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!
* 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.
* 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.
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!)
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).
* 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...
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.
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.
* 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...
...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.
* ASININE TRADE POLICIES... INSANE TAX POLICIES... COUNTER-PRODUCTIVE REGULATORY POLICIES...
(*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...
* 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...
* 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.
* ANYWAY... PERHAPS ROLO AND ODM WILL COMMENT FURTHER.