Miran suggested that the US’s stablecoin leadership could unleash a second so-called ‘savings glut’ inflow into the US and lift the US dollar in the process, but is this correct?

Miran has a vested interest in espousing the virtues of stablecoins as he is essentially still a member of the Administration. His time as Ged Governor will likely be brief and then he will go back to being the head of the White House’s National Economic Council. The Administration has put all of its chips on stablecoin while the vast majority of others are adopting Central Bank Digital Currencies (CDBC). The two are very similar except that stablecoins are essentially private ‘money’ backed by high quality public assets while CBDC’s are pure public ‘money’.

With just about all stablecoins denominated in US dollars the Administration is betting that the demand for US dollar-based stablecoins outside of the US will generate significant demand for US assets and maintain global dollar dominance. Miran suggested this week that stablecoins could prove another so-called ‘savings glut’ for the US; something that could not just cement dollar dominance but lift the value of the currency.

The term ‘savings glut’ is named after former Fed Chair Ben Bernanke who argued in 2005 that there had been strong capital inflows into the US over the previous decade-or-so, such that the deterioration of the current account over this time was less a function of pressure from the trade component but from the financial account.

Previous Fed Chair Greenspan had talked about a conundrum while he was in office because rate hikes from the Fed did not lift treasury yields in the usual way. Bernanke’s explanation was that the global savings glut saw hefty foreign inflows into US treasuries that prevented any significant rise in yields. Should a new savings glut be in train now, created by the supercharged growth of stablecoins, the implications could also be lower US yields a stronger US dollar and a wider current account deficit – at least according to Miran.

However, Steven Barrow, Head of Standard Bank G10 Strategy, said there are reasons to be cautious about this. For a start, if the consequence of a new savings glut is a worse current account position for the US it could easily provoke President Trump to talk down the US dollar, or even act to create dollar weakness through FX intervention or some other means. A second reason for caution is that policymakers in other countries might seek to restrict or even prohibit domestic purchases of dollar-based stablecoins. They might do so over concern that widespread dollar-based stablecoin use will undermine domestic monetary policy.

Another note of caution is that there is some concern that stablecoins might not prove to be riskless. For while stablecoins do not pay interest and are meant to be backed by high quality assets, such as treasury bills, there is thought to be some troubling wiggle room on both sides. Stablecoin issuers may offer other incentives to holders that could potentially undermine their financial robustness. At the same time, even limited scope to back stablecoins with assets that are not deemed to be 100% ‘safe’ could create a risk of runs on the stablecoins in the same sort of way that we have seen runs on US money market funds in the past.

One final point here is that non-US based holders of US dollar-linked stablecoins are not just betting on the financial robustness of the company issuing the stablecoins, but also the desirability of the underlying asset. “The link between a stablecoin and the assets that back it, such as treasury bills and US dollar cash might be solid, but if foreign investors fear that these underlying assets themselves are ‘poor’ in some way, we could find that stablecoin issuance proves a bit of a dud. Clearly only time will tell if US stablecoin dominance produces a new source of dollar strength, but we have our doubts”, said Steven Barrow.