Posted on 05/04/2023 9:40:21 PM PDT by SeekAndFind
Earlier this month, Larry Kudlow insisted that it is "it's incumbent on the U.S. government, no matter who's in power, to maintain the reserve currency status of the dollar." Kudlow laments that a toppling of the dollar from that perch "seems to be the direction we're going in."
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.
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.
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.
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.
Reserve currency is great for interest rates, because Americans get their interest rates subsidized by the rest of the world, but its drawback is abusive politicians who borrow money to the point of unsustainability.
Then why do ascendant powers want to have it?
Review
Americans have by far the highest standard of living in the world. We aren’t smarter or harder working than everyone else, it’s our power to dictate to the rest of the world that gives us the easy life.
It’s never a good thing when the nation you love and call home loses stature.
Because they can create monetary policy that most favours them. Canada, for example, could adopt the American dollar as its currency. We would gain the benefit of lower interest rates, because we are using the world’s reserve currency.
The disadvantage is that we would be stuck with the consequences of US’s monetary policy if it turns out that some of policies have negative effects on Canada’s economy.
So consider the current candidates for “reserve currency”. Do we want to have our monetary policy dictated by them?
Yes.
But that easy life comes to an end, if the US loses its reserve currency. Right now, your country is running $3 trillion deficits now. Lose the reserve status and, if nothing changes, you might run $5 trillion deficits because of increase in interest rates.
Could be ok in the long run. But there is a decade or two of massive inflation, misery and deep changes before ii becomes ok for regular people.
No, probably not. Not one of them wants to fix the US in a way that binds politicians from undoing the fix.
If it means that the Neocons can no longer run around the world starting wars, then I’m for it.
This is pretty much uncharted territory with hypothetical consequences. I’ve tried to compare the switch from the Pound Sterling to the US Dollar as the world’s reserve currency, but there are too many differences between today and the 30’ leading into WWII. For most, a change today is instinctively scary. It’s much more comfortable living with the status quo. Perhaps that’s the real problem, the status quo that is. Other nations are in an ascendancy and quite honestly the U.S. is either stagnant or in decline.
Politicans buy votes. When they can’t borrow or tax to get it they inflate the currency creating inflation. The rest of the world eventually figures out the dollar is becoming worthless and finds another way to conduct trade . The rest of the world has been funding this Insane spending by using our dollars and won’t be a sucker for much longer.
We were freer which is why despite not working harder or being smarter the world owes us everything fr turning medical care into an actual science to ending mankind’s all time’s greatest killer famine. The US has put a halt to war in Northern and Western Europe for 80yrs. Enabling Romans and Parisians to live to 80yo without being warred on for the first time in a long time.
US is responsible for 45% of all new medical: drugs,procedures and equipment. It is 5% of every US HC bill and subsidizes every other HC system on earth.
I look around-flat screen. cell, computer chip, microwave not one thing descends from anywhere but the USA-most of it fr the DoD budget.
7.7 billion non Americans on earth and their collective contributions in recent generations to my life don’t exist.
The Euro was supposed to unseat the dollar?
The always wrong were wrong again?
Instead USD went fr 72% to 65% of all global commerce=
this while the US has debased the dollar about 90% since Nixon left the gold standard and assured us no loss of purchasing power.
Notice how the author did not include a current number?
no different than leaving the race out of crime pieces.
last thing on earth to know is that despite endlessly debasing the USD, the world cannot function without it.
Maybe a glimmer of hope that Taiwan doesn't become the next US victim like Ukraine.
Stupid headline, posing a ludicrous rhetorical question.
"Is It a Good Thing to Lose Your Job, Get Kicked to the Curb, and End Up on Skid Row, Renting Out Your Body Orifices to Random Passersby for Spare Change?"
Gee, let me think about that for a while!
Regards,
You needn't bother doing that!
Rather, just compare the drop in the standard of living and loss of geopolitical importance suffered by the British due to the displacement of the Pound Sterling.
But even that is difficult to assess, since you'd have to try imagining what it would have been like if the £ had instead retained its status (= an exercise in contrafactual history!).
Regards,
The U.S. Navy polices the world's sea lanes!
This ensures rel. free trade and is more responsible than anything else for the unparalleled levels of internat'l commerce (vulgo: economic globalization) and thus PROSPERITY we see today.
Regards,
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.