The writer is an FT contributing editor
In August 2019, central bankers and academics gathered at Jackson Hole in Wyoming to talk, among other things, about the dollar. The guest of honour was Mark Carney, then the departing head of the Bank of England. He gave the kind of speech you can only give on your way out, starting a disagreement that doesn’t yet have a clear answer: is the global dollar system inherently problematic, or is it America’s to lose?
Carney warned that the old models of how to be a central banker might not work any more. Everyone in his audience with an economics PhD had learnt that financial co-ordination among countries was inefficient, and that flexible exchange rates and sovereign discretion over their own currencies gave central bankers the tools to fix their own problems. But exchange rates weren’t actually flexible, Carney pointed out, when half of global trade was invoiced in dollars. And when two-thirds of global securities were issued in dollars, tightening at the Fed meant tightening everywhere. It was an illusion that each central bank had sovereign discretion to respond to shocks such as trade wars.