A post-dollar world is coming

 The currency may look strong but its weaknesses are mounting writes Ruchir Sharma in The FT

This month, as the dollar surged to levels last seen nearly 20 years ago, analysts invoked the old Tina (there is no alternative) argument to predict more gains ahead for the mighty greenback. 

What happened two decades ago suggests the dollar is closer to peaking than rallying further. Even as US stocks fell in the dotcom bust, the dollar continued rising, before entering a decline that started in 2002 and lasted six years. A similar turning point may be near. And this time, the US currency’s decline could last even longer. 

Adjusted for inflation or not, the value of the dollar against other major currencies is now 20 per cent above its long-term trend, and above the peak reached in 2001. Since the 1970s, the typical upswing in a dollar cycle has lasted about seven years; the current upswing is in its 11th year. Moreover, fundamental imbalances bode ill for the dollar. 

When a current account deficit runs persistently above 5 per cent of gross domestic product, it is a reliable signal of financial trouble to come. That is most true in developed countries, where these episodes are rare, and concentrated in crisis-prone nations such as Spain, Portugal and Ireland. The US current account deficit is now close to that 5 per cent threshold, which it has broken only once since 1960. That was during the dollar’s downswing after 2001. 

Nations see their currencies weaken when the rest of the world no longer trusts that they can pay their bills. The US currently owes the world a net $18tn, or 73 per cent of US GDP, far beyond the 50 per cent threshold that has often foretold past currency crises. 

Finally, investors tend to move away from the dollar when the US economy is slowing relative to the rest of the world. In recent years, the US has been growing significantly faster than the median rate for other developed economies, but it is poised to grow slower than its peers in coming years. 

If the dollar is close to entering a downswing, the question is whether that period lasts long enough, and goes deep enough, to threaten its status as the world’s most trusted currency. 

Since the 15th century, the last five global empires have issued the world’s reserve currency — the one most often used by other countries — for 94 years on average. The dollar has held reserve status for more than 100 years, so its reign is already older than most. 

The dollar has been bolstered by the weaknesses of its rivals. The euro has been repeatedly undermined by financial crises, while the renminbi is heavily managed by an authoritarian regime. Nonetheless, alternatives are gaining ground. 

Beyond the Big Four currencies — of the US, Europe, Japan and the UK — lies the category of “other currencies” that includes the Canadian and Australian dollar, the Swiss franc and the renminbi. They now account for 10 per cent of global reserves, up from 2 per cent in 2001. 

Their gains, which accelerated during the pandemic, have come mainly at the expense of the US dollar. The dollar share of foreign exchange reserves is currently at 59 per cent — the lowest since 1995. Digital currencies may look battered now, but they remain a long-run alternative as well. 

Meanwhile, the impact of US sanctions on Russia is demonstrating how much influence the US wields over a dollar-driven world, inspiring many countries to speed up their search for options. It’s possible that the next step is not towards a single reserve currency, but to currency blocs. 

South-east Asia’s largest economies are increasingly settling payments to one another directly, avoiding the dollar. Malaysia and Singapore are among the countries making similar arrangements with China, which is also extending offers of renminbi support to nations in financial distress. Central banks from Asia to the Middle East are setting up bilateral currency swap lines, also with the intention of reducing dependence on the dollar. 

Today, as in the dotcom era, the dollar appears to be benefiting from its safe-haven status, with most of the world’s markets selling off. But investors are not rushing to buy US assets. They are reducing their risk everywhere and holding the resulting cash in dollars. 

This is not a vote of confidence in the US economy, and it is worth recalling that bullish analysts offered the same reason for buying tech stocks at their recent peak valuations: there is no alternative. That ended badly. Tina is never a viable investment strategy, especially not when the fundamentals are deteriorating. So don’t be fooled by the strong dollar. The post-dollar world is coming.

The stark truth about management and power

 Stefan Stern in The FT

 

“If you want power to be used for good, more good people need to have power.” 

This quotation is usually attributed to Jeffrey Pfeffer, professor of organisational behaviour at Stanford University’s graduate school of business. Pfeffer himself is more modest about its origins. He cites it at the beginning of his new book — more on this later — but describes it simply as “a quote attributed to me”. 

This slightly sheepish opening sums up an intriguing paradox about the man. He tells stark truths about management and power and what it takes to get to the top, which some may find unsettling. But, fundamentally, his purpose is compassionate. The challenge embedded in his famous aphorism is this: it is little use criticising the excesses of terrible leaders but then being too squeamish to engage with and win power yourself. 

When I call Pfeffer at his Californian home he sounds a bit distracted, for reasons that become noisily apparent. “I need to move my car,” he says. “My garage is about to be . . . I’m having some construction work done . . . I’ll be back in a minute.” 

He is true to his word, and proceeds to offer a tutorial on the realities of power, revealing why his course on the subject at Stanford, where he has taught for more than 40 years, is so popular with students. 

“Exercising power and being a leader is not about winning a popularity contest,” he says. “It was Gary Loveman [former chief executive of the Caesars casino business] who said: ‘If you want to be liked, get a dog. A dog will love you unconditionally.’ 

“A lot of leaders are not necessarily nice people,” he adds. “Many of the things that leaders have to do are not necessarily nice . . . There is very little overlap — I mean, almost none — between companies on the ‘best places to work’ list and companies led by leaders who are on the ‘most admired leaders’ list,” Pfeffer says. 

His new book, published this summer, is called 7 Rules of Power: Surprising — but True — Advice on How to Get Things Done and Advance Your Career. His seven rules are: 

Get out of your own way — that is, speak with confidence and do not undersell yourself. 

Break the rules — do the unexpected. 

Show up in powerful fashion — with conscious body language and actual language. 

Create a powerful brand. 

Network relentlessly. 

Use your power — do not be afraid to wield power once you have it. 

And, finally, remember that “success excuses (almost) everything” — the powerful attract and retain support. 

These rules are not simply plausible-sounding assertions but are in fact based on deep research and decades of social science experiment and observation. These are “the realities on the ground”, as Pfeffer says. 

While clearly not a fan of former US president Donald Trump, Pfeffer notes that he was a skilful follower of these rules. “He was seven for seven,” he says. He describes the winning Trumpian mentality in these terms: “You tell me what I need to do to win, and I’ll do it. I will say anything, I will do anything. The question is: are you willing to do what it takes?” 

This may sound Hobbesian and bleak. But note, too, that Pfeffer’s last book was called Dying for a Paycheck, and was a strong attack on the worst forms of modern management and the harm it can do both to employee health and company performance. An earlier book was called “The Human Equation: building profits by putting people first”. There is a touching passage in the book’s acknowledgements about the author’s late wife, Kathleen, who died last year and to whom the book is dedicated. 

Our call is once again interrupted by an off-stage crash. “Pardon the background noise — they must be doing something serious here — they should be, for what I’m paying them . . . ” 

In this latest work, Pfeffer writes: “One reason why people fail to achieve their objectives or lose out in competitions for high-status positions is their unwillingness to do what is required to prevail.” 

This is his reality check for aspiring leaders and those who want to get on in the organisation. You have to take responsibility and put yourself in a position where professional advance is possible and likely. “Happy talk”, or “leadership BS” (the title of another of his books), will not get you there. 

“I don’t think anybody is going to say that Elon Musk is sweet,” Pfeffer says, “or that Jeff Bezos is sweet, or Steve Jobs was nice, or Jack Welch was going to be picked by anybody to be stranded on a desert island with. Many leaders are narcissists,” he adds, “although their ‘autobiographies’ say that they are lovely human beings . . . ” 

Pfeffer looks power in the eye and does not flinch. He tells it like it is. Can we handle the truth? If we want power to be used for good, more good people need to have power.

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