The Dollar Still Has Its Mojo. X, Not So Much

Paul Krugman

“There is a great deal of ruin in a network,” Adam Smith once observed. OK, it was actually “nation,” not “network”; he was reassuring a compatriot that a British defeat at the hands of American revolutionaries wouldn’t destroy his country’s future. But both his original version and my update seem relevant these days — partly because Smith carefully didn’t say unlimited ruin.

And we may be watching in real time what happens when the level of ruin in a network — specifically X, previously Twitter — reaches the tipping point at which the edifice implodes. By a network I mean a social arrangement held together by what economists call network externalities — situations in which people find it convenient to engage in some activity because many other people are doing the same thing. A commonplace example is the long-running dominance of Excel spreadsheets; I don’t know anyone who loves Excel, but businesses keep using it largely because everyone else is using it.

A less mundane example — indeed, one wrapped in a lot of mystical thinking — is the international role of the dollar. I’ve spent more or less my entire professional career being bombarded with dire warnings that the dollar’s global status was at imminent risk of collapse, and with it American power. Even if such a collapse were likely, it would matter much less than people think; America certainly derives some advantages from what was once called the “exorbitant privilege” of issuing the world’s dominant currency, but they’re not that big.

In any case, predictions of the dollar’s demise generally fail to appreciate the extent to which the dollar’s role is a result of network externalities that no potential rival offers. International banks make payments in dollars because dollar markets are huge, largely because the dollar is used so widely. Importers and exporters write contracts in dollars because everyone else does and hold dollar balances to make those payments. And so on.

Forty years ago, I wrote a paper about how these network effects would make it difficult to displace the dollar despite widespread predictions of its demise at the time. In the intervening years, every once in a while there’s a scare story — Saudi Arabia may accept oil payments in China’s currency, the renminbi — that gets interpreted by some as the beginning of the end for the dollar. But all such tales are marginal compared with the dollar’s huge advantage.

Still, it wouldn’t be impossible for the dollar to lose its mojo if the United States government behaved badly enough. Imagine America suffering from extreme economic mismanagement leading to very high inflation. Imagine a major erosion of the rule of law in our country, with politically connected businesses gaining an upper hand across industries.

If either or both of these things were to happen, it’s not hard to see how the dollar could lose its special status — yes, the dollar’s strength lies in its ubiquity, but also in the perceived stability of the nation that issues it. And these scenarios sound a lot more possible now than they did a few years ago. But although I expect Donald Trump to take us down the path to crony capitalism, even I don’t think he’s about to destroy the dollar as a brand.

X may be a different story. Pre-Elon Musk, Twitter was the place people in my business had to be. I know different people used it for different purposes — nothing against Katy Perry, but not all of her nearly 106 million followers are on social media platforms for the same reasons I am. What I used Twitter for was to learn from and interact with people possessing real expertise, sometimes in areas I know pretty well, sometimes in areas I don’t, like international relations and climate policy.

I won’t go through the litany of ways the platform has changed for the worse under Musk’s leadership, but from my point of view it has become basically unusable, overrun by bots, trolls, cranks and extremists. But where could you go instead? In the past couple of years, there have been several attempts to promote alternatives to X, but none of them really caught on. To some extent this may have reflected flaws in their designs, but a lot of it was simply lack of critical mass: Not enough of the people you wanted to interact with could be found on the alternative sites.

Then came this year’s presidential election, which seems to have sparked an exodus (“Xodus”?) from Muskland. From my point of view, Bluesky, in particular — a site that functions a lot like pre-Musk Twitter — quite suddenly has reached critical mass, in the sense that most of the people I want to hear from are now posting there. The raw number of users is still far smaller than X’s, but as far as I can tell, Bluesky is now the place to find smart, useful analysis.

And yes, most of the new Bluesky posters I find useful are liberal, but that reflects the modern right’s anti-intellectualism rather than political bias on the part of the site. I have no idea what this means for X’s financials, and I don’t care. What I see is that you can indeed ruin a network if you try hard enough. And it’s starting to look as if Musk has managed to pull it off.