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Is It Time For The Us To Disengage The World From The Dollar?

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I suspect that there is little point posting this here as there are none so blind that will not see, but FWIW:

http://mpettis.com/2011/05/is-it-time-for-the-us-to-disengage-the-world-from-the-dollar/

Apologies for the long quote - I tried to trim, but it is all good so here is the lion's share of the piece:

The week before last on Thursday the Financial Times published an OpEd piece I wrote arguing that Washington should take the lead in getting the world to abandon the dollar as the dominant reserve currency. My basic argument is that every twenty to thirty years – whenever, it seems, that American current account deficits surge – we hear dire warnings in the US and abroad about the end of the dollar’s dominance as the world’s reserve currency. Needless to say in the last few years these warnings have intensified to an almost feverish pitch. In fact I discuss one such warning, by Barry Eichengreen, in an entry two months ago.

But these predictions are likely to be as wrong now as they have been in the past. Reserve currency status is a global public good that comes with a cost, and people often forget that cost.

Just as importantly as a public good it requires a number of characteristics. At a minimum these include ample liquidity, central bank credibility, flexible domestic financial markets, minimal government or political intervention, and very deep and open domestic bond markets. With the exception perhaps of the euro, which may or may not emerge in the next decade on a more rational basis than it currently exists (albeit with more than one defection), no other currency has the necessary characteristics that will allow it plausibly to serve the needs of the global economy.

And no other country, not even Europe, will be willing to pay the cost. If there is any chance that the dollar’s status declines in the future, it will require that Washington itself take the lead in forcing the world gradually to disengage from the dollar.

Ironically, this is exactly what Washington should be doing. Conspiracy theory notwithstanding, claims that the reserve status of the dollar unfairly benefits the US are no longer true if they ever were. On the contrary, the global use of the dollar has become bad for the US economy, and because of the global imbalances it permits, bad for the world.

During the first few decades of the post-War period, the cost of maintaining the dollar’s status could be justified by the incremental benefits to the US of a stable and growing world economy within Cold War constraints. The trading benefits that accrued from a widely available global currency benefitted US allies and the relative size of the US economy ensured that the costs were limited. But beginning in the 1980s, trade policies in a number of countries abroad have sharply raised the cost to the US, while the end of the Cold War has limited the benefits.

This cost comes as a choice between rising unemployment and rising debt. The mechanism is fairly straightforward. Countries that seek to supercharge domestic growth by acquiring a larger share of global demand can do so by gaming the global system and actively stockpiling foreign currency, mainly in the form of, but not limited to, central bank reserves. This allows them to forcibly accumulate domestic savings while relying on foreign demand to compensate for their own limited domestic demand.

Always dollars

In practice, dollar liquidity, limited Washington intervention, and the size and flexibility of US financial markets ensure that these countries always stockpiled dollars. There is no real alternative to the dollar, and most other governments would anyway actively discourage massive purchases of their own currencies because of the adverse trade impacts. If foreigners accumulate euros or yen at anywhere near the rate they accumulate dollars, they would force Europe and Japan into massive current account deficits, and neither Europe nor Japan has any interest in seeing this happen.

So foreign acquisition of dollars automatically forces the US into running a corresponding current account deficit as foreign polices that constrain consumption at home require higher consumption abroad. Active trade intervention in countries that engineer large trade surpluses, in other words, have to be accommodated by rising trade deficits in the US.

This importing of US demand by other countries forces the US economy to respond in one of two ways. Either American unemployment must rise as demand is diverted abroad and the tradable goods sector in the US shrinks, or Americans must counteract the employment impact by increasing domestic consumption or investment.

Without government intervention, there is no reason for domestic investment to rise in response to policies abroad. On the contrary, with the diversion of domestic demand private investment may even decline.

So in order to limit the employment impact, capital flows into the US have to finance additional US consumption. Americans, in other words, are forced to choose between higher unemployment and higher debt, and in the past the Federal Reserve has chosen to encourage higher debt.

But what about the benefits to the US of reserve currency status? A lot of analysts argue that the predominance of the dollar gives the US two important advantages. It reduces the cost of imports to American consumers and it lowers US government borrowing costs.

But both arguments are seriously flawed, I think. Americans already over-consume, and so it is hard to argue that they benefit in the aggregate from lower consumption costs, especially when it comes at the expense of employment. And anyway if cheaper consumption is such a gift, it is hard to explain why attempts by the US to return the gift to countries whose consumption costs are artificially high – demanding for example that these countries revalue their currencies and so reduce costs for their own consumers – are always so indignantly rejected.

As for borrowing cheaply, what matters to a government’s borrowing cost, as countries like Switzerland clearly demonstrate, is not major reserve currency status but rather creditworthiness. Because reserve currency status actually increases US borrowing, it is more likely to undermine the ability of the US Treasury to finance itself cheaply than the loss of reserve status would.

The supposed advantages of reserve currency status are simply the obverse of the cost. As countries accumulate dollars, they force trade deficits onto the US, which the US can only manage by increasing borrowing. This borrowing is financed by the foreign accumulation of dollars.

So will it happen?

The massive imbalances that this system has permitted are destabilizing for the world because they permit large and unstable debt buildups both in countries that over-produce, like China and Japan, and those that over-consume, like the US. If the world were forced to give up the dollar, there is no doubt that there would be a cost – it would reduce global trade somewhat and it would probably spell the end of the Asian growth model – but it would also lower long-term economic costs for the US and reduce dangerous global imbalances.

The US, I would argue, should take the lead in shifting the world to multi-currency reserves in which the dollar is simply first among equals. The cost of maintaining sole reserve currency status has simply become too high in the past three decades and is leading inexorably to rising American debt and worrying global imbalances.

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there is nothing stopping the world from not using dollars.

but people have to pay in dollars as companies request to be paid in dollars.

as long as the US remains the most atttractive country in the world, people will be happy to accept them.

Edited by mfp123

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Pettis writes some excellent stuff.

If you are an advocate of MMT and it seems that the leading western powers are then it stands to reason that the country that issues the reserve currency must also be the largest exporter or it will swiftly hit the buffers.

By allowing the Chinese to game the system with currency manipulation and intellectual theft of a staggering magnitude without shouldering any responsibilities these two super-powers have plunged the whole world into chaos.

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Given that the Chinese hold 2 or 3 Trillion dollars

I can't see the Dollar becoming worthless any time soon.

Also, can anyone explain why they think the US is finished given that its population and therefore its economy could easily double in the next 100 years?

China on the other hand has reached the limits of its resources and is teetering on the brink of social meltdown

IMHO.

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Given that the Chinese hold 2 or 3 Trillion dollars

I can't see the Dollar becoming worthless any time soon.

Also, can anyone explain why they think the US is finished given that its population and therefore its economy could easily double in the next 100 years?

China on the other hand has reached the limits of its resources and is teetering on the brink of social meltdown

IMHO.

Loads of people would like to think that the USA is finished. Once this Obama idiot loses the next election we will be back on track again. The USA has very good demographics compared to China. It has loads of untapped energy reserves too.

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there is nothing stopping the world from not using dollars.

but people have to pay in dollars as companies request to be paid in dollars.

as long as the US remains the most atttractive country in the world, people will be happy to accept them.

Among all the remotely viable alternatives the $ has decent growth (compared with others), huge natural resource reserves, relatively young and diversified workforce and a stable system of government.

Few would want to make the Russian Rouble, Iranian Baktar or even totalitarian Chinese Yuan the reserve. The Euro is a non-starter all the time member states are collapsing and needing bailouts due to overwhelming debt issues that cannot be solved by the states themselves. Anti-US sentiments should not cloud judgment on these issues. Better the Fed calling the shots than The Bank of Iran or Moscow.

Edited by Realistbear

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  • 312 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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