[House Hearing, 118 Congress]
[From the U.S. Government Publishing Office]
DOLLAR DOMINANCE: PRESERVING
THE U.S. DOLLAR'S STATUS AS
THE GLOBAL RESERVE CURRENCY
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON NATIONAL SECURITY,
ILLICIT FINANCE, AND
INTERNATIONAL FINANCIAL INSTITUTIONS
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTEENTH CONGRESS
FIRST SESSION
__________
JUNE 7, 2023
__________
Printed for the use of the Committee on Financial Services
Serial No. 118-29
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
__________
U.S. GOVERNMENT PUBLISHING OFFICE
53-177 PDF WASHINGTON : 2023
-----------------------------------------------------------------------------------
HOUSE COMMITTEE ON FINANCIAL SERVICES
PATRICK McHENRY, North Carolina, Chairman
FRANK D. LUCAS, Oklahoma MAXINE WATERS, California, Ranking
PETE SESSIONS, Texas Member
BILL POSEY, Florida NYDIA M. VELAZQUEZ, New York
BLAINE LUETKEMEYER, Missouri BRAD SHERMAN, California
BILL HUIZENGA, Michigan GREGORY W. MEEKS, New York
ANN WAGNER, Missouri DAVID SCOTT, Georgia
ANDY BARR, Kentucky STEPHEN F. LYNCH, Massachusetts
ROGER WILLIAMS, Texas AL GREEN, Texas
FRENCH HILL, Arkansas EMANUEL CLEAVER, Missouri
TOM EMMER, Minnesota JIM A. HIMES, Connecticut
BARRY LOUDERMILK, Georgia BILL FOSTER, Illinois
ALEXANDER X. MOONEY, West Virginia JOYCE BEATTY, Ohio
WARREN DAVIDSON, Ohio JUAN VARGAS, California
JOHN ROSE, Tennessee JOSH GOTTHEIMER, New Jersey
BRYAN STEIL, Wisconsin VICENTE GONZALEZ, Texas
WILLIAM TIMMONS, South Carolina SEAN CASTEN, Illinois
RALPH NORMAN, South Carolina AYANNA PRESSLEY, Massachusetts
DAN MEUSER, Pennsylvania STEVEN HORSFORD, Nevada
SCOTT FITZGERALD, Wisconsin RASHIDA TLAIB, Michigan
ANDREW GARBARINO, New York RITCHIE TORRES, New York
YOUNG KIM, California SYLVIA GARCIA, Texas
BYRON DONALDS, Florida NIKEMA WILLIAMS, Georgia
MIKE FLOOD, Nebraska WILEY NICKEL, North Carolina
MIKE LAWLER, New York BRITTANY PETTERSEN, Colorado
ZACH NUNN, Iowa
MONICA DE LA CRUZ, Texas
ERIN HOUCHIN, Indiana
ANDY OGLES, Tennessee
Matt Hoffmann, Staff Director
Subcommittee on National Security, Illicit Finance,
and International Financial Institutions
BLAINE LUETKEMEYER, Missouri, Chairman
ANDY BARR, Kentucky JOYCE BEATTY, Ohio, Ranking Member
ROGER WILLIAMS, Texas VICENTE GONZALEZ, Texas
BARRY LOUDERMILK, Georgia WILEY NICKEL, North Carolina
DAN MEUSER, Pennsylvania BRITTANY PETTERSEN, Colorado
YOUNG KIM, California, Vice BILL FOSTER, Illinois
Chairwoman JUAN VARGAS, California
ZACH NUNN, Iowa JOSH GOTTHEIMER, New Jersey
MONICA DE LA CRUZ, Texas
ANDY OGLES, Tennessee
C O N T E N T S
----------
Page
Hearing held on:
June 7, 2023................................................. 1
Appendix:
June 7, 2023................................................. 39
WITNESSES
Wednesday, June 7, 2023
Billingslea, Hon. Marshall, Senior Fellow, Hudson Institute; and
former Assistant Secretary, Terrorist Financing and Financial
Crimes, U.S. Department of the Treasury........................ 10
Faulkender, Hon. Michael, Dean's Professor of Finance, Robert H.
Smith School of Business, University of Maryland; and former
Assistant Secretary, Economic Policy, U.S. Department of the
Treasury....................................................... 6
Goodspeed, Tyler, Kleinheinz Fellow, Hoover Institution, Stanford
University; and Chief Economist, Greenmantle LLC............... 4
McDowell, Daniel, Associate Professor, Maxwell School of
Citizenship & Public Affairs, Syracuse University.............. 8
Norrlof, Carla, Nonresident Senior Fellow, GeoEconomics Center,
Atlantic Council; and Professor of Political Science,
University of Toronto.......................................... 11
APPENDIX
Prepared statements:
Billingslea, Hon. Marshall................................... 40
Faulkender, Michael.......................................... 46
Goodspeed, Tyler,............................................ 49
McDowell, Daniel,............................................ 51
Norrlof, Carla............................................... 53
Additional Material Submitted for the Record
Luetkemeyer, Hon. Blaine:
Bloomberg Opinion piece, ``The Dollar's Demise May Come
Gradually, But Not Suddenly,'' by Niall Ferguson, dated
April 23, 2023............................................. 62
Written statement of the Coalition for a Prosperous America.. 72
De La Cruz, Monica:
Moody's Investors Service, ``Dollar dominance will persist
for decades despite new challenges,'' dated May 25, 2023... 77
Waters, Hon. Maxine:
Written responses to questions for the record submitted to
Michael Faulkender......................................... 88
Written responses to questions for the record submitted to
Daniel McDowell............................................ 89
Written responses to questions for the record submitted to
Carla Norrlof.............................................. 93
DOLLAR DOMINANCE: PRESERVING
THE U.S. DOLLAR'S STATUS AS
THE GLOBAL RESERVE CURRENCY
----------
Wednesday, June 7, 2023
U.S. House of Representatives,
Subcommittee on National Security,
Illicit Finance, and
International Financial Institutions,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 10:01 a.m., in
room 2128, Rayburn House Office Building, Hon. Blaine
Luetkemeyer [chairman of the subcommittee] presiding.
Members present: Representatives Luetkemeyer, Barr,
Williams of Texas, Loudermillk, Meuser, Kim, Nunn, De La Cruz,
Ogles; Beatty, Gonzalez, Nickel, Pettersen, Foster, and Vargas.
Also present: Representative Green.
Chairman Luetkemeyer. The Subcommittee on National
Security, Illicit Finance, and International Financial
Institutions will come to order. Without objection, the Chair
is authorized to declare a recess of the subcommittee at any
time.
Today's hearing is entitled, ``Dollar Dominance: Preserving
the U.S. Dollar's Status as the Global Reserve Currency.''
I now recognize myself for 5 minutes to give an opening
statement.
First, we would like to thank our very impressive set of
witnesses for being here today. You possess tremendous
expertise on the U.S. dollar and global economics, and we look
forward to your insights.
The U.S. dollar has been the preferred global currency
since the end of World War II, providing our nation with
inherent economic advantages as well as responsibilities.
Today, an estimated 88 percent of all currency transactions by
value are conducted in U.S. dollars. Among other things, this
limits the risk of a balance-of-payments crisis, which
inherently lowers our exchange rate risk. The dollar's position
also allows the United States and Americans to borrow at rates
such as 50 to 60 basis points lower.
Our currency strength not only benefits the U.S.
Government, but it also helps American consumers by lowering
the price of imported goods, resulting in an estimated $25
billion to $45 billion a year in savings.
Further, the dominant dollar offers investors dependability
and a save haven in times of economic uncertainty, as seen
during the 2008-2009 financial crisis, and more recently in the
economic shock caused by the coronavirus pandemic.
Finally, possibly the most important advantage of having
the global reserve currency within our country is embedded in
the title of our subcommittee: ``National Security.'' The
dollar's status allows us to apply powerful economic sanctions,
which when used properly as a targeted tool, can alter our
adversaries' actions in a way that advances U.S. and global
security.
Today, the biggest threat to American and global security
is the Chinese Communist Party (CCP). Next week, Treasury
Secretary Yellen will appear before our committee, and one
thing I hope to find out is, does this Administration have a
plan for when China inevitably attacks Taiwan? I asked the same
question of Under Secretary Nelson in April and was not
impressed by his answer. And I asked that same question of Fed
Chairman Powell and was not impressed with his answer. We have
concerns about that.
Committee Republicans have seen the writing on the wall and
have acted by putting forward meaningful legislation. I only
hope that the Administration also has some foresight.
Sanctions are a powerful tool, and their use should not be
considered lightly. As such, diverse opinions exist on the
effectiveness of the U.S. approach to sanctions. Some believe
that carrying out sanctions too broadly rather than in a
targeted manner can have a negative effect and ultimately
undermine dollar dominance. And some believe we should use
every tool in our kit to maximum effect.
Because of the formidable impact that U.S. unilateral
sanctions can have, adversaries and even some friends have
sought alternative payment methods and systems. It is
anticipated that when the BRICS--which stands for Brazil,
Russia, India, China, and South Africa--have their annual
summit this summer, they will discuss the feasibility of a
common currency mechanism for trade among their countries as an
alternative to the dollar. Other countries, including Saudi
Arabia, Iran, Argentina, the UAE, Algeria, Egypt, Bahrain, and
Indonesia have also expressed interest in such a mechanism.
While I don't think this idea is practical in the moment,
something like it could materialize in the not-so-distant
future.
China is also engaged in creating an alternative in the
form of a central bank digital currency (CBDC), which the
Chinese communist security agencies intend to use to surveil
the financial activity of any user. Because this eCNY presents
an assault on financial privacy and has a risk to our national
security, I introduced H.R. 804, the Chinese CBDC Prohibition
Act of 2023. This bill prohibits U.S. money services businesses
from engaging in transactions involving a central bank digital
currency issued by China.
Eventually, the United States will need to make a decision.
Do we open the door to the expansion of CCP's digital dollar,
or do we slam it shut? My bill slams the door and locks it.
Finally, our own domestic actions should make dollar-based
assets less attractive, particularly, the unsustainable Federal
spending trajectory and resulting inflation that has spread
around the world. We must take this risk seriously. It is all
too clear that inflation is undermining U.S. national security.
The good news is that despite attempts by the Chinese
government and other bad actors, the dollar seems secure for
now, as there is no clear or immediate alternative to serve as
a global reserve currency. But to ensure that remains the case,
we must keep our eye on the ball and preserve and protect this
key national asset.
With that, the Chair now recognizes the ranking member of
the subcommittee, the gentlewoman from Ohio, Mrs. Beatty, for 4
minutes for an opening statement.
Mrs. Beatty. Good morning. Thank you, Mr. Chairman, for
holding this hearing. And thank you to our witnesses for
appearing here today to discuss the preservation of the U.S.
dollar as the global reserve currency, a topic which we all
agree is of the utmost importance.
The U.S. dollar is considered the global reserve currency
because roughly 60 percent of central bank reserves around the
world are held in U.S. dollars. The dollar is the preferred
currency for international trade, oil is priced and settled in
U.S. dollars, and nearly 90 percent of transactions in foreign
exchange markets involve, yes, the dollar.
The market for U.S. Treasuries is also the deepest and
most-liquid market in the world, and the reliability and
stability of U.S. capital markets makes the dollar the
preferred currency for investors.
The dominance and supremacy of our currency affords the
United States numerous benefits, from reduced borrowing costs,
to increased financial stability, to influence over global
financial markets. It also allows us to leverage economic
measures against those that seek to threaten our national
security and foreign policy.
Given the undeniable value of the U.S. dollar's dominance,
it is critical that we address the currency and the present
threats to it. As we speak, foreign adversaries like Russia and
China are actively working to undermine the U.S. dollar and
cripple our global power and influence. We see this in Russia's
rapid accumulation of gold reserves over the last decade, as
well as China's development of non-SWIFT (Society for Worldwide
Interbank Financial Telecommunications) systems to settle and
clear transactions involving the renminbi (RMB).
Furthermore, several other countries are pushing efforts to
bypass the use of the U.S. dollar in the U.S.-led financial
system. That is why I agree that the subject of this hearing
unquestionably deserves our time and attention in Congress and
in this subcommittee. Thank you, Mr. Chairman.
However, I can't help but note the irony of my colleagues
holding this hearing after months of threatening a default on
our debt that would undermine the strength of the U.S. dollar.
While we are discussing the threats of the dollar's dominance,
let us not forget that the biggest threat to the dollar is
political brinkmanship and hostage-taking, a tactic that we
witnessed by the other side of the aisle, and that is
conspicuously employed only when a Democrat is in charge. It is
paramount that we preserve the trust and confidence that the
world has in the ability of the United States to pay its debt.
Just yesterday, our Financial Institutions Subcommittee
held a hearing on the debt ceiling and Treasury Department
calculations, and our witnesses unanimously agreed that
defaulting on the debt would greatly damage the U.S. dollar's
status as the global reserve currency and hand-deliver a
victory to foreign adversaries that seek to replace us on the
global stage.
After once again coming within hours of defaulting on our
debt and collapsing our economy, perhaps it is time to consider
measures that will prevent the weaponization of the debt
ceiling debate. The U.S. economy and the U.S. dollar is not a
political tool.
I look forward to continuing the efforts of my fellow
Committee Democrats who have led the charge to protect and
promote the United States competition and our standing on the
global stage. Once again, I thank our witnesses for their
presence here today, and I look forward to your testimony.
And with 1 second left, I yield back, Mr. Chairman.
Chairman Luetkemeyer. The gentlelady yields back.
With that, we will go to our witnesses for today: Dr. Tyler
Goodspeed, a Kleinheinz Fellow at Stanford University; Dr.
Michael Faulkender, the Dean's Professor of Finance at the
University of Maryland, and Chief Economist at the American
First Policy Institute; Dr. Daniel McDowell, an Associate
Professor of Political Science at the Maxwell School of
Citizenship & Public Affairs at Syracuse University, and a
Wilson China Fellow at the Wilson Center; Mr. Marshall
Billingslea, a Senior Fellow at the Hudson Institute; and
Professor Carla Norrlof, a Nonresident Senior Fellow at the
Atlantic Council, and a professor at the University of Toronto.
I thank each of you for taking the time to be here today.
Each of you will be recognized for 5 minutes to give an oral
presentation of your testimony. And without objection, each of
your written statements will be made a part of the record.
Dr. Goodspeed, welcome, and you are now recognized for 5
minutes.
STATEMENT OF TYLER GOODSPEED, KLEINHEINZ FELLOW, HOOVER
INSTITUTION AT STANFORD UNIVERSITY; AND CHIEF ECONOMIST,
GREENMANTLE LLC
Mr. Goodspeed. Good morning. Thank you, Chairman
Luetkemeyer, Ranking Member Beatty, and members of the
subcommittee. I am a Kleinheinz fellow at the Hoover
Institution at Stanford University and chief economist at
Greenmantle LLC, a global macroeconomic and geopolitical
advisory firm.
From 2017 to 2021, I had the privilege to serve on the
President's Council of Economic Advisors as Senior Economist,
Chief Economist for Macroeconomic Policy, Member, and Acting
Chairman.
In 2022, as the ranking member highlighted, 88 percent of
all foreign exchange transactions, by value, involved the
United States dollar, a figure that has been roughly constant
since 1989, which is testament to the substantial past
dependence in international currency usage due to large
positive network externalities. As the ranking member also
highlighted, 59 percent of all official foreign exchange
reserves were held in U.S. dollars, which is down from a figure
of 71.5 percent in 2001.
By comparison, 31 percent of all foreign exchange
transactions, by value, involve the euro, which is the second-
most commonly-transacted currency, which accounted for 20
percent of official foreign exchange reserves.
The fact that 90 percent of all foreign exchange
transactions continue to involve the United States dollar and
that global central banks continue to hold almost 60 percent of
their foreign exchange reserves in U.S. dollars confers net
economic benefits on the United States economy.
First, foreign demand for reserves of U.S. dollars raises
demand for dollar-denominated securities, in particular, United
States Treasuries. This effectively lowers the cost of
borrowing for U.S. households, U.S. companies, and Federal,
State, and local governments. It also means that, on average,
the United States earns more on its investments in foreign
assets than we have to pay on foreign investments in the United
States, which allows the United States to import more goods and
services than we export.
Second, foreign demand for large reserves of U.S. dollars
and dollar-denominated assets raises the value of the dollar,
and a stronger dollar benefits U.S. consumers and businesses
that are net importers of goods and services from abroad.
Third, large reserve holdings of U.S. currency abroad, in
effect, constitutes an interest-free loan to the United States
worth about $10 billion to $20 billion per year.
Fourth, the denomination of the majority of international
transactions in U.S. dollars likely modestly lowers the
exchange rate risks faced by U.S. companies.
Fifth, given the volume of foreign U.S. dollar holdings and
dollar-denominated debt, monetary policy actions by foreign
central banks generally have a smaller impact on financial
conditions in the United States than actions by the United
States' central bank have on financial conditions in other
countries.
However, the benefits of the U.S. dollar's global reserve
status are not without costs. The lower interest rates in the
United States benefit U.S. borrowers, especially the Federal
Government. They also lower returns to U.S. savers.
In addition, although a stronger dollar benefits U.S.
consumers and businesses that net import goods and services
from abroad, it does also disadvantage U.S. firms that export
goods and services abroad as well as firms that compete against
imported goods and services.
Furthermore, the perception of the U.S. dollar as a safe-
haven asset means that demand for the dollar tends to increase
in response to adverse macroeconomic events that are global in
nature. As a result, the competitiveness of U.S. exporters and
U.S. firms that compete against imported goods and services are
likely to face an increased competitive disadvantage at times
of elevated global macroeconomic stress.
However, despite these costs, studies generally find that
the economic benefits of the dollar's prominent global status
outweigh the costs, providing a modest net benefit to the
United States economy. This does not include the substantial
benefit to which the chairman referred of the United States
dollar's centrality in global transactions, allowing the United
States to utilize financial sanction tools when appropriate in
support of national security objectives.
There are economic policies that would help to preserve
this net economic benefit. Prudent fiscal policy, avoiding
excessive levels of regulation that would allow for continued
financial innovation to occur within the United States rather
than without, restoring low and stable inflation.
I look forward to your questions and participating in this
important economic discussion.
[The prepared statement of Dr. Goodspeed can be found on
page 49 of the appendix.]
Chairman Luetkemeyer. Thank you, Dr. Goodspeed.
Dr. Faulkender, you are recognized for 5 minutes.
STATEMENT OF THE HONORABLE MICHAEL FAULKENDER, DEAN'S PROFESSOR
OF FINANCE, ROBERT H. SMITH SCHOOL OF BUSINESS, UNIVERSITY OF
MARYLAND; AND FORMER ASSISTANT SECRETARY, ECONOMIC POLICY, U.S.
DEPARTMENT OF THE TREASURY
Mr. Faulkender. Thank you, Mr. Chairman, Ranking Member
Beatty, and members of the subcommittee. Thank you for the
opportunity to speak with you today on dollar dominance,
Federal fiscal mismanagement, and the implications for our
nation's economy.
I had the honor of serving as Assistant Secretary for
Economic Policy at the Department of the Treasury during the
previous Administration. In that role, I worked with Members on
both sides of the political aisle and with the Small Business
Administration to quickly implement the Paycheck Protection
Program (PPP) to ensure that the economic devastation that
might have resulted from the pandemic was not realized.
As Assistant Secretary, I told my team that the Treasury
Secretary proudly states that the dollar will never not be the
world's reserve currency, and our job is to make sure that is
true. Maintaining that role means engaging in prudent economic
stewardship, continuously upgrading the technology supporting
the nation's payment system, and showing restraint in our
deployment of unilateral sanctions. Most importantly, we must
demonstrate to the rest of the world that we are financially
responsible by addressing our unsustainable fiscal path.
To understand why this is the case, we must start with the
role of money. Academic literature has identified three
purposes of money: one, to facilitate the exchange of goods and
services; two, to serve as a store of value from when the money
is received until it is used; and three, to act as a unit of
measurement.
One reason the dollar is the world's reserve currency is
because approximately half of global trade is invoiced in U.S.
dollars, even though U.S. trade only accounts for approximately
10 percent of global trade.
Some countries peg their currency to the dollar, bringing
greater stability to their trade with the United States by
removing currency risk. However, to keep the peg in place,
those countries must also adopt the interest rates of the U.S.
Federal Reserve, causing interest rate effects here to be
exported abroad.
Foreign companies operating in non-dollar-pegged currencies
may still invoice in dollars because they want a currency
easily converted and that stores value in the interim. As has
been recognized by both the chairman and the ranking member, a
significant portion of trading in spot, forward, and swap
markets features the U.S. dollar in one leg of the transaction.
Our financial markets are the most-liquid in the world.
Transactions are implemented at low cost with fast execution
and minimal price impact. Thus, part of maintaining our role as
the world's most-transacted currency means keeping our markets
open with ongoing improvements in technology that speeds order
implementation while safeguarding against illicit transactions
and cybersecurity threats.
Most importantly, dollar dominance is aided by policies
that reinforce the dollar's historical strength and stability.
When fiscal and monetary policy generate robust economic growth
with low inflation, the U.S. dollar is stronger and less-
volatile, thus serving the important second role of money as a
store of value. In contrast, stagnant growth and high inflation
do not serve foreign transactors looking to mitigate currency
risk.
During COVID-19, aggressive fiscal policy was essential to
ensure that our nation's families and small businesses survived
its devastation. By January 2021, the economy had nearly fully
recovered from the pandemic. Nevertheless, Congress and the
Administration enacted an additional $1.9 trillion in Federal
spending, resulting in the highest inflation our nation has
endured in 40 years.
Even last year, well after the pandemic had ended, Federal
spending was still 24 percent of national output, significantly
above its 20-person average that existed between 1980 and the
onset of the pandemic.
Under current projections, our debt is anticipated to reach
566 percent of national output by the end of the 75-year
forecast period in the financial report of the U.S. Government.
Our growing debt erodes confidence around the world that the
U.S. will continue being a responsible economic steward worthy
of its status as the world's reserve currency.
Given the outsized role of the Federal Government in our
economy, recent growth has been anemic. Inflation is still well
above the Federal Reserve's 2-percent target. Inflation-induced
interest rate hikes have resulted in three of the four largest
bank failures in U.S. history.
Yet, there seems to be an insistence on throwing more
gasoline on the stagflation fire. Washington directed spending
that replaces low-cost, reliable sources of energy with high-
cost, unreliable sources of energy. It creates both inflation
and contraction.
The Federal Reserve alone cannot mitigate the inflationary
impacts of fiscal and regulatory policy. Higher interest rates
further undermine the banking system and erode the value of the
dollar. Instead, the Federal Reserve needs help from Congress
and the Administration. They should reduce Federal spending,
and rescind regulations that are curtailing economic growth and
devaluing the dollar.
Policymakers must return to the responsible fiscal
stewardship that made the U.S. the premier economic and
financial nation in the world. Reduced government spending
facilitates greater private sector ingenuity and dynamism,
thereby improving living standards for the American people.
I look forward to participating in this important
conversation. Thank you.
[The prepared statement of Dr. Faulkender can be found on
page 46 of the appendix.]
Chairman Luetkemeyer. Thank you, Dr. Faulkender.
Dr. McDowell, you are recognized for 5 minutes.
STATEMENT OF DANIEL MCDOWELL, ASSOCIATE PROFESSOR, MAXWELL
SCHOOL OF CITIZENSHIP & PUBLIC AFFAIRS, SYRACUSE UNIVERSITY
Mr. McDowell. Thank you. Chairman Luetkemeyer, Ranking
Member Beatty, and distinguished members of the subcommittee,
it is my honor to be speaking with you today about preserving
the U.S. dollar's status as the world's preeminent
international currency.
I would like to open with my bottom line up-front. As the
United States has increased its reliance on financial sanctions
as a tool of foreign policy, it has provoked anti-dollar policy
responses from our adversaries. While such steps are unlikely
to upend the dollar's position as top international currency,
including the reserve currency role, over time, such policies
could diminish the coercive capabilities that the United States
derives from dollar centrality.
Although our republic has never been ruled by a monarch,
the U.S. dollar has become a powerful symbol of American
financial royalty. Indeed, the dollar is often described as the
king of all currencies and rightly so. Across the full spectrum
of international roles that a national currency can play--the
reserve currency role, cross-border payments and trade
settlement, turnover in foreign exchange markets, and so on--
America's currency outcompetes all comers and presently lacks a
true rival in this space.
Dollar preeminence and U.S. financial centrality are not
without consequence for American coercive power, as you all
know. With little more than the stroke of the President's pen
or through an Act of Congress, the U.S. Government can use
financial sanctions to impose enormous economic costs on
targeted foreign actors, be they individuals, firms, or State
institutions, by freezing their dollar assets or cutting them
off from access to the banks through which those dollars flow.
The consequences for individual targets known as Specially
Designated Nationals (SDNs) are severe, significantly impairing
the target's capacity to participate in international trade,
investment, and debt repayment, and depriving them of access to
their wealth.
Over the last 2 decades, the United States has used the
tool of financial sanctions with increasing frequency. For
example, in the year 2000, just 4 foreign governments were
directly targeted under a U.S. Treasury country program
overseeing the Office of Foreign Assets Control (OFAC). Today,
that number is greater than 20, and if we include penalties
from secondary sanctions, the list gets even longer.
The more that the United States has reached for financial
sanctions, the more it has made adversaries and foreign
capitals aware of the strategic vulnerability that stems from
dependence on the dollar. Some governments have responded by
implementing anti-dollar policies, measures that are designed
to reduce an economy's reliance on the U.S. currency for
investment in cross-border transactions. Although these
measures sometimes fail to achieve their goals, others have
produced modest levels of de-dollarization.
Notable examples here include Russian steps to cut its
dollar reserves and reduce the use of the dollar in trade
settlement in the years leading up to its full-scale invasion
of Ukraine, or China's ongoing efforts to build its own
international payments network based on the yuan, efforts that
have taken on a new sense of urgency as Beijing has become more
aware of its own strategic vulnerabilities from dollar
dependence.
To be clear, I do not believe that geopolitically-motivated
moves by Russia, China, or any other country gravely threaten
the dollar's supremacy in the near or immediate term. The
dollar remains the world economy's indispensable currency and
maintains economic and political advantages over all
alternatives. However, the growing number of states espousing
anti-dollar viewpoints and adopting anti-dollar policies does
threaten to weaken the future potency of U.S. financial
sanctions.
I will conclude my remarks with three suggestions for U.S.
sanctions policy moving forward, aimed at protecting the
dollar's global status and preserving the tool's effectiveness
for moments when U.S. interests are most gravely threatened.
First, the United States should reconsider the use of so-
called symbolic financial sanctions. That is, if the main
objective of a tranche of sanctions is to signal to the world
or to a domestic audience that Washington disapproves of a
foreign government's policy choices, other measures that can
send a similar signal but do not politicize the dollar system
ought to be considered first.
Second, the use of financial sanctions against issuers of
potential rival currencies--in particular, China and its yuan--
should face a higher bar of scrutiny. Even a small targeted-
sanctions program provides information to our adversaries about
their vulnerabilities and gives them time to prepare for a
future event when a broad U.S. sanctions program may be called
upon as part of a major security crisis when such measures will
be most needed.
Finally, whenever possible, U.S. financial sanctions should
be coordinated with our allies in Europe and Asia, who should
feel as if they are key stakeholders in the dollar system and
not vassals to it. Such coordinated efforts will prevent our
friends from seeking to conduct business with U.S. adversaries
outside of the dollar system and will send a message to the
whole world that moving activities into secondary currencies
like the euro or the yen is not a safe haven.
It is my privilege to be here with you today and speak on
this critically important issue. And I am happy to answer your
questions.
[The prepared statement of Dr. McDowell can be found on
page 51 of the appendix.]
Chairman Luetkemeyer. Thank you, Dr. McDowell.
Mr. Billingslea, you are recognized for 5 minutes.
STATEMENT OF THE HONORABLE MARSHALL BILLINGSLEA, SENIOR FELLOW,
HUDSON INSTITUTE; AND FORMER ASSISTANT SECRETARY FOR TERRORIST
FINANCING AND FINANCIAL CRIMES, U.S. DEPARTMENT OF THE TREASURY
Mr. Billingslea. Thank you, Mr. Chairman. It is great to be
back with this committee, this time in a personal capacity. The
last time I was here was as Assistant Secretary of the Treasury
for Terrorist Financing and Financial Crimes during the Trump
Administration, where we talked about a wide range of sanctions
programs that we were imposing.
I will say at the outset that I agree with you and others
that, to paraphrase Mark Twain, reports of the dollar's demise
have been greatly exaggerated. That being said, we need to
remind ourselves that in the 16th Century, the Spanish silver
dollar was the dominant currency. In the 17th Century, it was
Dutch florins. In the 18th Century, it was the pound sterling.
The link between a nation's currency and its role as the
relatively-dominant political actor on the world stage is
pretty clear. And that is why people like Lula de Silva from
Brazil, Vladimir Putin, and Xi Jinping all aspire to undercut
the role of the dollar as the global reserve currency.
In my view, Chairman Xi poses the most serious threat to
this effort. He has dictatorial control of Communist China. He
has purged all of his main rivals. He has a vision of China as
the Middle Kingdom to which all of the nations on the periphery
ultimately will pay tribute. And some cultures, like the
Uyghurs, will be enslaved and eradicated.
And to that end, he has overseen a massive expansion in
Chinese conventional military capability, an unprecedented
nuclear weapons buildup, and he is now ominously threatening
invasion of Taiwan. It should therefore come as no surprise
that he, via the People's Bank of China, would like to both
undercut the dollar and sanctions-proof the Chinese economy as
they plan for that invasion of Taiwan.
If we look at what Russia did in the run-up to its further
invasion of Ukraine, they began dumping ownership of Treasury
bonds in 2018. In that year, they plummeted from $96 billion in
holdings down to $15 billion, and they also started buying
large amounts of gold.
China is now, as the ranking member has observed, embarking
on its own gold-buying spree. I haven't seen the data from May,
but April marked the sixth straight month of Chinese expansion
in its gold holdings. And I am not sure I believe the official
figures. We have to recall that China is the dominant gold-
mining player around the world, and half of those gold-mining
companies are state-owned, so the actual size of China's war
chest when it comes to gold reserves may be far higher. In
fact, I suspect it is inevitably far higher than official
numbers suggest.
Last year, China also started dumping its Treasuries--2022
marked the second-largest decrease on record, with a drop of
about $174 billion, and China stood at the lowest levels since
2010 in terms of its holdings, although this past March, they
did reverse course. This bears close watching because a sell-
off may be a strong indicator of planned aggression.
But I think the area where we really need to focus, and
where I would agree with you, Mr. Chairman, is that I am not
sure the Treasury has a plan. How do we deal with the fact that
the sheer size of the Chinese economy dwarfs what we have been
contending with in the form of Iran, Russia, and so on?
One of the first things the Biden Administration did in the
wake of Russia's attack was start sanctioning Russian banks and
de-SWIFTing them. And that is one thing when you are going
after an economy smaller than the size of Texas. It is quite
another when you consider that, out of the 100 largest banks in
the world, China has 20, and all 4 of the top 4 are Chinese
banks. And that is why many within the Treasury contended when
I was there, and they still contend to this day, that these
Chinese banks are simply too big to sanction.
I don't agree that we can allow that to stand, but I do
believe we have to start taking very swift action to put us in
a situation where we could take punitive measures on these
banks if necessary.
And to that end, it is good that the market is beginning to
respond to Chinese bellicose rhetoric. We have seen the Chinese
stock market and the capitalization of Chinese companies come
way down. We have also seen a drop in most of the major
indexes. We have also seen the three biggest banks in the
United States start to trim their exposure. But I believe we
need to encourage further reduction.
And to that end, one of the things we should do is increase
the capital requirements on banks that have substantial
exposure. We need to ensure that our largest banks can
withstand the systemic shocks that would arise from a tit-for-
tat with China.
We also need to recognize, as the Atlantic Council has
pointed out, that China holds over $5 billion in various
liabilities to western investors that they could hold hostage
in the event of a sanctions war. And we need to begin educating
our pension funds and our investment funds on the substantial
risk that they run by leaving those assets in China.
Again, I appreciate the chance to testify before this
committee, and I look forward to your questions.
[The prepared statement of Mr. Billingslea can be found on
page 40 of the appendix.]
Chairman Luetkemeyer. Thank you, Mr. Billingslea.
And Professor Norrlof, you are recognized for 5 minutes.
STATEMENT OF CARLA NORRLOF, NONRESIDENT SENIOR FELLOW,
GEOECONOMICS CENTER, ATLANTIC COUNCIL; AND PROFESSOR OF
POLITICAL SCIENCE, UNIVERSITY OF TORONTO
Ms. Norrlof. Thank you, Chairman Luetkemeyer and Ranking
Member Beatty, for inviting me to testify on this important
topic. I am honored.
I will speak to three themes: the dollar's dominance;
threats to dollar dominance; and what the U.S. should do to
maintain dominance. And my written statement provides further
explanation and context.
The dollar is the most-important currency in the world for
both official and private actors, although its dominance has
been declining since the 1970s, and there has been a recent
downward cycle since 2016. Now, dominance can simply mean
relatively stronger than anyone else, but here I take dominance
to mean a currency that other currency majors are unable to
balance, effectively, a unipolar currency order.
I will note that the dollar's dominance is not quite as
strong amongst private actors and private markets as it is with
governments. In private transactions, it averages about 45
percent of the world's total. That includes ethics
transactions, but also things like issuance of international
debt securities and cross-border banking.
On threats to dollar dominance, the Russia sanctions have
had little impact to no impact, actually, on dollar dominance.
In fact, given the recent uptick in the dollar's reserve
currency status, sanctions may be reinforcing dollar dominance.
The Chinese yuan poses no immediate threat to dollar
dominance. It accounts for roughly 3 percent of overall
reserves. And so far, China has been successful in promoting
the yuan with its trade partners, but the yuan is scarcely used
by countries outside trade with China.
China is a potential long-term challenger due to its active
pursuit of trade and investment relationships. If the yuan is
increasingly used by third countries, it will pose a greater
threat to the dollar. And in addition to these external
threats, there is also a domestic threat. Flirting with the
possibility of a voluntary default puts dollar dominance at
risk.
What should the U.S. do to maintain dominance? To curb the
domestic threat, Congress should consider creating an
alternative mechanism for resolving political differences on
government spending and its consequences. To rein in external
threats, the United States should, whenever possible, implement
multilateral sanctions in support of broadly-endorsed goals to
shore up the liberal international order. This is likely to
limit dollar backlash. To counter China's advances, the U.S.
should consider economic inducements, in addition to its use of
sanctions, as a tool of economic statecraft.
The United States cannot afford to alienate security allies
in this geopolitical environment. Security relationships are
increasingly informing economic relationships. Just as
countries are starting to source goods from friendly nations,
they may adopt friendly-nation currencies as they did during
the Cold War.
Thank you.
[The prepared statement of Dr. Norrlof can be found on page
53 of the appendix.]
Chairman Luetkemeyer. Thank you for your testimony.
And I thank each of you for your testimony this morning. It
was very impressive.
And with that, I will now recognize myself for 5 minutes as
we begin the questioning portion of our hearing.
The conversation around the dollar being the reserve
currency is becoming louder and louder as we have more and
more, I think, threats to it. I think I agree with all of you
that there is not an immediate threat within the next few
years. But as a businessman, I usually look at not only short-
term problems, but I look at long-term problems. And I look
from 30,000 feet. And from 30,000 feet, and from a long-term
perspective, I see the threat that each of you have discussed
this morning with regards to China. They are trading now in
their own currency with their friends and allies. As that
sphere of influence gets bigger, it chips away at our reserve
currency. I think one of you gave some statistics on it.
So, I would like to talk a little bit about how we are
forcing them into this position from the standpoint that--I
think each of you made the comment--Dr. McDowell made a comment
with regards to the history of the currency.
We are looking at a currency that is being challenged now
because we are putting sanctions on China, and they are looking
at other ways to get around it. As long as our friends are our
friends, they are okay with our dollar. When the enemies are
getting pushed into a corner, they look for ways to get out of
it, and our dollar is a way to control people, and they don't
want to be under our control. Therefore, they are looking at
ways to get around it.
Mr. Billingslea, would you comment on that? They seem to be
decoupling themselves from our own--trying to establish their
own currency. Where do you see this going in the next, say, 20
years?
Mr. Billingslea. Thank you, Mr. Chairman. I think that
their desire to establish their national currency as a true
international currency fits hand-in-glove with their vision of
themselves as the dominant player on the world stage, or at
least that is what they would like to become.
I agree with you that for the time being, I don't see that
they are going to have all that much success in establishing
yuan as a hard currency globally for basically two reasons.
One, China is a currency manipulator, so people who hold the
yuan are also holding a lot of risk that it may not have the
same value tomorrow that it has today. And two, they have a
very restrictive capital outflow regime that basically prevents
you from moving currencies out of the country. They are very
closed in that respect. And those are going to be their two
main impediments.
The thing I do worry about--and I come back to the fact
that they have been buying a lot of gold, which would be very
concerning if they wind up having larger reserves of gold than
we believe--is that they could start issuing gold-denominated,
gold-backed yuan contracts. And that would further their
ambition for introducing the yuan onto the world stage.
But at the moment, the yuan is not a widely-held reserve
currency. In fact, a third of all yuan reserves are sitting in
Russia today. Thank you, Mr. Chairman.
Chairman Luetkemeyer. Believing or suggesting, perhaps,
that they go into Taiwan, how would this affect our reserve
currency status with them--basically, the world would be in a
lock-down position for a period of time until that situation is
resolved because they will invade, we will sanction, and off we
go.
I think a couple of you talked about the sanctions being
something we have to be very careful about how we manipulate.
It can be counterproductive. Would somebody like to comment on
that?
Mr. McDowell. Yes. Chairman Luetkemeyer, thank you for a
great question.
My own view on China here is that their short-term efforts
are focused primarily on increasing their resilience and
autonomy in the event of a future sanctionings package from the
United States, perhaps as a result of a conflict with Taiwan.
Their focus, I think, is on trade settlement and cross-
border payments. That is where I think we are seeing most of
the developments. Right now, around 20 percent of China's
cross-border trade is settled in its own currency. That is up
over the last few years after reaching 30 percent prior to
2015.
The reason they are focused on that is I think the strength
of our sanctions are actually more on stopping firms,
individuals, and government institutions from participating in
cross-border trade and payments, more so than even freezing
assets, which is sort of a one-time, one-off sanction. Whereas,
cutting actors off from banks means your ability to participate
in cross-border trade, debt payment, et cetera, is constrained
for as long as those sanctions are in place.
And the Chinese have been interested, I think, in improving
the use of the yuan through networks like the Cross-Border
Interbank Payment System (CIPS)--piloting eCNY and other things
like that--which will eliminate their 100-percent reliance on
using the dollar and the dollar system.
Chairman Luetkemeyer. As the last thing, I would like to
really follow up with regards to your gold comment, Mr.
Billingslea, because it looks to me like, at some point, there
may be a shift to the gold standard again. And if that is
happening, if they are going to push us in that direction, it
would be interesting to at least play a, ``what-if,'' game of
what could happen there.
My time is up. With that, I will recognize the ranking
member of the subcommittee, the gentlelady from Ohio, Mrs.
Beatty, for 5 minutes.
Mrs. Beatty. Thank you, Mr. Chairman.
And, again, thank you to the witnesses.
Let me echo what the chairman and I were talking about.
Certainly, your presentations--all of you were not only quite
impressive and scholarly, but this is probably one of the best
panels that I have witnessed on this topic. So, again, thank
you for that.
Not to mention, Mr. Chairman, let the record show that they
did quote me several times.
With that, let me move to the first question to Dr.
Norrlof. I would like to start with other countries' efforts to
replace or bypass the U.S. dollar. We have heard from all of
you a lot about China and Russia increasing their gold
reserves, the use of alternative payment systems, and certain
African nations also partnering up to develop a multilateral
system that evades the dollar.
Can you tell me if there is any one thing that stands out
to you, that you can share with us about efforts led by China
and Russia and other nations to circumvent the U.S. dollar and
the U.S.-led financial system?
And then, Mr. Billingslea, I am going to ask you the same
question.
Ms. Norrlof. Yes. I think that those efforts are a new
development, but I think that they are not very consequential
because they build on the idea that local currencies will be
used, the bilateral currencies, and these relationships will be
used. And in order to internationalize the currency, you really
need to use a third-party currency, so, outside that
relationship. And that is not happening on any scale that is
significant whatsoever. Therefore, I see those efforts as very
limited.
Now, as has been pointed out by the entire panel here, I
think that there is something to still track in that these
alternative payment systems allow for a relative insulation of
the dollar system. And as we move forward, it is important to
look at where those investment and trade relationships are
going.
Mrs. Beatty. Thank you.
Mr. Billingslea?
Mr. Billingslea. Thank you, Congresswoman. I would offer
two thoughts in this respect.
The first is that China considers the actual composition of
its foreign exchange reserves to be a state secret. So they
don't publish, and they view it as a criminal offense to try to
obtain that information in terms of the balance of how much is
gold, and how much is dollar- and euro-denominated. But the
numbers I have seen suggest that still, at this moment, about
50 to 60 percent of their forex reserves are still in dollars
or euros, which means that they are at high risk of sanctions.
We can affect them.
The problem is that the war chest that they built up is
enormous. It is more than $3 trillion that they have in forex
reserves. Compare that with what Russia had at the onset of its
assault, which was around $680 billion, of which we managed to
freeze overseas half of it. But Russia is still keeping its
economy going, despite the Biden Administration's sanctions. So
imagine how they are going to be able to continue with that
sizable war kitty in Beijing if they do decide to go off after
the Taiwanese.
The final point on gold, the reason why regimes that come
under sanctions like gold is because it is hard to trace. It is
fairly anonymous. The only problem with it is that it is
really, really heavy.
Mrs. Beatty. Thank you very much.
Let me just skip to another question. And I am really
asking you this because I want it to be on the record. We spent
a lot of time after our debt ceiling vote on getting educated.
We know we will revisit this in 2 years, in January 2025.
So let me ask all of you, and this is a yes-or-no question;
I will go down the line and ask you to comment yes or no on the
effect of the debt default on the strength of the U.S. dollar.
Is it yes or no for you that the dollar's position as the
world's reserve currency would be harmed by a default on
Americas' debt? And we will start at this end.
Mr. Goodspeed, yes or no?
Mr. Goodspeed. If the U.S. defaulted on its debt, it would
harm the U.S. dollar status.
Mrs. Beatty. Okay.
Mr. Faulkender?
Mr. Faulkender. I agree, yes.
Mrs. Beatty. Okay.
Mr. McDowell?
Mr. McDowell. I agree.
Mrs. Beatty. Mr. Billingslea?
Mr. Billingslea. Absolutely.
Mrs. Beatty. Ms. Norrlof?
Mr. Norrlof. Yes.
Mrs. Beatty. Thank you so much for that.
I don't know if I have time for the next question, so I
will read it, and you can all respond in writing.
We know that non-U.S. mobile payment applications
reportedly have reached more than 1 billion consumers and
processed more than $6 million worth of transactions. So, I
believe the continued advancement of these products into
foreign markets can diminish U.S. competitiveness and yield
opportunities for foreign governments to influence
international payment.
The question to all of you will be, what do you think about
that? And we will take those responses in writing.
My time is up.
Chairman Luetkemeyer. The gentlelady yields back.
The gentleman from Kentucky, Mr. Barr, who is also the
Chair of our Subcommittee on Financial Institutions, is
recognized for 5 minutes.
Mr. Barr. Thank you, Mr. Chairman, and thank you for
holding this hearing and for the witnesses' impressive
testimony. This is probably the most important hearing we have
held this entire Congress, and the testimony is excellent.
Let me ask Dr. Goodspeed and Dr. Faulkender about the
relative risks to the dollar's dominance. We have these
internal risks, regulatory failure, that diminish the dynamism
of the U.S. free enterprise system. We may have bad tax policy.
We have an unsustainable debt trajectory. Those are internal
threats.
Then, we have these exogenous external threats: BRICS; a
Saudi oil deal with China denominated into yuan; the CIPS
system, which is an alternative to SWIFT; the advent of crypto;
and the adoption of a Chinese CBDC. Compare the risks, and
which is the more significant risk, in your mind?
Mr. Goodspeed. Economists like to talk about the short term
versus the long run, and I think that is applicable here.
Short term, I think the risk is that we continue to see
diversification away from the dollar, PRC continuing to push
other countries to use trade invoicing and renminbi, that they
continue to promote the offshore renminbi market, that they
continue to promote or force bilateral clearing.
Longer term, I think the bigger risk is that foreign
investors no longer perceive the United States Federal
Government debt to be as safe and risk-free as it is perceived
today.
Mr. Faulkender. I tend to agree.
I would say that in the short run, as you see more trading
take place in other currencies, just for facilitating
transactions, you'll see reserve banks around the world
increasing their holdings of other assets denominated in things
other than dollars.
But for purposes of holding long-term reserves, ultimately,
it is a claim on the underlying country. And for reasons that
have been spoken to, I don't trust claims against the Chinese
economy when it comes to commodity-backed currencies. One is
always concerned about whether they would suspend
convertibility in times of crisis, and whether those asset-
backed currencies actually will be backed by those assets when
the time comes.
And instead, you are still going to be a claim against the
underlying economy, which is why growth, along with fiscal
stewardship, is essential to maintaining our status as what you
would hold for long-term reserve assets.
Mr. Barr. It sounds like preserving the dollar's dominance,
maintaining that, is both offensive and defensive. We need to
be defensive when it comes to keeping our house in order,
getting our house in order here at home, but also recognizing
some offensive threats outside of the United States.
Mr. Billingslea, and also Dr. McDowell, I wanted to ask you
about this idea of sanctions. Mr. Billingslea is advocating for
a legislative proposal that would implement some investment
screening, Western investment screening. It would use the
architecture of OFAC to sanction Chinese entities that threaten
our national security, to give a clear red light to Western
investors to not invest in Chinese technology, defense,
military, and surveillance companies that threaten our national
security on exchanges, A-shares, outside of the United States
as well.
But I wanted Dr. McDowell to speak about this idea of
symbolic sanctions and politicizing the dollar. Is there a risk
with that kind of approach that we would be doing what you
advise against?
Mr. McDowell. It sounds like what you are describing is
more of an investment restriction, using sort of access to
information through OFAC to prohibit or advise against
investment. That is different, I think, from cutting off the
firms from using dollar payments, so I think the risk is lower
based on what you have just described.
Mr. Barr. Right.
And, Mr. Billingslea, are there alternatives to a central
bank digital currency (CBDC) that would help maintain the
dollar's dominance as China pursues a CBDC? In other words,
would a stablecoin regulatory framework that would encourage
stablecoins denominated in the dollar be a better alternative
than the United States adopting our own CBDC? What I always say
is we shouldn't counter China by becoming more like China.
Mr. Billingslea. The Chinese CBDC is a surveillance tool.
And I think we all need to just understand that they are kind
of very open about the fact that they intend to track holdings
of this.
I also have some doubts that--if we can't even get a
website for healthcare functioning, I am not exactly sure that
we can build a digital dollar in any meaningful timeframe under
the Federal Reserve.
There is a stablecoin already out there that is denominated
in dollars, and for every dollar they issue, they do hold in
reserve.
Mr. Barr. I yield back. Thank you.
Chairman Luetkemeyer. The gentleman's time is up.
The gentleman from North Carolina, Mr. Nickel, is
recognized for 5 minutes.
Mr. Nickel. Thank you, Chairman Luetkemeyer, and Ranking
Member Beatty.
And thank you to your witnesses for joining us today.
One potential threat to the U.S. dollar as the global
reserve currency is the growth and expansion of alternative
cross-border payment systems, such as those developed by Russia
and China. Increased use of these systems could lead to a world
less dependent on U.S. dollars, which would likely limit our
traditional methods of economic sanctions.
Dr. Norrlof, how should U.S. national security experts be
preparing to respond to this scenario?
Ms. Norrlof. Thank you. I think that this is a long-term
threat. And it really requires the countries that are pushing
alternative payment systems to build economic relationships, to
build commercial relationships, and to start trading in the
yuan outside of established bilateral relationships.
So, I think that the best way that the United States can
counter this is to start reinforcing its economic relationships
by expanding trade, expanding investment.
Mr. Nickel. Thank you.
Sanctions that are made possible by the strength of the
U.S. dollar could push countries to reduce their use of U.S.
dollars and minimize the global economic power of the United
States. Governments could experiment with other national
currencies to proactively shield their economies from the
United States.
Dr. Norrlof, again to you, what inflection points would
signal that major economies are making serious attempts to de-
dollarize?
Ms. Norrlof. I think that we are nowhere close to an
inflection point in the reserve currency function. There is
actually more movement on the private dimension.
And there were some numbers quoted here before--I think
that in ethics transactions, for instance, the dollar is not as
dominant as it has been made out to be; it accounts for about
45 percent of ethics transactions, because the 90-percent
figure is out of 200 percent. Because currencies exist on both
sides of an exchange. And we see across-the-board in the
financial markets that the U.S. dollar is in fact less-dominant
than it is with official holders.
Mr. Nickel. Just to sum up here, how should policymakers
like us be responding to the scenario I laid out?
Ms. Norrlof. I think, again, the key here really is to
reinforce existing relationships, economic relationships that
the United States has and expand them where they do not exist.
This is the best way for the United States to undercut the
developments that are now underway.
Mr. Nickel. Thank you.
And, Mr. Chairman, I yield back.
Chairman Luetkemeyer. The gentleman yields back.
I now recognize the gentleman from Texas, Mr. Williams, who
is also the Chair of the House Small Business Committee, for 5
minutes.
Mr. Williams of Texas. Thank you, Mr. Chairman.
And I thank all of you for being here today.
The U.S. dollar has held a leading position in the global
economy as a primary reserve currency since World War II. We
talked about that. And this status has given the United States
economic and political advantages to strengthen market security
and boost our monetary independence.
Now, there are concerns that the rise of China's yuan and
the euro and other currencies are threatening to replace the
U.S. dollar as the world's reserve currency. This decision
would have, as we all know, severe economic consequences. We
talked about that.
However, despite challenges to the role of the U.S. dollar,
other countries' currencies lack the scale and ability to serve
as the workable alternative. So even still, we must continue to
examine risks that threaten the dollar's global role as the
reserve currency.
Dr. Goodspeed, could you elaborate some more on the dangers
of replacing the dollar as the global reserve currency, and
what makes the dollar the safest compared to the alternatives,
and how we can better promote the retail about the global
confidence in the dollar?
Mr. Goodspeed. Sure. I have heard it said by the President,
``Don't compare me to the Almighty, but compare me to the
alternative.'' And I think something similar can be said of the
U.S. dollar, that this is, as members of the panel have said,
the deepest, most-liquid market for safe assets in the world.
And if you are going to hold a currency, you want to be able to
park that currency in a safe liquid asset that you can easily
dispose of if you want to convert it.
And that is not the renminbi, for the reasons that have
been cited, in particular, the capital controls. They are
working to get around that by having offshore markets. And it
is not the euro, because they lack a liquid market for a single
homogenous debt. It is the U.S. dollar. And we benefit from
that for the reasons I cited economically and for reasons that
others members of the witness panel have cited in terms of
national security.
Mr. Williams of Texas. Thank you.
In recent years, China has conducted a series of strategic
initiatives aimed at challenging the dominance of the U.S.
dollar. One specific strategy has been currency manipulation.
The Chinese have been manipulating their currency to gain
unfair advantages in international trade, and Communist China
is creating an unlevel playing field by imposing capital
controls and limiting the currency flowing in and out of China.
This negatively impacts countries with market-driven exchange
rate systems by creating doubts about the convertibility of the
yuan. So, we must put an end to this manipulative practice and
protect U.S. interests by holding China accountable.
Mr. Billingslea, what actions are the Chinese Communist
Party (CCP) taking to undermine the global role of the U.S.
dollar, and how can we hold them accountable for their
manipulation of currencies while maintaining our dominance?
Mr. Billingslea. I think it is important that the Treasury
resume calling it what it is, which is a currency manipulator.
We did that under the Trump Administration. I also would point
out that we run a trade deficit with the Chinese, and what that
means is they export more to us than they import from us. All
of that delta between what we buy versus what they buy goes
into that war chest that they are building up. That is their
forex reserves.
Under the Biden Administration, the amount of that
bilateral trade and the deficit has surged yet again from what
it was when he took over in 2020.
So, we do need to look at how to become much more
competitive and to insist on a more-equitable balance of trade.
Mr. Williams of Texas. My last question, during past
economic crises, like the financial crisis of 2008 and the 2020
COVID pandemic, the dollar remained strong on the world stage.
However, there is a concern that the rapid rise of inflation
our nation is currently facing is not only hurting us at home,
but is also hurting our reputation abroad.
The Biden Administration has fueled the economic downturn
our country is facing, and many Americans are struggling to
keep up with increasing costs for groceries, gas, and housing.
And on top of all of that, small businesses--of which I am
one--are crippled behind inflation and rising interest rates.
Despite warnings, this Administration continues their
reckless spending spree that has brought on the highest
inflation in decades. Dr. Faulkender, quickly, can you expand
on how record-high inflation is affecting the U.S. dollar
globally? How can the government boost dollar assets to protect
our financial markets and make us more attractive?
Mr. Faulkender. Absolutely. As you said, during the onset
of the pandemic, it was necessary to engage in significant
spending to support American households. But since then, the
ongoing spending well in excess of historical levels has meant
that there are way too many dollars chasing too few goods and
services, and American families and small businesses have
struggled the most.
The issue that we also have is that we have called upon
foreign countries, largely through the budget deficits we run,
to hold those dollar-denominated assets as part of their
reserves. And what that does is contribute to the very trade
deficit we are talking about.
So, to the extent that we wanted to not facilitate China's
buildup of a war chest, running something closer to a balanced
budget that does not necessitate foreign countries buying our
debt would be beneficial.
Mr. Williams of Texas. Thank you.
I am out of time. I yield back.
Chairman Luetkemeyer. The gentleman's time has expired.
The gentlelady from Colorado, Ms. Pettersen, is recognized
for 5 minutes.
Ms. Pettersen. Thank you all so much for being here today.
This is a very important conversation, and it has been on all
of our minds after going through the debt ceiling debate and
what might happen if we were unable to come to an agreement.
This is my first year in Congress, but I have been watching
this for a long time, and the hostage-taking that unfortunately
has taken place every time this comes up is deeply concerning.
And it is even more concerning to me, having gone through
it now in this body. When I think about the long-term impacts,
the message that this sends globally when people have to
question whether or not investing in the United States is
viable, and whether or not the United States of America will
pay its bills, that is a huge security risk, and we made it
past this time, even though I think that the tactics you used
were deeply disappointing.
But I am very concerned about this in the long term. And
when I think about some of my colleagues who oftentimes talk
about the threat to China, inadvertently, this is--China would
want nothing more than what we have gone through and what the
potential consequences are.
It would reduce the value in the dollar, the security of
the United States and our reputation, and our long-term
investments here in this country.
So, do you think that it is in the best interest of our
national security and the strength of our dollar to address the
debt ceiling and take that off the table for the United States?
Ms. Norrlof. Was that question directed to me?
Ms. Pettersen. Anyone who would like to answer.
Ms. Norrlof. I think it is very detrimental to the United
States' credibility and to the dollar status in the world. I
also want to underline that any default that occurs on the part
of the United States is entirely voluntary. There can be no
forced sovereign default in the case of the United States.
Mr. Billingslea. Congresswoman, the dilemma is that once
you issue debt, you need to honor it, so defaulting on that
would do grave harm. But the problem is that at a certain
point, if you keep issuing debt and debt and debt and you have
runaway spending, that also winds up biting you, because it
begins to call into question whether or not we actually can be
trusted to honor that debt.
So there is a balance here, but it is clear that the
profligate spending really does have to come to an end.
Ms. Pettersen. Absolutely. And I think that everyone here
in Congress is concerned about the debt that the United States
has and has different approaches on what we need to do to deal
with that. But that should be a legislative process and much
more long-term planning than the hostage taking that we have
seen.
Something that you brought up, Mr. McDowell, was around the
symbolic financial sanctions that have been used if we don't
agree with a country politically. And one that immediately
comes to mind, that has impacted my community and is still on
the books, is the sanctions on Canada for lumber that has
increased costs for housing and actually addressing the needs
there.
I don't know if you have any other examples of what that
looks like, but making sure that we use these sanctions very
strategically, and that we should consider other measures to
send signals to countries so it is not compromising our dollar.
Can you give examples of what those measures look like,
recognizing, of course, that utilizing these economic tools is
important for ensuring peace, but making sure that they are
very limited?
Mr. McDowell. Yes, thank you for that question,
Congresswoman. Time is short, so I will be brief. When I talk
about symbolic sanctions, again, I am talking about sanctions
specifically using the financial system and access to the
dollar. Other forms of sanctions are not part of the discussion
that I provided today.
An example I would use would be sanctions that were used to
target Carrie Lam and other officials in Hong Kong in 2020. I
was as upset as anyone about what was happening there. But in
that case, it is very unlikely they are going to change Xi
Jinping's behavior and plan for Hong Kong. And the effect is
that it raised alarm bells in Beijing about the United States'
willingness to use sanctions against China, which I think has
sort of precipitated further steps from the Chinese to again
build up the resilience to a future event where we may need
sanctions in a moment where our security is critically at risk.
Chairman Luetkemeyer. The gentlelady's time has expired.
With that, we will go to the gentleman from Pennsylvania, Mr.
Meuser, for 5 minutes.
Mr. Meuser. Thank you very much, Mr. Chairman. And thank
you all for being here. We are having a serious discussion on
the economy because we have some serious issues. The present
Administration policies are weakening our economy through
excessive spending and the value of the dollar which causes
inflation, energy policies that are causing energy to spike and
maintain a level of stagflation perhaps; a Fed reaction that
was overdoing it with stimulus, followed by the most-rapid
increase in interest rates we have ever seen. And, of course,
the threat of taxes on American businesses, which is pretty
much the worst thing you can do and gives nothing but an
advantage to China.
Meanwhile, China is strengthening. It has RMD incentives,
more engineers, strategic alliances, low-cost production, and
workforce availability. So, we need to get into shape. We are
getting ourselves out-of-shape, and we need to be serious about
being the strongest economy in the world.
Mr. Billingslea, I would like to start with you. Do you
think reversing some course here where we rein in spending,
i.e., curbing inflation, create some predictability to future
taxes, and have an independent energy program, will be steps in
the right direction?
Mr. Billingslea. I do, and it would certainly help my
investment portfolio. But more to the geo-strategic point here,
because of what the Biden Administration has done on energy, we
are seeing that our efforts to go after Putin are not being
successful because we have been unwilling to actually sanction
his oil exports.
The Biden Administration has actually issued a license that
explicitly permits all of those sanctioned banks--it is still
fine to transact with them as long as it is related to energy
exports, because they don't want to see the price at the pump
go up, but they are not willing to allow the exploration and
production necessary to bring the price of the pump down
through American energy.
Mr. Meuser. Sure. And it's a huge cost to the typical
American family and business.
Mr. Billingslea. And to the Ukrainian people who are
suffering from the fact that the war machine in Russia keeps
going.
Mr. Meuser. Agreed. I have a bill, the China Exchange Rate
Transparency Act, which would require the U.S. Executive
Director of the International Monetary Fund (IMF) to advocate
for enhanced transparency and surveillance of the People's
Republic of China's exchange rate arrangements. Do you think
this level of transparency is something that would make an
impact, would make a difference? And are we doing enough to
maintain, to keep China following the rules all of the other
IMF nations are following? Mr. Billingslea?
Mr. Billingslea. I would have defer to my colleagues, sir.
I actually haven't had a chance to read your bill, but I would
be happy to take a look at it.
Mr. Meuser. Please, Mr. Faulkender, I would appreciate it.
Mr. Faulkender. I would reiterate something that was said
earlier, which is that the Biden Administration should yet
again label China as a currency manipulator and once again take
steps to mitigate some of those impacts, some of the things
that we did during the Trump Administration in our trade
administrations to punish them for not only the intellectual
property theft and the forced technology transfers, but also
their currency manipulation. And I think we need to take a much
harder line on reining in some of the manipulation they are
doing.
I don't know whether the IMF is the best way to do it
versus doing it through bilateral activities in multilateral
sanctions, but certainly, there needs to be at least a
relabeling of them as a currency manipulator.
Mr. Meuser. That is one of many actions that probably need
to be taken.
Mr. Faulkender, my colleague, French Hill, introduced the
21st Century Dollar Act. Could you speak to how requiring the
Treasury to develop a real strategy to strengthen the dollar
would help set a clear path for Congress, moving forward?
Mr. Faulkender. Absolutely. As I mentioned in my opening
remarks, the Treasury Secretary, more than anyone, has a
responsibility for ensuring that the dollar maintains its
status as the world's reserve currency. So, Treasury should be
at the forefront of the intersection of the three things that
Congressman Hill's bill speaks to, which are upgrades to the
payment system, fiscal responsibility, and appropriate use of
sanctions.
I think the Treasury needs to take a much greater role as
the steward of American debt to help guide us towards a path
towards fiscal responsibility, but we also need to make sure
that we create a regulatory sandbox of where financial
innovation and technology investments can take place, but find
the balance between speeding payment implementation with the
national security anti-money laundering statutes that we have.
Mr. Meuser. Okay. I have limited time here.
Mr. Billingslea, you mentioned how the dollar is not under
short-term threat but is under long-term threat. So as a
follow-up to this hearing, maybe you could send me something on
what you think should be done, what Congress can do over the
longer term. I yield back, Mr. Chairman.
Chairman Luetkemeyer. The gentleman's time has expired. The
gentleman from Illinois, Dr. Foster, is recognized for 5
minutes.
Mr. Foster. Thank you. Many of the witnesses here have
emphasized the advantages that the American consumer gets from
having a strong U.S. dollar. And over the last 40 years,
without exception, the U.S. dollar has strengthened under
Democratic Administrations and weakened under Republican
Administrations.
This is the data here, which is a pretty impressive plot.
And I will just read you the actual number--the United States
dollar weakened by 2.2 percent under President Reagan, and
another 1 percent under President Bush.
It then strengthened by 18 percent under President Clinton
and weakened by 24 percent under President George W. Bush. It
then strengthened by 13 percent under President Obama, and
weakened by 10 percent under President Trump. And the last time
I made this plot, it would have been up about 12 percent under
President Biden. So, this is a pretty impressive correlation.
I was wondering what the witnesses' thoughts are on what is
driving them? Is it simply the fact that the international
community has a lot more confidence in the U.S. economy when
Democrats are running it? Is there a pattern that we see here
of Republicans getting the keys to the car, sending it into the
ditch, and then Democrats have to go dig it out and get it
moving again? What are the things that are responsible for that
really impressive correlation? Any thoughts on that? I will
just go left to right.
Mr. Goodspeed. I think that there are many factors that
influence foreign exchange rate movements that don't boil down
to political cyclical factors, but rather asynchronous,
monetary policy tightening.
In recent years, in 2018-2019, the Federal Reserve was
engaged in quantitative tightening and was raising interest
rates, while Europe, Japan, and the United Kingdom were
continuing quantitative easing and low----
Mr. Foster. So, you would argue that it was just an
accident, that without exception, it is always with every
Democrat?
Mr. Goodspeed. It is also a function of budget deficit.
Typically, if we are having to borrow more, that means yields
on government debt here are going to be higher. That is going
to----
Mr. Foster. Okay. So Republican tax cuts, for example,
would be one of the things that would weaken the dollar or
actually maybe----
Mr. Goodspeed. Insofar as they contributed to larger
deficits, that would actually increase the dollar. Because
deficits can----
Mr. Foster. If we can go down the line, any other thoughts
on what the reason for this might be?
Mr. Faulkender. I have not yet studied the data. I am happy
to respond for the record and look into the timing of when it
took place and try to factor out what were the policy decisions
versus what were the other factors, but I would be hesitant to
speak to six data points and try to claim, on the fly, a
causation.
Mr. Foster. Okay. Yes, so if you can all follow up for the
record on that. I think it is a pretty powerful correlation,
and we have to understand it. And also, as someone who started
a manufacturing business that exports a good fraction of what
we manufacture, this is a double-edged sword when people
complain about currency manipulation, which is artificially
depressing the value of your currency.
So, it is not a clean win. Some business sectors win and
some lose when you have a strong or weak dollar. But it is my
feeling that as much as anything, it is a statement about the
confidence that the rest of the world has in the way Democratic
Administrations take their responsibility seriously.
Dr. Goodspeed, thank you for your service on the Council of
Economic Advisers for the last President. But last month your
former boss, President Trump, urged Republicans to do a default
as part of their budget negotiating tactics. Is this a policy
that the Trump White House Council of Economic Advisors
considered or endorsed during the times of Republican control?
Mr. Goodspeed. If I recall from the town hall, I don't
think he urged them to default. And to answer your question,
no, it was not something we considered or recommended in the
Council of Economic Advisers.
Mr. Foster. Okay. Let's see, previously, President Trump
had suggested that the entire national debt could simply be
retired by a one-time wealth assessment on multimillionaires
and billionaires. First off, is this even feasible in the sense
that is there enough money in the top fraction of a percent to
completely retire the national debt?
Mr. Goodspeed. Not to my knowledge.
Mr. Foster. Some of you have these numbers. I think it is
pretty clear there is. It may or may not be a good idea, but
roughly, the majority of wealth is held by people with net
worth over $10 million, which is roughly the top 10 percent, I
believe.
Mr. Faulkender. If you look at the paper wealth, the wealth
on paper of the U.S. economy anyway, market capitalization is
about $80 trillion, which, as you said, is in excess of $30
trillion. But understand that operationally, you would then
have to liquidate simultaneously $30 trillion worth of
financial assets. And when you did so, the market impact is
going to crush the economy and you would not help----
Mr. Foster. Sure. I don't think it is a serious short-term
solution.
Mr. Faulkender. No, it is not feasible to do so.
Mr. Foster. But it would be something you would do over
time. Thank you. I yield back. I look forward to responses for
the record on the----
Chairman Luetkemeyer. The gentleman's time has expired. We
will go to the gentleman from Georgia, Mr. Loudermilk, for 5
minutes.
Mr. Loudermilk. Thank you, Mr. Chairman. And thank you all
for being here and sharing your time and knowledge with us.
Mr. Billingslea, in your response to Chairman Luetkemeyer's
question earlier in the hearing, you expressed concern with the
convertible gold-backed Chinese yuan. I wanted to follow up and
ask if you would elaborate further on whether a gold-backed
yuan would possess more credible threat to the dollar than the
BRICS' common currency?
Mr. Billingslea. Thank you, sir. Basically, what I mean by
that, is they have not done that. But the world wants
relatively safe, stable investments. And that is what the
dollar represents, but that is also what gold represents. The
yuan does not currently represent that.
Mr. Loudermilk. Okay. Thank you for that. What about the
risk of long-term bilateral trade agreements between China and
emerging countries? Does the idea that China would use
multilateral international agreements like BRICS' common
currency conflict with what we know about their preference for
deliberate piecemeal strategies.
Mr. Billingslea. Would you like me to respond to that?
Mr. Loudermilk. Yes, yes, I'm sorry.
Mr. Billingslea. Sure. The BRICS are countries--India being
an exception in that--that are autocratic or otherwise have
very hostile opinions of the United States, especially Russia
and China. So, I think we need to understand that they are
working at cross purposes with us on a full range of issues.
What we need to be very, very careful on, and where we, I
think, have perhaps taken a major step backwards is allowing
China to insert into the Persian Gulf and what they are doing
with the Saudis, in particular. They want guaranteed access to
Saudi oil in the event of a crisis. And that is what they are
up to in brokering those relationships.
Mr. Loudermilk. Okay. I appreciate that. I think that China
would want significant control over common currencies, and we
have to be very vigilant.
Another question, Mr. Billingslea, how have BRICS and
BRICS-aligned counties responded to the de-SWIFTing of Russia
following the Russian invasion of Ukraine?
Mr. Billingslea. They don't like it, because they can see
it being done to their banks in a crisis, but they don't
currently have much of an alternative. Because of the dominant
role that the dollar plays, whether it is 200 percent or 100
percent, it is still the dominant trading currency. SWIFT is,
for the time being, the only game in town.
Mr. Loudermilk. Okay. I appreciate that. What risk does the
excessive use of de-SWIFTing as a sanctions alternative pose to
U.S. dominance in the global financial system? Anybody can
answer that.
Mr. McDowell. I think, again, the demonstration of U.S.
control over the actual flow of dollars, of communication,
absolutely provides information to adversaries to prepare for
events where they may face similar circumstances.
And I think what we are seeing is China, Russia, and other
countries trying to create alternative payment networks. Russia
has its own SPFS payment messaging system. It is quite small.
It was launched in 2014, coincidentally, not coincidentally,
after the initial round of sanctions starting in Russia.
In terms of CIPS, China's cross-payments network, Belarus
joined and announced it was having banks join immediately
following the 2022 sanctions.
So, what I am saying is there is a pattern between when the
United States mobiles control over the pipes and the messaging
of cross-border statements, and adversaries looking for
alternatives. It doesn't mean they are using them, but they are
getting plugged into the system as at least sort of a rainy-day
option in the event of a future target.
Mr. Loudermilk. Thank you, Mr. McDowell. While I have you,
what standards of scrutiny would you recommend Congress or the
President consider before leveling sanctions on a country like
China?
Mr. McDowell. I think with China, again, I look at China
not just as a typical country, because I think they are an
alternative service provider. Most countries fall into
alternative service users. They are looking for an alternative
to the dollar.
China, and you could perhaps put Europe in this as well,
are the only two sort of economic blocks capable, I think, of
constructing an attractive enough cross-border statements
network that could attract those alternative service users that
are looking for that network.
And that is why I think, again, with China there should be
a higher bar of scrutiny. It doesn't mean sanctions would never
be appropriate against China. We can talk about circumstances
where they would be very appropriate.
But I think for smaller bites at the apple, it may not be
worth the risk of sort of spurring China to move forward and
build that alternative network, if that makes sense.
Mr. Loudermilk. Yes. Thank you very much. And, Mr.
Chairman, I yield back.
Chairman Luetkemeyer. The gentleman yields back. The
gentleman from California, Mr. Vargas, is now recognized for 5
minutes.
Mr. Vargas. Thank you very much, Mr. Chairman. Again, I
thank you and the ranking member for holding this hearing. I
also want to thank the witnesses. I, too, think that this has
been an excellent hearing.
Dr. Faulkender, you have mentioned the interest rate in the
United States. Has the inflation rate been higher or lower in
the U.K. and the E.U than in the United States?
Mr. Faulkender. Inflation----
Mr. Vargas. Has it been higher or lower?
Mr. Faulkender. Inflation immediately following the
pandemic was originally higher in the United States, and then
ultimately became higher in Europe. But it started here and was
higher here first.
Mr. Vargas. So it started higher here, then it was higher
in Europe. Is it higher in Europe now, or is it higher here?
Mr. Faulkender. It is currently higher in Europe.
Mr. Vargas. How long has it been higher in Europe?
Mr. Faulkender. We peaked at 9 percent in early 2022. They
peaked a little higher than that, later than that. So, it has
been about a year, if I recall correctly.
Mr. Vargas. I think it has been longer that they have been
higher than us.
Mr. Faulkender. Yes.
Mr. Vargas. If you go back and look, because I know it has
been more than a year.
Mr. Faulkender. It was right around the Russian invasion of
Ukraine in February, so, I guess, a year and 4 months.
Mr. Vargas. It is interesting because you keep blaming the
Biden Administration tangentially for inflation. You don't
mention that this is a worldwide inflation problem because of
COVID and also because of, obviously, the war in Ukraine. You
keep saying it is because of the spending of the United States.
Well, the spending of the United States is not causing
inflation in Europe. But anyway, I will move on to my next
question.
The interesting thing is you all talk just about cuts and
not that we are spending too much, but not about money, not
about bringing more money into the system, taxes, in
particular. What were the taxes under President Eisenhower?
What was the highest marginal tax rate? Does anybody know?
Mr. Goodspeed. I believe before the Kennedy tax cuts, the
top marginal rate peaked in above 90 percent. Although, that
was not a rate that anyone really paid.
Mr. Vargas. Under President Eisenhower, I think it was 91
percent. In fact, interestingly, President Kennedy ran on
lowering taxes. And, in fact, he wasn't able to because he was
murdered before he was able to do that.
It was President Lyndon Johnson who actually brought it
down to 78 percent. But the interesting thing was they really
were worried about the debt. They really didn't want to pay it
back. They didn't want to put it off on future generations.
They didn't want to put it off on the poor.
So, they paid higher taxes. Their effective rate was much
higher than it is today. But, again, they paid their taxes. You
all just look at cuts. You want the cuts on the poorest of
people, but you are not looking at what the wealthy are paying.
And I think that is very important.
I do want to ask another question--I am through with those
questions--about crypto currency. It hasn't been brought up
much today. What is the issue with crypto currency? Is that a
danger to the dollar? Some of us know, obviously, it is very
small at the moment, but it could increase to be a real
problem. Why don't we start with you, Dr. Goodspeed?
Mr. Goodspeed. Sure. First of all. I would say the 2017 tax
law was a lesson in terms of lowering marginal rates and
broadening the base, and the way we broaden the base is by
limiting the State and local tax deduction and the mortgage
interest deduction, which are two deductions that massively
favor the highest-income earners in the United States.
In terms of crypto currency, as of yet, I don't see crypto
currency being a safe liquid asset that would rival other U.S.
dollar-denominated assets in terms of reserve currency and
international currency appeal.
Mr. Vargas. Dr. Faulkender?
Mr. Faulkender. On taxes, I would just merely mention----
Mr. Vargas. Not taxes, we are on crypto currency----
Mr. Faulkender. ----the percentage of GDP that is captured
in the form of taxes is the third-highest----
Mr. Vargas. I am going to move on and reclaim my time. If
you are not going to answer the question----
Mr. Faulkender. With crypto currency----
Mr. Vargas. ----no, I am going to move on, thank you.
Mr. Faulkender. Crypto currency, sir.
Chairman Luetkemeyer. The gentleman will either ask a
question or allow your----
Mr. Vargas. I asked a question, and he answered a different
question.
Chairman Luetkemeyer. The gentleman will either reclaim
your time and go to another witness, or ask a question.
Mr. Vargas. My time is continuing to run here, so I am
going to have to----
Chairman Luetkemeyer. You are going to continue to talk
about it. You are recognized for the balance of your time to
ask a question of the witnesses.
Mr. Vargas. He was answering a question I already asked.
Chairman Luetkemeyer. And you reclaimed your time and went
back to go to another witness.
Mr. Vargas. In fact, my time is almost over now since----
Chairman Luetkemeyer. I will give you another 30 seconds.
Mr. Vargas. No, that is okay. When I asked the question,
they answered the question, and I didn't want them to go back
to the question.
Chairman Luetkemeyer. Reclaim your time.
Mr. Vargas. No, go ahead, but I am going to yield back my
time. I asked my questions.
Chairman Luetkemeyer. The gentleman yields back. The
gentlelady from California, Mrs. Kim, is recognized for 5
minutes.
Mrs. Kim. Thank you, Chairman Luetkemeyer, and Ranking
Member Beatty, for holding this hearing. It is no secret that
the CCP, under the authoritarian regime of President Xi
Jinping, wants to displace the United States as the top economy
in the world and counter the American Dream with the CCP's
version of the China dream at the global stage.
The CCP is strategically undermining U.S. interests at
every turn, as proven by their theft of valuable intellectual
property and agreements with Russia to circumvent economic
sanctions triggered by the invasion of Ukraine.
I am going to direct this question to Mr. McDowell. The
Russian invasion of Ukraine has been ongoing for over 15
months, so what lessons should the United States Government
take from how we utilize sanctions when assessing the
possibility of a similar impending attack by the Chinese
towards Taiwan?
Mr. McDowell. Yes, thank you for that question,
Congresswoman. I think the lessons we can take from the
sanctions against Russia, I would say before the war and after,
again, are that they provoke our adversaries to move into
alternative currencies. In fact, they sort of require it,
because targets cannot use the dollar system, so they are
forced to move into other currencies.
We have seen, again, leading up to the war, Russia settling
more trade with China in euros, settling more trade with China
in yuan. We have seen that increase with the focus on the yuan,
and then rubles after the invasion and the new rounds of
sanctions.
And in one sense, that is a sign that sanctions are
working. Because if sanctions are working, countries will have
to move their activity away from the dollar. But it is also a
sign that sanctions do not stop countries like Russia or China
from participating in the world economy. There are limitations
to how effective they can be.
And again, I think the bigger lesson here is in thinking
about how to use sanctions in a way that doesn't provoke
additional sort of infrastructure building that will weaken the
effectiveness of those in the future.
Mrs. Kim. Thank you.
Mr. Billingslea. Congresswoman, may I offer three or four
specifc things I think we need to learn from what did and
didn't work? The first lesson is you can't make vague
unspecified threats in the run-up to hostilities. You have to
begin imposing consequences before the assault begins.
Lesson number two, you cannot piecemeal sanctions on banks
when it comes to state-controlled autocratic systems because
they simply use the non-sanctioned banks to get around it.
Lesson number three, you have to go after the thing that
they export which is giving them the hard currency reserves to
keep the war effort going. And we have not done that with
regard to Russian oil. So those, I think, are three major
deficiencies that we need to fix.
To the chairman's point earlier, I served as an Acting
Assistant Secretary of Defense, and Deputy Under Secretary of
the Navy, as well as Assistant Secretary of the Treasury. And I
can tell you the Treasury does not sufficiently plan in advance
for these kinds of consequences. We need to urge Treasury to
come up with a serious game plan to go after the Chinese if we
believe an invasion of Taiwan in imminent.
Mrs. Kim. Thank you. Thank you so much for both of your
perspectives on that and the lessons that we can take from it.
But we should all be troubled by the increase of central bank
swap line agreements deployed by the People's Bank of China.
According to a 2021 People's Bank of China (PBOC) report, it
has swapped facilities with 40 countries with a combined
capacity of almost 4 trillion yen, or about $570 billion.
And just a few days ago, Argentina, a country facing a deep
currency devaluation and 109-percent annual inflation,
announced a deal to renew its currency swap line with China and
double the amount it can assess to nearly $10 billion. The PBOC
justifies the swap lines as a way to force countries to utilize
the yen as a method of exchange.
I want to ask you, Mr. Billingslea, instead of liberalizing
its capital account and allowing the yen to be fully
convertible into the currency exchange markets, the CCP has
opted its increase into its bilateral swap line agreements to
further internationalize its currency.
Is there anything that the United States can do to slow
down or reduce adaptation of the PBOC's current swap lines?
Mr. Billingslea. Thank you, Congresswoman. I am not an
expert on credit swaps, but we do have some experts here, so I
will defer to my colleagues.
Mr. McDowell. Quickly, my only reaction here is that the
swap lines were initially pitched as a way to promote the use
of RMD and trade settlement. There are some studies that show
there is a slight increase in trade settlement in yuan when a
country has a swap line, but they are not transformational.
Now, it seems like in the case of Argentina, they are being
used more as a way to help these countries that have found
themselves heavily indebted to Chinese state-owned banks and
the Chinese government to effectively get access to RMB to save
their dollar reserves. To be honest, the use of the swap lines
from Argentina is actually a stronger symbol of the dollar's
strength than the reliance of countries like Argentina on the
dollar as a sign of the line strength.
Chairman Luetkemeyer. The gentlelady's time has expired.
With that, we go to the gentleman from Texas, Mr. Green, for 5
minutes.
Mr. Green. Thank you, Mr. Chairman. I thank the ranking
member as well. And I thank the witnesses. I concur with those
who have indicated that your testimony has been stellar. I
greatly appreciate what you have said, while I may not agree
with all of what has been said.
It seems that in life, I have been relegated the duty to
ask the most-sensitive questions. So, please forgive me for
asking what will appear to be a super-sensitive question. But
there's a reason for it. And please also carefully consider
your answer, because you will be photographed. I have in my
office answers that have been photographed to super-sensitive
questions.
Here is a question: If you consider yourself as someone who
is not a White male, someone other than a White male, raise
your hand, please. If you are something other than a White
male. I believe there has to be at least one hand. Thank you,
Doctor, for raising your hand.
Let the record reflect that but one hand is up, and that is
the hand of Dr. Carla--is it, ``Norrlof?''
Ms. Norrlof. I get all kinds of pronunciations, but it is,
``Norrlof.''
Mr. Green. Thank you very much. I am asking this question
because Democrats can only have one witness, and you are the
Democrats' one witness.
We are witnessing White male privilege. You are the
beneficiaries of it. You didn't create it. You didn't cause it.
Someone on the other side should have said: Guys, listen, these
are all White men. This is super-sensitive. You see, they
become very much touched by this kind of questioning. But it is
because we don't do this, that the privilege continues.
Let me ask all of you, do you know women who could testify
here today? If you do, raise your hand. Reluctantly, okay. Let
the record reflect that all of the witnesses know women who
could testify. Dr. Norrlof, I assume you know a woman who could
testify other than yourself?
Ms. Norrlof. Yes.
Mr. Green. Thank you. So, we have witnesses--women who are
capable, competent, and qualified, who could do this. But the
system continues as it is because there are people who are not
sensitive enough to understand that this depiction of White men
has an impact on society, has an impact on the little girls who
look at this.
I regret to have to do this, and I don't blame any of you,
but it has to be done. There will be a photograph in my office
with but one hand up when I did ask that sensitive question.
Now, let's go on to something more conventional. Do threats
of default have an adverse impact on the dollar as a global
currency of choice? Do threats of default have an impact? If
so, raise your hand. Raise your hand, please. Reluctantly so.
Dr. Norrlof, do you agree? If so, raise your hand.
Ms. Norrlof. I don't agree that threats--I do agree that
defaulting would have adverse consequences.
Mr. Green. But you don't think that saying we should
default would have any impact?
Ms. Norrlof. I think it is mitigated by the dollar safe
haven status.
Mr. Green. The dollar safe haven status? What is that?
Ms. Norrlof. That means that in times of crisis, the dollar
actually increases.
Mr. Green. Let the record reflect that all but Dr. Norrlof
raised their hand indicating that threats of default can have
an adverse impact. I mention this because we have a former
President who regularly indicates that we should just let it
default, which aids and abets those who are in the business of
extorting, by the way. I don't agree with this. I think that
the dollar has supremacy because people know that we won't
default and they believe in it. I yield back.
Chairman Luetkemeyer. The gentleman's time has expired. The
gentleman from Tennessee, Mr. Ogles, is now recognized for 5
minutes.
Mr. Ogles. Thank you, Mr. Chairman. And I want to thank the
panel, again, a very esteemed panel, for their great testimony
today. And, again, I would say of our panels, this has by far
been the one that I have most enjoyed. Although, we have had
some great panels. Don't misread my comments.
But as we talk about the significance of the U.S. dollar,
we have seen countries take actions to start to move away or
perhaps diversify away from the United States economy, for
example, the pact France has made with China and the yuan. And
the Malaysian Prime Minister said there is no reason to
continue to solely rely on the United States.
But yet, the dollar survived the Bretton Woods collapse,
the launch of the European Union, the euro, the financial
crisis. We have discussed the stability and the depth, and it
really did diversify the U.S. economy.
But as we look to continuing to attract and continue to go
really kind of remain the dominant predator in the currency
space, Mr. Goodspeed, what other incentives are there for
countries to continue to ally with the United States, and then,
what do we need to do to continue to further those incentives?
Mr. Goodspeed. I think first and foremost is to maintain a
dynamic, large, growing economy. Because that constitutes a
center of gravity within the global economy that people have to
transact in dollars, they have to invoice in dollars, and the
market for U.S. dollar-denominated debt remains, to say it
again, the deepest and most-liquid in the world.
I would also say we have had some discussion of innovation
in crypto currency, in payment systems, and we want to make
sure that we have a regulatory framework in place that allows
for that innovation to occur within the United States versus
without. And I would also add that low and stable inflation is
important for stability in the dollar, and that is why it is
essential that we get inflation back to target.
Mr. Ogles. You mentioned inflation, and if you look at our
current spending levels, that has obviously created inflation
within the United States. It has also created inflation abroad,
as was mischaracterized previously. So as we look at the
current Administration, and we look at our debt levels, we are
currently at roughly $32 trillion. And we just added $4
trillion to $5 trillion over the next 2 years. What impact do
you see on the horizon if we don't get spending under control?
It should also be noted that we don't have a revenue
problem. Historically, revenues have only exceeded current
levels to GDP a few times in recent history. So, spending is
the issue, not revenue.
Mr. Goodspeed. I will say it will over time, as deficits
mount and as the debt burden rises above 100 percent--I think
the Congressional Budget Office has it ending the budget window
at about 119 percent of our economy. Then, we will probably
observe an acceleration of diversification away from the dollar
as a hedge.
Again, I don't see another single currency displacing the
dollar as the major international currency or as the major
reserve currency, but continued diversification.
Mr. Ogles. Mr. Billingslea, why would banning of the Allied
Paid, the cuwala, and WeChat be vital to national security?
Mr. Billingslea. I'm sorry. I didn't catch the first part
of that question.
Mr. Ogles. Why was banning some of the alternative payment
systems, CCP payment systems, important and imperative for
national security?
Mr. Billingslea. I think the CCP had a number of reasons
for going after some of these. One, I think had to do with some
concern, some legitimate concern that the People's Bank of
China had, that they were providing credit in an unregulated
fashion.
Some of it is a control mechanism, because Chairman Xi
wants absolute and total control over the Chinese oligarchs as
they are. So, I think those are actions that motivated him. And
I defer to my colleagues on the effect for the U.S. economy.
Mr. Ogles. Any further comments?
Okay. As we move forward--and we are about out of time--and
continue to see escalation from the CCP against Taiwan, what
impact would that have on the global economy--not the U.S.
dollar, but the economy? Anyone?
Mr. Faulkender. It would be catastrophic.
Mr. Olges. Mr. Chairman, I yield back.
Chairman Luetkemeyer. The gentleman yields back. The
gentleman from Iowa, Mr. Nunn, is recognized for 5 minutes.
Mr. Nunn. Thank you, Mr. Chairman, and thank you to the
ranking member for holding this hearing. I want to compliment
you all for being here, based on both merit but also a long
lineage of successful insight into the strength of the U.S.
dollar on the global economy.
Now, it is my belief that we are not under immediate threat
of the U.S. dollar being replaced as the world's reserve
currency. However, there are developments here that I applaud
this Congress for taking a leadership role in helping to drive.
So, Mr. Billingslea, I am going to begin with you, both in
your defense service as well as at Treasury, in February of
this year, the Office of Foreign Assets Control (OFAC) issued
action against several Russian individuals and proxies accused
of skirting with the most-aggressive, or at least so-called
aggressive sanction regimes in U.S. history.
Can you please talk with us about how Russian individuals
and defense firms like Rostec have been able to facilitate arms
sales under this extreme sanction regime leveled by the
President?
Mr. Billingslea. Congressman, some of the sanctions that
this Administration has imposed have been effective. In
particular, some of the actions taken against Russian
oligarchs. Likewise, I think it is commendable that they have
rallied the U.K., and the E.U., and even some Asian allies to
further impose sanctions.
But overall, the sanctions imposed by the Biden
Administration have not, in fact, been the strongest ever, as
they have touted. They are riddles with loopholes and
exceptions. We are in the process of allowing the Iranians to
continue to cut billion-dollar deals with the organization
which also is expanding the Russian nuclear weapon stockpile,
for instance.
So, it has not been comprehensive. We need to go after the
full set of banks across-the-board, and we need to go after
Russian oil exports. Otherwise, it prolongs the war.
Mr. Nunn. I fully agree with you on that. I do. I
compliment the fact that we have been able to work with our
allies on this. The challenge, though, remains that there is a
shadow network in which a lot of this is skirting U.S.
sanctions, and we are losing the ability to control that.
Specifically, let's talk about one of these, the Minkoff
network. It is beginning to chip away at U.S. foreign policy
and the legitimacy of the U.S. dollar just the way you
highlight it. Tell me how one of these networks operates
outside the U.S. control system?
Mr. Billingslea. They do it in a lot of ways. Russia also
partners with Hezbollah, for instance, inserting sanctions on
both sides of that equation. And they use jurisdictions which
don't have really truly effective anti-money laundering
regulations. And here I am specifically talking about the
Emirates, I am talking about Turkey, and we also see a lot
interest in Venezuelan gold. The largest gold reserves in the
world are in Venezuela.
And as I said earlier in my testimony, people love gold
because it is anonymous. It is hard to trace. And you see those
gold flows going up into Turkey, over to the Emirates, and then
onward either into China, India, or Russia itself.
Mr. Nunn. So, what we just highlighted here is this idea
that we are weaponizing a network.
Dr. McDowell, I want to speak to one of these points you
brought up during your opening statement. When people talk
about weaponizing currency, I would offer that it is a mistake
to assume that currency is the weapon beyond the monetary
means.
Really what we are talking about here is that currency is
just a payload. The real weapon is the underlying rails, the
networks of these currencies and their corresponding payments
and economic activity are transmitted on. Countries, companies,
consortia, they control the rail and ultimately wield this as a
real economic power.
I would like to highlight here for the record the
blockchain payment network developed by Rastian Russia
hospitality. CIPS is a payment clearing settlement out of the
Communist Chinese currency. In 2022 alone, we saw over $14
trillion in transactions through this network, in over 109
countries.
So, the question I have here is, can you elaborate on how
China's development of the Cross-Border Interbank Payment
System (CIPS) has facilitated an alternative payment network
for clearing these settlements outside U.S. networks?
Mr. McDowell. Sure. Essentially, what we are talking about
here is a Chinese replication of the Clearing House Interbank
Payments System (CHIPS) in the United States. And that is a
system of correspondent banking accounts between hubs. These
are big global banks to which thousands of smaller banks are
connected and have shared accounts with, so if you think about
when you move around the country in a free airplane, but you
are connecting in a major hub, all of the smaller airports is
sort of what we are talking about.
And CIPS has something like 70 direct participants--these
are all Chinese state-owned banks that are at the core of the
CIPS network. And they are connected to now around 1,400
indirect participants. Some of these are in China, but they are
in over a hundred countries now. That doesn't mean that all of
those banks are participating in it, but again, they are hooked
up to the plumbing, so, essentially, it is a----
Mr. Nunn. Dr. McDowell, I agree, this is fantastic. I want
to highlight this point between CIPS and cell, the Russian
version of this, are they effectively isolating the United
States out of this, and is it a threat to the United States?
Mr. McDowell. I don't think it is a threat to the U.S.,
again, I think it is more a tool for China to improve its
resiliency. It wants to have the plumbing in place so that if
it gets caught in a Russia-like scenario, it already has that
network, and if it needs to lean more heavily on it, it is
already using it, but it is marginal right now.
Mr. Nunn. Thank you, Mr. Chairman. I yield back.
Chairman Luetkemeyer. The gentleman's time has expired. We
will now go to the gentlewoman from Texas, Ms. De La Cruz, for
5 minutes.
Ms. De La Cruz. Thank you, Chairman Luetkemeyer, for
holding this hearing today. Now, this hearing comes at a
critical time when some academics and naysayers are spreading
theories that dedollarization has begun, and that the beginning
of the end has arrived for the dollar's dominant role as a
global reserve currency.
I want to start off with some basic observations and
questions for our witnesses. But before I do that, Mr.
Chairman, I would like to submit for the record a recent report
from Moody's Investors Service dated May 25, 2023, ``Dollar
dominance will persist for decades despite new challenges.''
Chairman Luetkemeyer. Without objection, it is so ordered.
Ms. De La Cruz. Thank you, Mr. Chairman. And as our
witnesses all know, the U.S. dollar enjoys a reserve currency
advantage over competing foreign currencies, which provides
benefits to the United States in several ways, including in
trade, finance, and in financing our unsustainable debt.
In this report, the Moody's report, it concludes that
despite the likely emergence of a multipolar currency system
over the coming decades, the global financial system will still
be led by the greenback, because its challengers will struggle
to replicate its scale, safety, and convertibility in full.
Mr. Faulkender, would you agree with this assessment?
Mr. Faulkender. I would. There is no other viable
competitor out there immediately that has the depth of market,
the international trade, and that other countries want claims
against our future economy the way that our competitors would
offer.
Ms. De La Cruz. Thank you. Is there a genuine risk that the
dollar could lose its reserve currency status in the short- to
medium-term?
Mr. Faulkender. Not in the short- to medium-timeframe, but
that doesn't mean we don't need the long term to address some
of these challenges.
Ms. De La Cruz. And, Dr. Goodspeed, would you agree with
Mr. Faulkender's remarks, and could you expand on them?
Mr. Goodspeed. Sure. And I would just like to note that
there are a couple of figures floating around in terms of how
big a share foreign exchange transactions are accounted for by
the dollar--45 percent or 90 percent. It depends on what you
are looking at. I tend to think that the ranking member's
number of 90 percent is more informative because it tells us
what share of transactions the dollar is involved with on
either side.
I would echo Mr. Faulkender's remarks in terms of in the
near-term, it is very hard to see a displacement of the U.S.
dollar. You can't replace something with nothing, or you can't
replace a reserve currency with the attributes of the U.S.
dollar, with a reserve currency like the euro or RMB that
doesn't share those attributes.
Over the long-term, we do need to address the risk that
investors no longer view the U.S. dollar and U.S. dollar-
denominated assets as the safest and most-liquid in the world.
Ms. De La Cruz. Thank you, both. Switching gears, I would
like to move to China and the yuan.
Mr. Billingslea, during your time at the Treasury
Department, you dealt extensively with Middle Eastern
countries, particularly Saudi Arabia. What do you make of Saudi
Arabia's off-again, on-again flirtations with Chinese officials
as reported by The Wall Street Journal last year regarding
dominating oil contracts in the yuan?
Mr. Billingslea. I think it is a huge issue, but it is a
huge issue because it actually reflects a massive
miscalculation on the part of the Biden Administration when it
comes to Saudis. You can't demonize the royal family and then
go crawling back to them and asking them to increase oil
production, and then demonize them again and ignore them.
Of course, you are going to see the Chinese step into the
gap. And that is precisely what they have done in brokering
normalization in the diplomatic guise between the Saudis and
the Iranians.
The Chinese have one ambition here, which is to ensure that
in the midst of a Taiwan invasion, their access to oil from
Saudi Arabia will be unimpeded.
Ms. De La Cruz. Thank you. With that, I yield back.
Chairman Luetkemeyer. The gentlelady yields back. Our
Members have all asked their questions. And with that, I would
like to thank our witnesses for their testimony today. You all
were fabulous. Thank you so much for your time and your
attention and your ideas and the discussions that we have had
with you.
The Chair notes that some Members may have additional
questions for this panel, which they may wish to submit in
writing. Without objection, the hearing record will remain open
for 5 legislative days for Members to submit written questions
to these witnesses and to place their responses in the record.
Also, without objection, Members will have 5 legislative days
to submit extraneous materials to the Chair for inclusion in
the record.
And with that, this hearing is adjourned.
[Whereupon, at 11:55 a.m., the hearing was adjourned.]
A P P E N D I X
June 7, 2023
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
[all]