. But he thought the economy was in terrible shape.
He thought the dollar was in good shape. But he thinks that dollar dominance is bad for us on some level.
I understand why you say that steelmanning their arguments is impossible. Because on the one hand, they say that the dollar should be weaker and it should somehow also be the complete unquestioned reserve currency. They want the dollar to be weaker and stronger at the same time.
The Miran plan — there’s this thing called the Mar-a-Lago Accord, which tries to parallel the Plaza Accord of the 1980s. It actually tells China: OK, we’re going to give you a hundred-year bond. And we’re going to pick the interest rate on them, and you’re not going to be able to sell them to anyone, and you’re going to love us. And by the way, that’s what you have to do. We’re going to do that to our friends, our enemies, to everyone. We want the dollar to be dominant. We want you to supplicate.
Needless to say, that’s a recipe for blowing up the global financial system, not for having stability. I’m just giving their contradictions. They say they want to be the reserve currency. But we’re willing to be the reserve currency if we don’t have to pay any interest. You can’t do anything with the money. And we’re basically defaulting. It is a partial default. It is a spectacular default.
Well, if they do that, it’s a default. But they haven’t done most of these things yet. What they have done, as best I can tell, is to say: Their theory of the case is that the U.S. financial system and the U.S. global military system are functionally global public goods that we provide at cost to the rest of the world. You guys are all free riders, and you’re going to start paying us. You’re going to start paying more for defense.
One of the things Miran said is that one way they could be in our good graces is just to cut a check to the Treasury — to just make a donation to the U.S. government for the privilege of using our defense system or our financial system.
But what we are going to start doing is squeezing. We are going to say — and they have told me this directly: We have all this leverage that these idiots like Biden and Obama and Bush were not using. We’ve been taken advantage of on deal after deal forever. And now we’re going to start using our leverage. We’re going to start squeezing. And if you want trade with us, if you want to be on the dollar — and you better [expletive] be on the dollar — you are going to be giving us some kind of better deal than you’re giving us now.
Maybe you give us a check. Maybe you give us a better trade deal. Maybe you spend more on defense. Maybe it’s something else. But you better come cut a deal and pay some kind of tribute that you’re not currently paying — whoever you are, even if you’re an island full of penguins.
Taking that case at its strongest, right now, there’s not a very good global alternative to the dollar. Nobody else is really a good option. But the thing that I see is that even if it worked in the short term, even if everybody comes to us and bends the knee because they don’t want to be driven into a recession — say Japan, the U.K., France, Brazil, India, the Philippines, Vietnam all make a deal with us — the signal we’ve sent to everybody is that being on our system is incredibly dangerous for you because at any moment we might decide to squeeze your throat. And you’re going to have to give us something. And you don’t even understand what it is right now. The terms of the deal are unclear and can change at any time under any administration.
And what you create then is a credible pressure to get the hell off our system. We can’t do it tomorrow. We can’t do it even in a year. But you can start to do things over five or 10 years.
That’s what everybody is doing. That’s what Trump is catalyzing. Like I said, I thought this would happen over a long period, and he is making it happen on steroids. He is undermining the rule of law.
By the way, free trade is one of the core things. Just think about a world where we have 100 percent tariffs and you can’t get your stuff in or out. Well, you’re not going to invest in the United States then. That turns out to be true with a 10 percent tariff to a lesser degree.
Our financial system is open. What about our university system sucking people in, helping integrate them into our culture? Our openness to immigration?
All of these things are being undermined that are our soft power that are at the core of the dollar’s strength.
In terms of things that have affected the dollar — what we’ve seen in terms of the dollar’s value and how other countries are responding — what did they do that was consequential? How would you tell the story as an economic historian, trying to track what has been important in this period?
There are a lot of little pieces that remain to be seen, like the universities. But the tariffs were just the dumbest, most incompetent thing. If he had just put tariffs that were 10 percent on everyone, we’d all get hysterical because it’s bad for globalization. But it would just not have been a big deal. It’s a tax. Taxes are bad. It raises revenue. You could cut another tax.
The problem is this totally unpredictable: Let’s make a deal.
I have a friend who has a little business importing Italian wines, and she doesn’t have a lot of capital. She needs to charge people in advance. What price is she going to charge? The boat takes two months to come. She doesn’t know what’s going to happen.
Look at bigger corporations. No one knows what’s going on. Investments freezing up.
The whole chaos, which I think you rightly described, is just something he plans. He wants to make everyone have to supplicate to him, and he is very good at that. But he can’t do that to the markets.
The only reason the markets haven’t fallen more is this belief that, on other things, he’s historically often been pragmatic. And when he screwed up, he would declare: That wasn’t my opinion ever — and he would just change his mind.
He seems to have a deeper-seated view about this. And the tariffs and the way he is doing them is such a disaster. Because historically, the president is the person who has kept this in check.
Actually, tariffs are very popular. My mother liked tariffs. She knew I was a Ph.D. economist, and I’d explain: But it makes the price of everything more expensive.
And she’d say: Yes, but I want to protect jobs for American workers.
And when Trump came in — and I say this confidently, having talked to high-level people around him — he thought everyone loved Harris. He looked at Bernie Sanders — who, by the way, was pretty similar. He’s a lot nicer person, but when it comes to trade, he saw himself as mimicking Bernie Sanders.
I don’t buy that.
Oh, the whole North American Free Trade Agreement thing? All my —
He might not like NAFTA, but Bernie Sanders has never proposed a tariff system like this.
Trump has had his views on trade since Japan in the 1980s. He didn’t need Bernie Sanders to teach him that. If you go back to what he was saying about Japan, it’s the same thing he’s saying now.
I’ll back off that because I don’t want to go there. But it’s popular. It’s not unpopular. And historically, Congress has pushed for tariffs. And I’ve met congresspeople and senators over there — they all wanted tariffs. They’d asked me about tariffs: Can we have a tariff to protect our local firm? Wouldn’t that be a good idea? We’d have local jobs.
So there are all these different congresspeople. They have their own districts, their own pressures, their own donations. And the president stood in the way.
And here we have a president leading the way.
So that’s the big story that has happened. And it isn’t over yet. Again, if he sticks to this, we have a lot longer down to go.
Something you’re saying that I just want to validate through my own reporting is: I’ve talked to a bunch of people who are significant market participants, is maybe the way I’ll put it. And they are definitely working off the idea that in a year the tariffs are going to be much lower than they are today. Not a little bit lower, not the same —
More stable. It’s the stability. They can do business if they know what it is, but if they don’t know what it’s going to be — and it depends on which side of the bed Donald Trump wakes up on — that’s the problem. The total unpredictability of it.
What has this done specifically to the dollar? People know what is going on in the stock market. It has been very shaky. People can watch that for themselves. What has been the story if I’m following the dollar’s value?
I think it’s a question of competency. People are saying: If he’s this bullheaded about this mistake, is this Trump — many years later, older — the same pragmatist that we thought was there before? What if he isn’t?
If you look closely at his tax bill, it’s Trump 1.0 plus a lot of nutty ideas. People thought he wouldn’t really do them — make Social Security not taxed, tips not taxed, changes in state and local — all these different things. Maybe he’s serious. Crypto — maybe he’s serious about it with: If you deregulate too much that is a problem.
Maybe he’s not competent. The British used to have this thing with Liz Truss. She was the prime minister for a nanosecond. She came out with this policy she hadn’t really sold, and everybody sold the pound. The interest rates went up, it collapsed. They called it the moron premium because she just didn’t understand.
And people are talking in similar terms about what is going on here.
I don’t think it’s just about the tariffs. The tariffs are terrible. But it’s a deeper loss of trust in the governance, the institutions —
Most people don’t track what is happening, literally, to the dollar’s value, or where people are putting their money in other currencies.
But you do. What has happened to the dollar’s value? What has happened with other currencies? What are the signs that the world’s relationship to the dollar is changing?
The thing that was just an incredible moment for everybody was when the dollar was going down in value but long-term interest rates were going up. Within a couple days after his announcement, the 10-year interest rate, which most people don’t think about but is the bellwether of global financial markets — it’s the most important market. It’s the deepest market.
Your car loan, your student loan, everything gets referenced off the 10-year rate. Not what the Fed does. Everybody talks about this overnight rate the Fed sets, but that’s not the reference. It’s the 10-year rate. Everyone looks at that. And it’s been going up, and suddenly it jumped half a percent within a very short period. And usually when the dollar goes up, boom, the interest rates are higher. I’m going to put more of my money in the U.S.
But no: The interest rate was going higher, and the exchange rate was going down. That happens when people are selling. When whoever it was — the Chinese, everyone — people were pulling out of dollar assets. It’s: Sell America first.
Is that dangerous? Did that reverse itself?
It has stabilized for the moment because Trump has retreated partly. But what I thought might have taken 10 or 15 years to happen took place within a week. And we’re never going back.
So our exorbitant privilege, our lower borrowings — never going back to what it was. We may have lost a quarter percent, a half a percent, just permanently higher.
We can have a recession to bring them down — and we can get into that — but I don’t think that bell will ever get unrung.
But let’s say in 2029 you have — pick your candidate — President Pete Buttigieg or President Wes Moore or President Gretchen Whitmer. You don’t think it all just reverts?
No. Because the 10-year rate is the bellwether. I didn’t say the four-year rate. It’s the 10-year rate.
So what happens in the next election? What happens in the election after that?
We’ve shown we’re willing to put a gun to everyone’s head. And many of the things Trump does, other presidents have thought. Go back to the Watergate tapes and Nixon, where he recorded all his conversations. He’s younger. He’s very smart. But he’s devious. And he’s throwing those sharp elbows. He says somewhere: I don’t give a damn about the Italian lira — or something. This was when the Italians were having a problem.
So they’re peeking behind the curtain of what’s going on. It’s Trump’s mind, and it’s particularly unpredictable, but it’s deeper in our DNA — the way social media is, the siloing of what everyone reads and watches and listens to.
They’re going to worry. It happened once. Why wouldn’t it happen again?
Well, twice.
It happened twice. So yes, it’s hard to understand what the plan is. I think we have lost trust in a way we’re never going to get it back.
You say it’s hard to understand what the plan is, but let me offer this as not even a plan but a frame: Somebody said to me recently that their model of Trump is that he loves to borrow from the future. He always has. In his businesses and everything.
And if it works out for him, in the good scenario for Donald Trump, what you get are some short-term wins. What you get is people without a good option have to give you something so you, say, bring the tariff down. They have to give you something so they get out of your cross hairs.
But in the long term, what you’ve done is spend down advantages and privileges we had. Or low borrowing costs we would have had. And maybe the bill comes due for some future president.
But maybe it doesn’t, by the way. He is making these bills come due pretty fast. But it’s kind of like pulling it from the future into the present. Benefits that would have been spread out over a long time, we’ll get them all now and then deal with the crisis sooner.
I’m actually not someone who thinks Trump is a hundred percent wrong about everything he says. But in this area, I’m struggling to think of what the logic would be.
Let’s go back to: The economy is terrible. Even the person in the low-20th percentile from the bottom is very well-off, compared to probably near the middle of the Italian income distribution — much less the world distribution. We had just taken flight during the 21st century.
The European economy was the same size as the United States in the mid-1990s, even into 2000. Their stock market was worth the same. We have had a period where the world has just looked at us in awe. And to come to the end of that period — everything is terrible. I mean, it’s very hard to understand.
There are things we need to fix. Income inequality. Trying to bring back meaningful jobs. And those are fine. But I think most of the solutions to those are domestic policy and things you could do differently and not kill the goose that lays the golden eggs.
Your book tracks this. There is this way where, if you look at our major competitors during this period, you get a somewhat different view of the U.S. than you get from the domestic political debate.
You track the rise of Japan. I was not really around for Japan as our big competitor. I was very young for that. And I had not really known that there was a period when their stock market was valued more highly than our stock market. That seems crazy today.
Their stock market was worth more. Actually, their housing stock was worth more.
Japan is about the size of California. And it’s hard to get your head wrapped around this, but its housing stock was worth more than the United States’ at one point. They just seemed like the coming thing. And that’s what everybody thought.
I don’t think people anticipated what problems it would have. We threw some sharp elbows at Japan. That’s a case — and maybe that’s why the Mar-a-Lago Accord hearkens back to when we beat up on Japan — we beat up on them, they gave into it, they made a mistake. They appreciated their currency by a lot more than they intended to.
And I’d say that’s one of the things where I changed my mind over time about just how bad that was. I was of the view: Well, they had their own internal problems. They had a two-decade growth crisis starting in the early ’90s. And that happened six or seven years later.
And I later came around to: That’s wrong. The view that, for example, the Chinese think that was a disaster, Japan gave in on that, they will never give in on it.
And I always thought the Chinese were wrong, and others. And I came around to: Well, we set in motion changes that their society was not ready to handle. They didn’t have a monetary framework, they didn’t have a regulatory framework. And for a while, they were doing great. But then they weren’t.
So it was a surprise. I was in Japan as a visiting scholar at the Bank of Japan in the early 1990s. I didn’t know what was going on. None of my friends who were economists — nobody knew what was going on.
I’d actually left the Federal Reserve and invested my small pension into Japanese stock. Seemed like a great idea. And it was — if I had sold then instead of later. [Laughs.]
You can go back to other occasions. Nobody knew Europe would fall as short as it did. Nobody.
Well, this part I was more around for. In the 2000s, there were all these books about the European future. If you just put out trend lines, the E.U. as an economic zone was bigger than the United States —
Yes.
And they have fallen way behind us.
We’ve had a little luck.
So I like to quote this chess player I knew, Bent Larsen. One of the great chess players. I played him. I knew him. I was being interviewed, and he was asked: Would you rather be good or lucky?
He thought for a second and said: I’d rather be good and lucky.
Americans know they’ve been good, but they don’t know they’ve been lucky. Fast-forward, and our luck may have run out here. We’ve had a lot of good turns where the other team was making mistakes. And I don’t even want to call it an “own goal” — like what they have in soccer.
But this isn’t being unlucky. This is being not good.
Yes. But we’re unlucky in the policies that the administration has.
Right, I’m saying that’s not being unlucky. We chose this. It’s being not good.
Well, it’s true. Because I don’t blame everything on Donald Trump. I blame a lot on us. What would we have done otherwise?
I know you’ve written a wonderful book about a brighter vision for the future, but our political system is stuck on a lot of bad ideas on both sides.
This is us. It isn’t just one person. It’s not that everything would just be perfect if we didn’t have this one person. It’s much deeper in our beliefs about ourselves, where we are. A certain rot in our system. Maybe it’s too strong to draw the analogy with Rome. But we can turn it around. We absolutely can. I hope we have a great government that does. But we need to turn ourselves around in order to do that.
This gets to something I have been worrying about. You have been warning that America’s debt situation is unsustainable for many years. We have gone through periods of how controversial that was.
I think, more recently, everybody has been getting more worried about the debt. Interest rates are up, our total debt load is very high, our deficits are quite high.
Now you have this huge tax cut coming. So you can keep all the tariffs, and you can raise some money. But if the tariffs are going to go down, they’re going to be raising less money through them. They don’t, at any level, pay for the tax cut that is currently being planned.
So you could very easily be looking at deficits of, say, 5 to 7 percent. And in a world where they’re causing financial conflagrations, let’s call it, there’s pressure on the dollar. There is a trade war with China where certainly one of the weapons China has is to sell off in U.S. Treasuries — which could put pressure on that market.
I’m not predicting a Trump-induced financial crisis. But it doesn’t seem impossible to me that those things could combine in a very dangerous way.
Not at all. And stepping back, because I think this is a fundamental point: There was this idea — particularly among progressives but also on the right — that interest rates were just going to keep diving down, so it’s never going to be an issue.
But actually the difference between having 60 percent debt of your income, which is where we were in about 2005, and 121 percent today — it’s a big difference in what you can do.
If you think stimulus is a good thing, if the debt fairy came along and took the 121 percent down to 60 percent, you could knock yourself out doing stimulus in the coming years.
And Donald Trump is going to hit this because the debt has gotten high. Interest rates have normalized. If you look at a long history, you never would have thought they would have stayed so low forever. The dollar is losing some of its exorbitant privilege. He’s going to throw around money. And it’s going to come to bite us.
It’s not the end of the world. It’s a little bit hard to predict this man’s mind. But there are two ways it can end for the United States. Default is not one of them. We don’t need to do that.
One would be inflation. I think the chance is we get another inflation similar to the Biden era one or worse. Very high —
In the next how long?
The next five to seven years is what I say in my book. I’ve got to make that a little shorter thanks to Donald J. Trump.
So next three to four years, you would say a better than even chance that you have inflation at 8 percent or above?
Yes, that’s absolutely what I’m saying. Because that’s where this is going. But you have to take out Jerome Powell.
And just to be clear: You’re saying the inflation option requires that because that is a world in which Trump could appoint somebody who would inflate away our debt by printing money to devalue the debt?
He’d need to commandeer the whole system because he only controls one position, and the others could vote against it. So it’s pretty stable. There’s an incredible culture at the Fed.
The others at the Federal Federal Reserve Board.
He needs the Federal Reserve Board and the way —
But that’s the worry you’re getting at here.
The worry I’m getting at is he finds a way to corrupt the Federal Reserve. And, of course, he could if he needs to.
I think a lot of people don’t appreciate that the Fed’s independence is not in the Constitution. Powell is the head of the Federal Reserve. It’s not in the Constitution. With Team Congress and Trump backing together, they could bring it back into the Treasury. So you’d have to do that for inflation.
And the Trump administration is, in a lawsuit, trying to bring it up with the Supreme Court, basically saying these independent agencies where Trump can’t easily fire the head of them is unconstitutional. So they could win that lawsuit, and then they could fire however they want.
Absolutely.
And Powell’s term will end at some point.
Yes. I don’t think that would be enough.
But depending on who they replace him with. They’re not going to reappoint Powell.
They’re not going to reappoint Powell. He would not want to be reappointed would be my guess. But they’re not going to reappoint him.
But it’s not just that. It’s the whole construct. It’s relatively new. It’s not ancient that we’ve had Fed independence. It is a creature of Congress. It’s not in the Constitution. It could get knocked out very quickly.
But to have the inflation option requires that there is another card he can play. And that’s basically ramming debt down people’s throats.
The Japanese have done that. Japan has debt twice our size. But they had, to use a jargon word, “financial repression”: We’re pushing debt. The pension funds, the insurance companies, the banks — everybody has to hold government debt.
And they’ve avoided a financial crisis. But there’s not enough money to lend around to entrepreneurs, innovators. They’ve gone from being richer than us at the beginning of this to being below the U.K., France, Germany. They’ve gone to roughly 60 percent of our income, from having been higher. And it’s partly this financial repression.
So he has a couple of cards he could play. None of them are good.
We’ve talked about this history, in the past couple of decades, where you had very dominant-seeming countries, or countries that seemed on a very bright trajectory, running into turbulence.
And how they look now is very different from how they looked two decades ago, in Europe’s case, or four decades ago, in Japan’s case.
And it sounds a bit like you’re saying there’s a very good shot that America could enter one of those periods itself. Our sense that our line only goes up is not preordained. We were good, and we were lucky. And now we might not be good anymore, and we might not be lucky anymore.
And if you’re not good and not lucky for 10 or 15 years, you can really lose a lot of altitude.
You can lose a lot of altitude. And I think what people don’t understand is that if you just went back 20 years, nobody thought the dollar would control as much of the world as it does.
And I want to mention that because it’s not so crazy that things would converge back to that. If they did, we’d pay a higher interest rate on our debt. Not as much as if they didn’t use the dollar at all. Maybe we’d still be first among equals.
It will affect our national security. Our ability to use sanctions is a heck of a lot less. If you’re Visa and you’re the only credit card, you can tell people: Do this or you can’t use Visa. But if there’s American Express and Mastercard, you can’t.
It will affect our information gathering or intelligence. Modern intelligence is mostly cyber these days. It’s not James Bond but instead somebody sitting with a laptop. And a heck of a lot of that was our financial information. And if our national security is weaker, we have to spend more money in other ways.
We’ll regret it. But it’s not an overnight — we’re talking about an inflation crisis. I think the loss of the dollar’s magnitude, its comedown from the altitude, is a slower burn. When that pandemic comes, when that crisis comes, we will feel it: People love us. They don’t love us as much.
We try to borrow typically two or three times what everyone else is borrowing. And suddenly, the interest rates are moving up faster than they do now.
So if over the next 10-ish years people have lost trust in the dollar, what do they go to? What is the likeliest scenario, 10 or 15 years from now, in a bad scenario for the dollar?
Is it that China has built financial dominance? Is it that many different currencies are used in slightly higher proportions than now — the multipolar scenario that people talk about? Are we all on Bitcoin?
We’re not all going to be on Bitcoin.
In the multipolar scenario, we lose market share. There’s a natural network externality that makes companies like Amazon, Facebook, Google giant. The same thing is true in currency.
And a lot of economists have these theories: Well, therefore, the dollar is always going to be there.
But we live in a political world. It’s not in China’s, Russia’s or Europe’s interest to have us control everything. They are willing to pay a price in order to not have the dollar have as much power, and we’re offering them a golden opportunity.
China is already courting Africa, Asia, South Asia, especially Latin America. Europe is remilitarizing. They’re realizing: Wow, this is a potential moment for the euro.
So I think we lose footprint.
I do think Bitcoin is in the mix. Because the nontaxpaying underground economy is very much a dollar economy. Nobody knows for sure how big that is. My estimate is that 20 percent of the global economy is not paying taxes. And crypto is very useful there. It has been a real alternative. Aside from being electronic, you can do things more conveniently. It’s more difficult to trace. So crypto is going to take up part of our market share. It’s doing it.
The renminbi is going to take up part of our market share. Not in New York but somewhere. And the euro is going to take some of our market share. And we’ll settle to where we thought we were going to be 20 years ago before we had this period.
I just want to come back to something you said about the military that I think is important. Basically, yes: I think a good system would be if everyone had to write a check to us and didn’t build up their military.
The trouble is — and I think presidents have faced this over the years — when they do that, and it starts to get to be a big check, they want something for it. At the end of the day, we want to control things. We didn’t really want NATO to be calling the shots. And when there are NATO missions, the U.S. is controlling them. We are the boss. We tell people what to do. We want it that way.
So you wish they would just pay you a check, but then you find out it’s golden handcuffs at the end of the day. Of course, if they have their own powerful military, that’s a whole other story when we disagree with them.
One thing you’re saying is: It has been a view of the Trump administration that everybody is free riding on the financial military services we provide to the world. And we might persuade them of that and persuade them that they should provide more financial and military services to themselves — or at least find another contractor or seller. And we might miss that when it is diminished from where it has been.
Another way of putting it is: Everyone wishes they were us. This is the great power turning on itself and pulling into retreat. And I think we’re going to wish we hadn’t done it.
The comedian Dave Chappelle said it very well: I want to wear Nike’s. I don’t want to make Nike’s.
It’s going to be a very different world.
Always our final question, what are three books you would recommend to the audience?
I have a few books to recommend, but I have to start out with my wife Natasha Lance Rogoff’s book “Muppets in Moscow,” which I’ve given you as a present. It’s about the making of “Sesame Street” in the 1990s. She oversaw hundreds of artists —
The making of it in Russia?
The making of it in Russia. An original version in Russia. And overseeing directors, puppeteers, writers and such. It’s during a period of tremendous instability. There was a lot of violence going on around her. It’s an amazing book. And it’s going to be a movie, I think, at some point.
Another book that I just love — and people have seen the series but haven’t read the book: “The Queen’s Gambit” by Walter Tevis. It is one of the most perfect books ever written. And it kind of asks the question: What if Bobby Fischer, maybe the greatest chess player of all time, were a woman? How would it have played out? And the Netflix series was just majestical.
And another book would be Walter Isaacson’s “Benjamin Franklin.” I just hadn’t known everything about him. He was the best chess player in the colonies, by the way — I was a professional chess player — and he printed money. It was very technical. He figured it out. But what an amazing person and an amazing book.
Ken Rogoff, thank you very much.
Thank you.
You can listen to this conversation by following “The Ezra Klein Show” on NYT Audio App, Apple, Spotify, Amazon Music, YouTube, iHeartRadio or wherever you get your podcasts. View a list of book recommendations from our guests here.
This episode of “The Ezra Klein Show” was produced by Rollin Hu. Fact-checking by Michelle Harris, with Kate Sinclair and Mary Marge Locker. Our senior engineer is Jeff Geld, with additional mixing by Aman Sahota. Our executive producer is Claire Gordon. The show’s production team also includes Marie Cascione, Annie Galvin, Elias Isquith, Marina King, Jan Kobal, Kristin Lin and Jack McCordick. Original music by Pat McCusker. Audience strategy by Kristina Samulewski and Shannon Busta. The director of New York Times Opinion Audio is Annie-Rose Strasser.
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Ezra Klein joined Opinion in 2021. Previously, he was the founder, editor in chief and then editor at large of Vox; the host of the podcast “The Ezra Klein Show”; and the author of “Why We’re Polarized.” Before that, he was a columnist and editor at The Washington Post, where he founded and led the Wonkblog vertical. He is on Threads.
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