| Ed,
A good admonition to avoid navel-gazing and isolationism. But wouldn’t you agree that one of the things that account for American success is our willingness to debate policy vigorously? It’s the most American thing we can do. I agree with you that it would be foolhardy to spoil the great global magic act of the USD. This particular discussion chain, which evolved thematically, started in response to my old WaPo piece on the question of the uses and abuses of dollar supremacy, i.e., global seigniorage broadly understood. The specific issue was sovereign asset forfeiture by operation of asserted universal jurisdiction of evolving US law. We did it with Iraq and now again with Afghanistan, in my view setting unhelpful unilateralist precedents. There is room to be concerned about the consequences of converting the USD’s global utility status (with its many benefits) into a naked tool of U.S. foreign policy via sanctions and asset seizures (driving the world away from the USD over time in search of crypto and other settlement alternatives). It’s a prudential balancing act, and reasonable people can disagree where to strike the most effective balance in the long-term national interests of the U.S. The main reason the RMB does not gain more traction as a trading currency is the unwillingness of PRC authorities to fully open the country’s capital account. As others here have pointed out, the USD remains a safe bet for store of value relative to the available choices for numerous valid and durable reasons (U.S. economic size, openness, dynamism, rule of law, steady macro management, demographic and geographic advantages, to name a few) — my two cents again, let’s not squander this good fortune with short-sighted policy grabs. And yes, as you suggest, let’s better invest our fiscal deficits in future American generations.
Mark
"costly" not "oostly" US national editor, Financial Times
Cell: (1202) 641 5395 Twitter: @EdwardGLuce
Arrogance and ignorance are oostly - 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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