12feb22 – Old Town
I’m not an expert on the legal status of the USD’s reserve currency status, apart from its role in the SDR. But when Nixon took the USD off the gold standard in 1971, that effectively ended the link officially established by the Bretton Woods Agreement. See: https://en.wikipedia.org/wiki/International_use_of_the_U.S._dollar for further details. I’m not sure what remains of the dollar’s legal role under Bretton Woods.
I would also note that the Federal Reserve has no responsibility for the dollar’s FX rate and goes out of its way to insist that its monetary policy is free of FX considerations. (There is debate outside the FED about that from time to time.)
It is the U.S. Treasury which is officially responsible for the dollar’s international role and value. When necessary, the Treasury uses its Exchange Stabilization Fund to intervene on foreign market, ordering the New York Federal Reserve to deal with foreign central banks.
What is sure is that the USD’s value, stability and role as a reserve currency has been established since 1971 by market forces. Occasionally, there will be G7 efforts to stabilize FX markets when turbulence occurs, as with the Louvre and Plaza accords and during the 2007-2009 financial crisis. But these had nothing to do with the USD’s legal status as a reserve currency.
As far as I can see, no U.S. administration can halt the USD from being the principal reserve currency because that is a role conferred by international choice, i.e. by markets and investors.
As long as they perceive the dollar as a reasonable store of value, freely interchangeable; and the economy and political system undergirding it remain reliable and viable, the USD will be the reserve currency no matter whether we like it or not.
There are huge advantages to the USD being the principal reserve currency. It means we can over-spend on ourselves (whether on private consumption and/or military-industrial goodies makes no difference); under tax ourselves (we pay the lowest total tax load of any major developed country); under save as a result of the first two items; and not have to pay seriously high interest rates (at least for the time being) to service our debt.
This is all possible because foreign capital inflows into the U.S. via the dollar continue to finance our shortage of savings, and our very large and continuing current account deficit.
Our military and security spending is a political choice but has virtually nothing to do with the USD’s reserve currency status. Except, and I would emphasize this, except to the extent that our military power enhances foreign investors/savers perception that the US. has the best-protected, and safest political system and economy, hence the safest currency.
I’m happy to discuss this with any of you.
Paul
From: Salon <salon-bounces@listserve.com> On Behalf Of Clyde Prestowitz via Salon
Sent: Saturday, February 12, 2022 7:51 PM
To: Warren Coats <wcoats@aol.com>
Cc: Chas Freeman <salon@committeefortherepublic.org>
Subject: Re: [Salon] In the Name of the Patriot Act: That's Ours
Indeed, and it would also shift the U.S. balance of payments toward actual balance and encourage making some things in America again. We would eventually be a much richer nation than we will be under the present regime.
Clyde,
Let me add that one of the advantages of ending the dollar's reserve currency role would be increasing the incentive for the US to develop and rely on diplomacy rather than rely on coercion and bullying.
You are exactly right. But I tend to think that ending the dollar’s role as the global reserve currency would be good for everyone. Yes, it would be painful in the short term. But “no pain no gain” is the watchword. Clyde
The attacks on our liberties facilitated by the Patriot Act only worsen with time. But the rest of the world grows more weary with the reserve currency status of the US dollar as the US increasingly sanctions its uses for one reason or another, sometimes unilaterally. Biden’s proposed confiscation of Afghan reserves at the NY Fed are another nail in that coffin. As they add up, plus growing concerns over the size and cost of US debt, we are ever closer to the one that sends the dollar over the cliff.
Putting your reserves in American banks has its perils. A timely reprise of 2003's snatch of Iraq's reserves.