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Page added on September 9, 2014
Dethrone ‘King Dollar’
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.
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.
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.
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).
This means that Americans alone do not determine their rates of savings and consumption. 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.
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.
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.
A result of this dance, as seen throughout the tepid recovery from the Great Recession, 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.
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. 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.
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.”
Others worry that higher import prices would increase inflation. 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.
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 percent inflation, versus the current 1 to 2 percent. 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.
15 Comments on "Dethrone ‘King Dollar’"
howmuchforyourwings on Tue, 9th Sep 2014 5:53 am
I must ask, what controlled substances has this author ingested? Does this author really, truly believe the rate of inflation in this Banana Republic of a country is only 1 to 2 percent? There are many people out there such as John Williams and Jim Willie who can easily show you, using the government’s own data, that inflation is in excess of 7 percent and true unemployment is in excess of 23 percent. This article would have made me laugh if the the truth wasn’t so bad.
Davy on Tue, 9th Sep 2014 6:53 am
There is a point to be made with the damage reserve currency status does to an economy hijacked by a mafia of political/financial/industrial corruption and manipulation. The cycle of civilizations and economies shows that power and corruption concentrates at the expense of the productive whole eventually. King dollar has provided the mechanism for global growth but it has run its course just as globalism, growth, and complexity has. The king dollar has damaged the American Main Street at the expense of the global 1%ers parasitic greed and corruption. There is no alternative to the dollar because there is no time nor cooperation in the global system to transition. We are locked in a slow motion financial bifurcation. Grab your seat belts and hang on.
Makati1 on Tue, 9th Sep 2014 8:45 am
Davy, the globe is already on the road to dethroning the USD. At the increasing rate of trade in other than USDs, there will be a tipping point where the change becomes a hockey stick on the charts. It may be a few years away, but likely before 2020.
All the US has to do is keep demonstrating their power to damage another country, that does not toe the US line, by fining their banks or placing illegal embargoes on their trade. Russia is a prime example.
The rest of the world is learning fast that the USD is a chain of slavery to the Empire. Those slaves are beginning to rebel. And about time!
penury on Tue, 9th Sep 2014 9:07 am
Commentators are always pointing to the fact that there is no other currency that can replace the dollar as a reserve currency. That is correct but, consider that there could be more than one currency used for trading among groups of nations. It wold not be as streamlined as today and would require a centralized clearing bank. I suppose we could call it the Bank of International Settlements (BIS). This would allow countries who are currently required to use the USD to use other currencies and separate them from the U.S. Sort of like what Russia,China, Iran, SA, Pakistan, Brazil, and Syria have started to try. If they survive the blowback from the dollar it might provide a blueprint for the future. Unless a nation controls its own currency they will always be a slave to someone elses Central Bank.
clueless on Tue, 9th Sep 2014 9:35 am
Davy, the trouble with denial approach is that eventually the lies collide with reality. Your king dollar is now just a pawn,and eventually will die a sudden death. I’ve already exchange mine into my nation’s currency, just to give me peace of mind. I still have a job here in CA, but i can sense that migration will be crucial very soon because water scarcity is looming. Never in my wildest dream would i thought that drought will kick us off from this state. Nevertheless i’m lucky i’ve already sold my property. America is getting diseases that are revealing slowly but surely…aren’t these what you call “wrath of God”?
JuanP on Tue, 9th Sep 2014 9:44 am
Penury, You’ll have to choose another name, there already exists a BIS, Bank for International Settlements.
http://www.bis.org/
Feemer on Tue, 9th Sep 2014 9:55 am
I think the Euro should be the reserve currency, why should just one country get all that power? And the US is so dysfunctional, when we almost defaulted because we didn’t raise the debt ceiling, it nearly caused a world recession.
Northwest Resident on Tue, 9th Sep 2014 10:00 am
Having the United States dollar as the world’s reserve currency made sense in a world where oil was king and a common currency was needed to conduct transactions between countries for oil. With the looming death of the oil age, it begins to make less sense to have a single world reserve currency. What does make sense is for geographically close nations to begin learning to trade in their own currencies because with the phase-out of oil there will be a corresponding phase-out of global trade, and nations located next to each other will be much more likely to build their own financial and monetary trading systems. Death of big oil = death of the dollar as the world reserve currency. It is just one of many monumental changes to BAU as we have known it that are going to be the new reality, sooner than we think.
shortonoil on Tue, 9th Sep 2014 11:28 am
The US has an almost insatiable appetite for petroleum products. The average American consumes more than 8 time the average Chinese, or more than twice what the average European consumes. It is the Hall Mark of the culture.
To satisfy that demand the US imports about 40% the oil it uses. It is not just any old oil that it imports, it is the particular grade of petroleum that is capable of being transformed into transportation fuels. It is petroleum that much of US production is not capable of replacing. To pay for this exorbitantly expensive behavior the US transfers $s to oil producing nations in exchange. Those $s are created by the FED/Treasury complex through bookkeeping mechanisms, and debt formation. It amounts to a perpetually revolving credit line on the rest of the world. Whereas, other nations have to produce something to acquire the $s to buy oil, the US just runs a continuous line of credit against them. A large percentage of its standard of living is derived from the “printed” barrel.
It is not surprising that the rest of the world is getting tired of footing the US’s oil bill. But if, or when the US dollar is no longer the world’s petro currency the country will find itself in deep economic trouble. Its over leveraged financial system would implode in a tsunami of defaults. The standard of living of the average American would collapse, and the banking system would find itself stripped of its royal status. That is not likely to happen without one hell of a fight! The nation does not spend 100’s of billion of dollars a year to protect itself from some camel riding terrorist with a box knife!
http://www.thehillsgroup.org/
Northwest Resident on Tue, 9th Sep 2014 11:34 am
shortonoil, isn’t there a chance that the bankers and financial wizards and other powers that be will look into their crystal ball and realize that it is impossible to maintain their supremacy derived from the dollar status and just let it go, versus fighting and killing to hang onto something that they know they’re going to lose anyway? (hahahahaha…) Yeah, right. Just joking around…
Davy on Tue, 9th Sep 2014 12:32 pm
The global world can’t decouple from the US or vice versa. I see no indication this can happen except in a generalized fall where all economies contract. There is just no time nor cooperative structure in place to facilitate the changes needed in time available to construct a new global credit and exchange system. A BIS among nations to trade currencies in bilateral trade other than the dollar. Sure this is great but it is still further steps to exchange generally limited to small trade deals. Look at the relative size of trade between 196 nations and realize a reserve currency is needed. Dollars are so numerous and available in many cases the exchange costs are less in dollars in a generalized sense. The mentioned of how dysfunctional the US is made me laugh because this comparison is with the Euro area that is equally or more dysfunctional and by all normal criteria insolvent. At least the US is not numerous sovereign nations that are unable to properly administer their currency policies. I saw mentioned comparison of the Europeans and Chinese to the US energy consumption. While I agree the US is a large per capita energy consumer China is a huge consumer in aggregate. What does it matter if 8 Chinese consume the same as one American? IMA the US energy consumption per unit of GDP is still higher than China’s. It is a luxury for China to have such a large population and there is a price to pay for this. I do not buy the per capita comparisons nor the idea of a fairness except in broad comparisons. One man’s fairness can be very different from another’s. As for Europe they consume far more than they should per their energy poor situation. Let us face the coming storm and realize no country is going to escape a financial collapse nor will the dollar go away as a significant tool of exchange until the whole system implodes. In a more normal world of cooperating countries not in the predicaments of limits of growth and diminishing returns of that growth there would be innovation in the whole process of credit and exchange. We would see a system that is more sustainable and resilient to financial hiccups. This is not the case because the globalized system all these countries rely on is fracturing. Each country has a comparative advantage in today’s globalism but they also have a comparative disadvantage to the end of BAU globalism. Many comments here are adversarial instead of all inclusive. The adversarial comments seek to find negativity against the US instead of the realization that we are all shit out of luck soon.
penury on Tue, 9th Sep 2014 2:01 pm
Davy you are correct in there is no single nation which has a currency which could be used in place of the dollar in world trade. Check your histories to find out what happens to countries or leaders which try to get away from the dollar. But, and it is a big but, there are more and more countries (and individuals) around the world who concede that the loss of control over their own currency makes slaves of them all. Really the availability of the dollar is one of its strongest attractions, and one of it greatest weaknesses. However, if countries institute bilateral currency exchanges or in the case of the BRICS multi-lateral exchanges it results in a more simple complex system. With China becoming the largest importer of Saudi oil the requirement for payment in dollars may be in trouble, in which case the equation for the U.S. may change for the negative.
shortonoil on Tue, 9th Sep 2014 2:39 pm
“shortonoil, isn’t there a chance that the bankers and financial wizards and other powers that be will look into their crystal ball and realize that it is impossible to maintain their supremacy derived from the dollar status and just let it go, versus fighting and killing to hang onto something that they know they’re going to lose anyway? (hahahahaha…) Yeah, right. Just joking around…”
“they know they’re going to lose anyway”, therein lies the problem. They may know that they are going to lose eventually, but eventually is something that they see as being a long, long ways away. Generally, most people can not accept the fact that the oil age will end before all the oil is pumped out of the ground, and there is, no doubt, an immense amount of oil still in the ground. The subtlety of differentiating between oil in the ground, and oil that can power our civilization is more than most people can comprehend, or are willing to accept. Even on the peak oil sites you still see arguments as to whether there is 4 or 9 Gb in the Bakken. They assume, almost with a religious fervor, that if it is there it will be extracted. It never even occurs to them that other factors may weight heavier on its disposition than its presence. Recently, a noted petro-geologists was still projecting oil production to 2100.
It is highly probable that the world will fight a horrible, bloody war over a commodity that will soon have little, or no value. There is an eternal truth in the old saying: “its not what you don’t know that will hurt you, it’s what you know that ain’t so”.
http://www.thehillsgroup.org/
Northwest Resident on Tue, 9th Sep 2014 2:54 pm
“It is highly probable that the world will fight a horrible, bloody war over a commodity that will soon have little, or no value.”
Up until recently, I tended to think that that there would never be another “big” war because there were people in control — “TPTB” — that were wise enough to realize that another big war had nothing to gain and everything to lose. But over the last few months or so my perspective has changed. Fact is, human nature has always been to fight and to kill to obtain control over scarce resources, and neither “wisdom” nor long term benefits get much priority. Human nature is to kill now, take whatever can be taken, to hell with the consequences. Wiser voices attempt to prevail, but rarely do they succeed. And as we head down that rabbit hole of scarcer and scarcer resources, I believe that fear and hunger and all other types of basic human emotions will take control, which leads ultimately to madness, war and death on a massive scale. There isn’t much in human history that would indicate that THIS TIME we’ll be smarter than before. The Gods are highly amused, no doubt, watching humans battle to do the death in their desperate attempts to survive and to procreate. But for humans, it becomes hell on earth, and I’m guessing that you’re right, and that we haven’t seen anything yet.
Makati1 on Tue, 9th Sep 2014 8:17 pm
A lot of good comments and a few who stubbornly cling to “if the US suffers, so will the rest of the world”. Suffering is a matter of degree. An American losing his job forever is traumatic.
A Chinese losing his job only means he has to go back to the farm and give up a few unnecessary perks of employment. If you never had electric or it’s attachments, you do not notice when the system goes down. If you never owned a car, you don’t notice the closing of the gas station.
Yes NWR, the last gasp of most empires is war. And, I’m afraid that the next one will end in a nuclear exchange. Then it is problematic whether the human species will survive to see 2100. Both the Us and Russia have nuclear armaments that are short of the big nukes, but radioactive and deadly anyway. It will be a war of escalation, if it happens. The US already tried out some if their nuclear munitions in Iraq. They have no qualms about using them anywhere else. We are already at war, but it has not hit the evening news … yet.