The era of the US dollar's "exorbitant privilege" as the world's primary reserve currency is coming to an end. Then French Finance Minister Valery Giscard d'Estaing coined that phrase in the 1960s, largely out of frustration, bemoaning a United States that drew freely on the rest of the world to support its over-extended standard of living.
For almost 60 years, the world complained but did nothing about it. Those days are over.
Already stressed by the impact of the Covid-19 pandemic, US living standards are about to be squeezed as never before. The seeds of this problem were sown by a profound shortfall in domestic US savings that was glaringly apparent before the pandemic. In the first quarter of this year, net national saving fell to 1.4 per cent of national income - the lowest reading since late 2011.
Lacking in domestic saving and wanting to invest and grow, the US has taken huge advantage of the dollar's role as the world's primary reserve currency and drawn heavily on surplus savings from abroad to square the circle. But not without a price. In order to attract foreign capital, the US has run a deficit in its current account every year since 1982. Covid-19, and the economic crisis it has triggered, is stretching this tension between saving and the current account to the breaking point.
A significant portion of the fiscal support had initially been saved by fear-driven, unemployed US workers. That tends to ameliorate some of the immediate pressures on overall national saving. However, monthly Treasury Department data shows the crisis-related expansion of the federal deficit has far outstripped the fear-driven surge in personal saving, with the April deficit 5.7 times the shortfall in the first quarter, or fully 50 per cent larger than the April increment of personal saving.
In other words, intense downward pressure is now building on already sharply depressed domestic saving. Compared with the situation during the global financial crisis of 2007-2008, when domestic saving was a net negative for the first time on record, a much sharper fall into negative territory is likely, possibly plunging into the unheard zone of minus 5 per cent to minus 10 per cent.
And that is where the dollar will come into play. For now, the greenback is strong, benefiting from typical safe-haven demand long evident during periods of crisis.
Against a broad cross-section of US trading partners, the dollar was up almost 7 per cent over the January to April period in inflation-adjusted, trade-weighted terms.
The key question is what will spark the decline?
Look no further than the Trump administration. Protectionist trade policies, withdrawal from the architectural pillars of globalisation such as the Paris Agreement on climate, Trans-Pacific Partnership, World Health Organisation and traditional Atlantic alliances, gross mismanagement of the Covid-19 response, together with wrenching social turmoil not seen since the late 1960s are all painfully visible manifestations of America's sharply diminished global leadership.
As the economic crisis starts to stabilise, hopefully later this year or early next year, that realisation should hit home just as domestic saving plunges. The dollar could easily test its July 2011 lows, weakening by up to 35 per cent in broad trade-weighted, inflation-adjusted terms.
The coming collapse in the dollar will have three key implications: It will be inflationary - a welcome short-term buffer against deflation but, in conjunction with what is likely to be a weak post-Covid economic recovery, yet another reason to worry about an onset of stagflation - the tough combination of weak economic growth and rising inflation that wreaks havoc on financial markets. Moreover, to the extent that a weaker dollar is symptomatic of an exploding current account deficit, look for a sharp widening of America's trade deficit.
Protectionist pressures on the largest piece of the country's multilateral shortfall with 102 nations - namely the Chinese bilateral imbalance - will backfire and divert trade to other, higher-cost producers, effectively taxing beleaguered American consumers.
Finally, in the face of Washington's poorly timed wish for financial decoupling from China, who will fund the saving deficit of a nation that has finally lost its exorbitant privilege? And what terms - namely interest rates - will that funding now require?
Like Covid-19 and racial turmoil, the fall of the almighty dollar will cast global economic leadership of a saving-short US economy in a very harsh light. Exorbitant privilege needs to be earned, not taken for granted.
• Stephen Roach is faculty member at Yale University and former chairman of Morgan Stanley Asia.