| Thanks for the cue Ken. I will discuss the dollar and SDR in the Salon March 22.
As Paul correctly noted, after Nixon closed the gold window in 1971 and the related revisions of the IMF Articles of Agreement, the dollar’s international role in pricing, payments, and store of value (reserve currency) has no legal status. It reflects the size of the open US economy, trusted courts (rule of law), deep and liquid financial markets for dollar assets, and the habits developed during the Bretton Woods gold exchange standard period. The Yuan will not replace the dollar as it lacks most of these conditions. And in our multi currency world markets will want a common vehicle currency—hence the potential for a reform SDR to be discussed next month.
The implications of eliminating our twin deficits (fiscal and trade) for the US economy are more complicated. Eliminating the fiscal deficit removes the need for the investment crowding out relief from foreign financing of the fiscal deficits (trade deficits). But the economic impact depends on how the fiscal deficit is reduced. If by tax increases, what taxes? What private spending will be cut to pay them? If by fiscal spending cuts —what spending (F35s, or infrastructure or what)?
If these adjustments increase domestic manufacturing (which by the way has not declined), fine. If increased manufacturing reflects government subsidies of one sort or another, it will be at the expense of more productive activities making us poorer.
The US should increase, not reduce, its engagement with the world—reactivate the WTO etc. But reliance on the dollar as the world’s common currency platform has too many problems and should be replaced by a non national currency (a reformed SDR).
Warren Warren Coats 9128 Vendome Drive Bethesda, MD 20817 (703) 608-2975 https://wcoats.blog On Feb 13, 2022, at 3:51 AM, Ken Weisbrode <weisbrode@gmail.com> wrote:
Point well taken. This is Warren's cue to champion the SDR...
I might add this, from Sir Geoffrey Elton (1984):
In England, at least, the fact that English history most convincingly demonstrated how man should order his existence on earth required no more than an apparently modest rehearsal of what had happened there in the course of a thousand years. But lo and behold: exactly the same story would serve to demonstrate the opposite with equal coherence and conviction. All you had to do was turn the medal over. What I may call the Froude complex -- the belief that the blessings of providence have fallen exclusively upon the island -- has always been matched by the New Statesman complex, the assurance that all things human are absolutely at their worst in this country. Those who praised the unique amalgam represented by a nation united under its rulers stood opposed -- indeed, stand opposed -- by those who know that structures and consciousness of class are found only in England. Those who looked with starry eyes upon the civilizing mission of anti-slavery frigates and heroic (if rather juvenile) district commissioners, faced the determined enemies of colonial exploitation and racial prejudice, so different, they proclaimed, from the welcome extended by France to her overseas territories. (The hallmark of the New Statesman complex is the belief that all things French are wonderful.) Encomia on a tolerant and kindly society (remember the unarmed policemen?) had to confront believers in the special depravity of a people of hypocrites, uniquely devoted to what was then called the English vice, whether this meant sexual aberration or oppression of the poor. Only in England, said the one side, was political freedom fully established; only in England, replied the other, was economic freedom systematically suppressed. It was such a lovely medal of which both sides made history so easy. No matter whether you put a plus or a minus sign before your construct, in either way you testified to your belief that England and her history enjoyed the special privilege of providing an example to mankind -- an example of either encouragement or warning.
Arrogance and ignorance are costly - the pound still suffers, and the UK economy still reflects that, a century after sterling lost its reserve currency status. If you really want to change America, and somehow genuinely want the downgrading of the dollar to secondary or tertiary status, you haven't thought through the implications. What most strikes me about this recurring thread on Chas's wonderfully eclectic selection of pieces is the weirdly anti-American approach to American reality of so many of the American responders. You're settling parochial scores - Americans arguing with Americans.
Respectfully, I don't think you grasp how today's world works. The Yuan will supplant the dollar, which everyone on this thread would bitterly regret when it actually happens. I don't think you've begun to absorb what that would mean for global power relations: you're so unaccustomed to alternative histories, that you can't imagine what that would entail in reality. The logical conclusion to what most of you who send replies, at least implicitly, seem to be advocating, is American isolationism, which is a childish and impractical concept in today's world and has never accurately captured any phase in US history. I'd love to see a pragmatic debate on Chas's email list about how we'd deal with today's reality, as opposed to the 20th century and 19th C myths about which many of the people on this thread seem to want to indulge.
I love Chas's article suggestions and greatly appreciate the service he provides. But this self-obsession is ironic, to say the least. If you're all so interested in how foreigners think then study them - please. Ask what they think. All of you know that good diplomacy is about seeing things from other people's perspective. Stop thinking America is the worst country in the world, or the best. Surely you're all old and wise enough to recognise the downsides to navel-gazing?
Best Ed.
ps. fiscal deficits are not the issue: lack of investment in future American generations is a scandal.
US national editor, Financial Times
Cell: (1202) 641 5395 Twitter: @EdwardGLuce
12feb22 – Old Town Thanks, Clyde. I’m not sure that it was the fault of the USD’s reserve currency status that our economy is increasingly less competitive. It has, however, contributed to our growing soft and indebted as we happily exploited our “exorbitant privilege”. We do need some belt-tightening, soon. Paul Hi Paul, I might quibble over some of that, but you are mainly right. Where I would differ is over the consequences. The reserve currency status of the dollar does indeed allow us to live higher on the hog than we otherwise might, and it has enabled us to do so for quite a long time. But it also enables us to sell the farm while we enjoy the good life and continually reduce our wealth producing capacity, relative productivity, and technological leadership. We would have been much better off to have accepted Keynes’ argument for balanced trade and the global currency Bancor. We do not have a competitive economy. There are several reasons for that, but a continually over-valued currency is an important one of them. Best wishes, Clyde 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 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.
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