Posted on 06/30/2023 8:46:18 AM PDT by NewJerseyJoe
This addresses some of the questions I've had about the pros vs. cons of a reserve currency.
(Source article has links)
Kudlow's remarks came a day after Donald Trump declared that China is trying to displace the U.S. Dollar [sic] as the NUMBER ONE CURRENCY" and that if this occurs, it would be the biggest defeat for our Country [sic] in its history."
Neither Trump nor Kudlow actually explain why maintaining reserve currency status is so important. After all, it's clear that it is not necessary for a country's currency to be a reserve currency in order for that country to have a high standard of living and a high degree of economic freedom. We could simply look to Norway and Switzerland to see that.
What's Good for the Government Isn't Necessarily What's Good for the People Trump and Kudlow seemingly can't tell the difference between what is good for the US government, and what is good for the people. The idea that global reserve currency status for the dollar is essential to "America" relies on the false notion that the interests of the US regime and the interests of ordinary taxpaying Americans are one and the same.
These interests rarely coincide, however, and they certainly don't when it comes to reserve currency status. This is especially the case when the dollar is unbacked by any commodity like gold, and is simply a floating fiat currency that can be inflated at the will of the regime at any time.
That global reserve currency status benefits the regime itself is obvious. This status for the dollar does indeed allow the regime to more recklessly inflate the dollar and increase deficits.
This enhances the US regime's ability to bribe voters with enormous welfare programs and involve the US regime in a dazzling array of wars that have nothing to do with defending US territory.
None of this, however, improves the standard of living of Americans who pay the bills. Even worse, when the dollar ceases to be the dominant reserve currency—an event that is inevitable—holders of dollars will see their purchasing power plummet. Yet, it not the end of reserve currency status that is to blame for the inflationist pain.
Rather, the fault will lie with the decades of monetary and fiscal mismanagement made possible by the dollar's status as global reserve currency.
To demand the regime continue to cling to global reserve currency status is to demand a continuation of the policies that have hollowed out the financial well-being of Americans for decades.
Trump and Kudlow, however, are not troubled by this. For them, it appears that the supposed importance of reserve currency status is not about economic concerns, but is really a political project.
This shouldn't surprise us given many of the narratives surrounding the dollar's status—which focus on China and Chinese geopolitical power as the main reason to fear a decline of the dollar. This isn't about protecting your wealth or reining in government power. It's about increasing US government power in the name of fighting the latest foreign "axis of evil."
In fact, China's currency, the yuan, doesn't even pose a threat to the dollar. The yuan is a fifth-place also-ran in the currency race. So, for now, the dollar still reigns supreme, and being the regime whose currency enjoys global reserve status comes with many advantages.
Why Reserve Currency Status Enhances State Power at the Expense of the Taxpayers The first advantage is reserve currency status brings a greater global demand for dollars. This means more of a global willingness to absorb dollars into foreign central banks and foreign bank accounts even as the dollar inflates and loses purchasing power.
Ultimately, this means the US regime can hoodwink the voters into accepting more monetary inflation, more financial repression, and more debt for many years before domestic price inflation becomes a political problem for the regime. After all, even if the US central bank (the Federal Reserve) creates $8 trillion in new dollars in order to prop up US asset prices, much of the world will take those dollars out of US domestic markets, and this will reduce price inflation in the US—at least in the short term.
A second advantage: the fact the dollar dominates in global trade transactions means more global demand for US debt. Or, as Reuters put it in 2019, the dollar is used “for at least half of international trade invoices—five times more than the United States' share of world goods imports—fuelling demand for U.S. assets.”
Those assets include US government debt. In fact, as Robert Murphy notes, this inflation-fueled demand for US assets will be "heavily tilted toward debt (rather than equity in growing companies)." This rush for US debt pushes down the interest rate at which the US government must pay on its enormous $30 trillion debt.
All in all, reserve status for the dollar means a lot more US government spending. This produces no net benefit since government spending in itself distorts the economy, drives up prices, and otherwise redistributes wealth according to political considerations, rather than according to the needs of consumers and entrepreneurs.
None of this is good for the productive people in the US. For one, deficit spending—whether for elective wars or welfare programs—must always be paid for, either in the form of price inflation (i.e., the inflation tax), or in terms of future ordinary taxation.
Moreover, reserve currency status creates political cover for the regime's easy-money policies in the short term. That is, global demand for the dollar helps create the temporary impression that monetary inflation comes with few downsides.
This, however, can only continue until the dollar's reserve status ends or even significantly weakens. In the meantime, the world will have been flooded with dollars.
Reserve currency status, by politically fostering more deficit spending, also harms those parts of the private economy that depend on private investment. As deficit spending increases, the economy is flooded with ever larger amounts of government debt backed up by tax dollars. This attracts huge amounts of wealth to government Treasurys that otherwise would have gone into private-sector investments.
All this dollar profligacy has been neither necessary nor advisable, yet maintaining global reserve currency status can help regimes get away with this sort of thing for decades.
The Effects of Losing International Currency Power Often, discussion about the dollar's reserve status creates a false dichotomy between total domination of the global monetary system on one hand and complete abandonment of the dollar on the other. A more likely scenario is that the dollar will weaken considerably but will remain among the most often used currencies. After all, even after the pound sterling lost its status as reserve currency in the 1930s, it did not disappear.
For example, let's say the US dollar sinks to 40 percent of all foreign reserves and is only used in one-third of all international trade invoices—instead of one-half, as is now the case. This would not necessarily destroy the dollar or the US economy, but it would certainly constrain the US regime's ability to pile on another trillion dollars worth of debt without the true costs of mounting debt becoming abundantly clear.
Perhaps more importantly, a world less awash in dollars will mean a world with less demand for US assets such as US government debt. That means higher interest rates for the US government and less of an ability to finance the welfare-warfare state by inflating the currency.
Naturally, politicians and pundits such as Trump and Kudlow view any threat to this kind of state power as a bad thing. At this point, however, how we feel about it is irrelevant. It's going to happen regardless of our feelings on the matter.
The only way it doesn't happen is if the US regime suddenly starts slashing deficits and government spending, embraces a strong dollar policy, and perhaps even anchors the dollar to a commodity like gold.
None of those things is going to happen without first experiencing a wakeup call on the level of losing currency reserve status. The good news is such a wakeup call will weaken the US regime, potentially forcing policymakers to embrace a more sane fiscal and monetary policy.
“The good news is such a wakeup call will weaken the US regime, potentially forcing policymakers to embrace a more sane fiscal and monetary policy.”
this will hopefully stop the international bailouts
The bad news is our prices will triple or worse for everything we buy. Say goodbye to your savings.
“ . . . potentially forcing policymakers to embrace a more sane fiscal and monetary policy”
Sure, Jan. Sure.
Even if that fairy tale miracle were to occur, it’s gonna get in fact downright Biblical before that. This is the problem. The whole arrangement since Bretton Woods say, looks pretty much Faustian. They got a tiger by the tail. They can’t let go.
So this guy thinks permanently super high interest rates, as a result of loosing reserve status, will be wonderful for “making” Congress spend less, rather than default on our debt?
He's freaking crazy.
I guess it is if you like living like a Brazilian. Or Argentinian.
When Britain lost its Reserve currency over the course of a few decades, it still had a cohesive society albeit with an attraction to socialism and literary communism (as C.S.Lewis coined), a central authority figure and some stiff Brit upper lip.
We have a huge border invasion, an entitlement class of people both white, black and in between, a failing education system, infrastructure that makes the current Apian Way outside Rome look good, and underappreciated and undermanned policing.
Does anyone think that the deficit will somehow magically disappear when the dollar is trashed? Does anyone think the current game of extend and pretend will be viable?
Little by little the dollar loses steam. Yellen admitted it, finally.
I’m glad someone is talking about this.
Yes indeed, our printed, fiat, centrally-manipulated currency’s main beneficiary is government, its cronies, and its 1000 woke social engineering schemes.
America had its most spectacular growth and became a world power when it did NOT have global reserve status, and the dollar was tied to gold.
That’s when Fed.gov was only about 5% of the US economy.
BUT - as the UK showed, losing the abililty able to print money and export inflation overseas doesn’t mean the socialists give up control, even if they can’t be funded - they just steal more.
Bkmk
“The bad news is our prices will triple or worse for everything we buy.“
We’ve practically seen that already in the last few years. Even the so-called “2% targeted Fed inflation” is outrageous, generally speaking it is the natural order of things, prices go down over time. Not up. Things get less expensive. Not more expensive.
They also keep making things smaller. A 50 pound bag of lawn fertilizer is now 40 pounds. Then 35. Or a “pound” of coffee is 11.235 ounces. They use ersatz ingredients, fillers, and golly knows what, sourced from golly knows where.
Too much bullshit for me to handle.
American prominence happened for the exact opposite reasons of Obama and his you didn’t build that. That backwards thinking throughout the ignorant pothead democrats is intended to bring America down. It’s the death to America crowd wanting a Somalia throughout North America.
Giving up one inch is the beginning of that pathway, let alone global stability.
Have you been keeping up with the “news” lately? Ukraine?
They are borrowing money from say, China, and giving it to say, India. Or Ukraine. Or whomever.
> The good news is such a wakeup call will weaken the US regime, potentially forcing policymakers to embrace a more sane fiscal and monetary policy. <
Not 1 chance in a 100. Deficit spending will continue with no thought of tomorrow. As an analogy, consider how many US cities, states, and the federal government are switching over to “green” energy. There is no thought at all as to where this green energy will come from.
As others have noted, this wild spending will end not with a whimper, but a loud bang. I would expect sudden, Weimar-like hyperinflation. Then chaos.
The only question is when.
Well, we've already achieved banana republic status, so...
I was thinking that inflation has gone up about 1000 percent in my lifetime.
When I was a kid, stamps were 8 cents. Now, to be 66 cents. X8.
You could buy a nice house around here for $100,000. Now it’s a million. X10
A cheeseburger would cost maybe 80 cents. Now it’s $5 at least. X7
Gas was like 60 cents a gallon. Now $5 at least. X9
You could get a new car for maybe 3-4000. I just bought a new car for $20,000, good deal. X7
Just riffing on the massive inflation we have been subject to since we are indeed a fiat currency. I earn a lot more, too - minimum wage is higher, etc. - so it is all somewhat relative.
There will not be a different Global Reserve Currency. If they drop the dollar there will be NO Global Reserve Currency.
Last year 11 BILLION TONS of shipping crossed the planets oceans. What happens when they have to switch to Gold or Barter?
Blame it on global warming.
Yep, we’ll be Argentina or even Zimbabwe.
Though I do agree with the author that it incentivizes bad government policies, the welfare state and the creation of a lazy, entitled class of people which leads to a cultural rot.
If you reduce it to it’s essence, the Chinese poor work so ours don’t have to. It is the Chinese (and other developing countries) that fund a big part of our welfare.
It goes like this, we buy their goods with dollars, and they use those dollars to buy our debt (treasuries) that pay for our welfare. They accept dollars for payment because it is the reserve currency, ie, there is a demand for dollars. If the dollar became like the Argentinian peso, the Chinese wouldn’t accept it as payment, and inflation and poverty would skyrocket.
The author is unduly harsh on Trump and Kudlow. Those two guys simply recognize the reality we are dealing with: Americans can’t afford the standard of living they have come to see as their God-given birthright, and massive government spending fueled by foreign lending to the U.S. government is the only thing that can perpetuate that delusion.
That is the heart of the problem. Cutting government back down to Constitutional size, however, will require eliminating a certain sacred cow ... one which all by itself accounts for more than half of federal government spending ... one that is vigorously defended even on this forum.
No you watch what you purchase. It is that simple. Perhaps more of the basic items will be made in country.
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