An article from Zero Hedge...
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There are few truisms about the world economy, but for
decades, one has been the role of the United States dollar as the world’s
reserve currency. It’s a core principle of American economic policy. After all,
who wouldn’t want their currency to be the one that foreign banks and
governments want to hold in reserve?
But new research reveals that what was once a privilege
is now a burden, undermining job growth, pumping up budget and trade deficits
and inflating financial bubbles. To get the American economy on track, the
government needs to drop its commitment to maintaining the dollar’s
reserve-currency status.
* I DISAGREE.
* THE AUTHOR SEEMS TO PUT THE CART BEFORE THE HORSE,
INCORRECTLY ARGUING THAT IT IS THE "RESERVE STATUS" OF THE DOLLAR
THAT CAUSES CONGRESS AFTER CONGRESS AND PRESIDENT AFTER PRESIDENT TO ACT IRRESPONSIBLY
AND ABUSE THE "PRIVILEGE." NO. HUMAN NATURE BACKED BY MODERN
PRECEDENT IS BEHIND OUR NATIONAL RECKLESSNESS! TRUE... THE "DOLLAR
WORLD" ALLOWS US TO GET AWAY WITH IT... BUT... ABSENT DOLLAR DOMINATION
WE'D BE GREECE - NOT SWITZERLAND!
(*GUFFAW*)
* I CAN JUST "HEAR" ROLO REACTING AS HE READS
THIS THAT "NO! WE WOULDN'T BE ABLE TO ACT AS WE DO!" TO THIS... I
CALL "BULL$HIT." SELDOM DOES REALITY SWAY POLITICIANS FROM SETTING
THEIR NATIONS ON A COURSE OF "FULL SPEED AHEAD; AIM FOR THE ROCKS!"
THAT'S SIMPLY THE HISTORICAL RECORD.
(*SHRUG*)
* ANYWAY... THE AUTHOR CONTINUES..
The reasons are best articulated by Kenneth Austin, a
Treasury Department economist, in the latest issue of The Journal of Post
Keynesian Economics (needless to say, it’s his opinion, not necessarily the
department’s). On the assumption that you don’t have the journal on your coffee
table, allow me to summarize.
It is widely recognized that various countries, including
China, Singapore and South Korea, suppress the value of their currency relative
to the dollar to boost their exports to the United States and reduce its
exports to them. They buy lots of dollars, which increases the dollar’s value
relative to their own currencies, thus making their exports to us cheaper and
our exports to them more expensive.
* ALL TRUE...
In 2013, America’s trade deficit was about $475 billion.
Its deficit with China alone was $318 billion.
* YEP...
Though Mr. Austin doesn’t say it explicitly, his work
shows that, far from being a victim of managed trade, the United States is a
willing participant through its efforts to keep the dollar as the world’s most
prominent reserve currency.
* ABSOLUTELY! (NO ONE IS ARGUING!)
(*STILL CHUCKLING*)
When a country wants to boost its exports by making them
cheaper using the aforementioned process, its central bank accumulates currency
from countries that issue reserves. To support this process, these countries
suppress their consumption and boost their national savings. Since global
accounts must balance, when “currency accumulators” save more and consume less
than they produce, other countries — “currency issuers,” like the United States
— must save less and consume more than they produce (i.e., run trade deficits).
* SOMETIMES.
(*SHRUG*)
* BUT THE U.S. - WE DELIBERATELY DRIVE DOWN THE DOLLAR.
(AND WE SURE AS HELL DON'T DO SO BY "INCREASING NATIONAL SAVINGS!"
JUST THE OPPOSITE, IN FACT...
(*SMIRK*)
This means that Americans alone do not determine their
rates of savings and consumption.
* YEAH... WE DO. I MEAN I "GET" THE POINT - THE
MACRO POINT - THE AUTHOR IS MAKING... BUT... I REJECT THE INEVITABILITY OF THE
EQUATION. NO... OBVIOUSLY AMERICANS - AS INDIVIDUALS... AS A COLLECTIVE - DO
NOT "ALONE" DETERMINE OUR RATES OF SAVINGS AND CONSUMPTION, BUT I
REJECT THE NOTION THAT WE DON'T HAVE THE UNDERLYING ABILITY TO SIMPLY IGNORE
WHAT WE'RE TOLD... DISREGARD THE "SIGNALS" OF THE FED AND TREASURE
AND EVEN WALL STREET... AND ACT AS RATIONAL LONG-TERM THINKERS.
(*SHRUG*)
Think of an open, global economy as having one huge,
aggregated amount of income that must all be consumed, saved or invested. That
means individual countries must adjust to one another. If trade-surplus
countries suppress their own consumption and use their excess savings to
accumulate dollars, trade-deficit countries must absorb those excess savings to
finance their excess consumption or investment.
* NOT QUITE SURE WHAT THE AUTHOR IS BABBLING ABOUT. TAKE
CHINA FOR EXAMPLE. THEY'VE BEEN TRYING TO MAINTAIN TRADE SURPLUSES
(SUCCESSFULLY - AT LEAST WITH THE U.S.) WHILE ALSO PUSHING FOR RISING DOMESTIC
CONSUMER SPENDING AND DOMESTIC RISING STANDARDS OF LIVING. (NOW IT'S TRUE THEY
HAVEN'T BEEN TOTALLY SUCCESSFUL... BUT THIS WAS THE POLICY.)
Note that as long as the dollar is the reserve currency,
America’s trade deficit can worsen even when we’re not directly in on the
trade. Suppose South Korea runs a surplus with Brazil. By storing its surplus
export revenues in Treasury bonds, South Korea nudges up the relative value of
the dollar against our competitors’ currencies, and our trade deficit
increases, even though the original transaction had nothing to do with the
United States.
* Er... SOMETIMES... AND SOMETIMES NOT.
(*SHRUG*)
* THE TEXTBOOK EQUATION SOUNDS REASONABLE... AND SIMPLE;
THE PROBLEM IS... IN THE REAL WORLD IT HASN'T ALWAYS WORKED THAT WAY. MY
GENERAL POINT: STRONG DOLLAR vs. WEAK DOLLAR IS DETERMINED NOT BY SOME
STRAIGHT-LINE LINEAR EQUATION, BUT BY A NUMBER OF FACTS BOTH CONCRETE AND
PSYCHOLOGICAL.
This isn’t just a matter of one academic writing one
article. Mr. Austin’s analysis builds off work by the economist Michael Pettis
and, notably, by the former Federal Reserve chairman Ben S. Bernanke.
* BUT... BUT... BUT... I THOUGHT WE WERE ALL AGREED - BEN
S. BERNANKE IS A MORON!
(*HUGE FRIGGIN' GRIN*)
A result of this dance, as seen throughout the tepid
recovery from the Great Recession...
* "RECOVERY..." HA! HA! HA! HA! HA! OH...
THAT'S FUNNY...
(*SNORT*)
...is insufficient domestic demand in America’s own labor
market. Mr. Austin argues convincingly that the correct metric for estimating
the cost in jobs is the dollar value of reserve sales to foreign buyers. By his
estimation, that amounted to six million jobs in 2008, and these would tend to
be the sort of high-wage manufacturing jobs that are most vulnerable to changes
in exports.
* Er... BY MY ESTIMATION IT'S FED, TREASURY,
CONGRESSIONAL, PRESIDENTIAL, AND BUREAUCRATIC POLICIES - IDEOLOGY... THE
PURPOSEFUL GROWTH OF THE WELFARE STATE - ETC., ETC., ETC., THAT HAS COST US
JOBS.
(*ANOTHER SMIRK*)
* ASININE TRADE POLICIES... INSANE TAX POLICIES...
COUNTER-PRODUCTIVE REGULATORY POLICIES...
(*SIGH*)
(*ROLLING MY EYES*)
* MUST I GO ON...?
Dethroning “king dollar” would be easier than people
think. America could, for example, enforce rules to prevent other countries
from accumulating too much of our currency.
* Er... WHY WOULD WE NEED "RULES" IN THIS BRAVE
NEW WORLD OF THE U.S. DOLLAR NO LONGER BEING THE WORLD RESERVE CURRENCY?
* WHY WOULD OTHER COUNTRIES WANT TO STOCKPILE A
NON-RESERVE CURRENCY? (AND IF THEY DID... WOULDN'T THEY END UP SPENDING THOSE
ACCUMULATED DOLLARS HERE? AND WOULDN'T THAT BE GOOD?
(*BIT OF A HEADACHE*)
In fact, others do just that precisely to avoid exporting
jobs. The most recent example is Japan’s intervention to hold down the value of
the yen when central banks in Asia and Latin America started buying Japanese
debt.
* AGAIN... IT'S NOT THE RESERVE DOLLAR THAT HAS
DEINDUSTRIALIZED AMERICA; IT'S AMERICAN TAX POLICIES... TRADE POLICIES...
REGULATORY POLICIES... AND SO ON AND SO FORTH.
Of course, if fewer people demanded dollars, interest
rates - i.e., what America would pay people to hold its debt - might rise,
especially if stronger domestic manufacturers demanded more investment. But
there’s no clear empirical, negative relationship between interest rates and
trade deficits, and in the long run, as Mr. Pettis observes, “Countries with
balanced trade or trade surpluses tend to enjoy lower interest rates on average
than countries with large current account deficits, which are handicapped by
slower growth and higher debt.”
* HEY! I'VE BEEN CALLING FOR RAISING INTEREST RATES SINCE
THE 1990's! I ANTICIPATED THE HOUSING COLLAPSE! THE AUTHOR IS PREACHING TO THE
CHOIR!
Others worry that higher import prices would increase
inflation.
* NO. HIGHER IMPORT PRICES WOULD STIMULATE DOMESTIC
PRODUCTION - AND DOMESTIC JOB/ECONOMIC GROWTH!
But consider the results when we “pay” to keep price
growth so low through artificially cheap exports and large trade deficits:
weakened manufacturing, wage stagnation (even with low inflation) and deficits
and bubbles to offset the imbalanced trade.
* WE DON'T HAVE LOW INFLATION. THAT'S A LIE. THE PAST
YEAR'S OIL COLLAPSE HAS OF COURSE HELPED A GREAT DEAL... BUT DON'T LET THESE
CHARLATANS GET AWAY WITH SELLING YOU A BILL OF GOODS.
But while more balanced trade might raise prices, there’s
no reason it should persistently increase the inflation rate. We might settle
into a norm of 2% to 3% inflation...
(*SIGH*)
* PAY NO ATTENTION TO THE GOVERNMENT NUMBERS; THEY'RE
BULL$HIT.
...versus the current 1% to 2%.
* ABSOLUTE NONSENSE...
(*ROLLING MY EYES*)
(*SPITTING ON THE GROUND*)
But that’s a price worth paying for more and
higher-quality jobs, more stable recoveries and a revitalized manufacturing
sector. The privilege of having the world’s reserve currency is one America can
no longer afford.
* SO... TO CLOSE... TWO POINTS:
* FIRST... NO... IT'S GOOD TO BE THE WORLD'S RESERVE
CURRENCY.
* TWO... WHAT THE HECK THIS HAS TO DO WITH OBAMA'S IRAN
DEAL...
(*SNORT*)
* FOLKS... JUST SO YOU KNOW... THAT WAS THE ORIGINAL
TOPIC THAT THIS POST IS RIFFING OFF; MY BUDDY ROLO WAS ARGUING FOR THE TREATY
AND ARGUING THAT SOMEHOW THE IRAN DEAL IS ACTUALLY ALL ABOUT THE DOLLAR - NOT
NUCLEAR WEAPONS.
(*SHRUG*)
* ANYWAY... PERHAPS ROLO AND ODM WILL COMMENT FURTHER.
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