Posted on 04/10/2002 7:48:59 PM PDT by Enemy Of The State
US dollar hegemony has got to go
By Henry C K Liu
There is an economics-textbook myth that foreign-exchange rates are determined by supply and demand based on market fundamentals. Economics tends to dismiss socio-political factors that shape market fundamentals that affect supply and demand.
The current international finance architecture is based on the US dollar as the dominant reserve currency, which now accounts for 68 percent of global currency reserves, up from 51 percent a decade ago. Yet in 2000, the US share of global exports (US$781.1 billon out of a world total of $6.2 trillion) was only 12.3 percent and its share of global imports ($1.257 trillion out of a world total of $6.65 trillion) was 18.9 percent. World merchandise exports per capita amounted to $1,094 in 2000, while 30 percent of the world's population lived on less than $1 a day, about one-third of per capita export value.
Ever since 1971, when US president Richard Nixon took the dollar off the gold standard (at $35 per ounce) that had been agreed to at the Bretton Woods Conference at the end of World War II, the dollar has been a global monetary instrument that the United States, and only the United States, can produce by fiat. The dollar, now a fiat currency, is at a 16-year trade-weighted high despite record US current-account deficits and the status of the US as the leading debtor nation. The US national debt as of April 4 was $6.021 trillion against a gross domestic product (GDP) of $9 trillion.
World trade is now a game in which the US produces dollars and the rest of the world produces things that dollars can buy. The world's interlinked economies no longer trade to capture a comparative advantage; they compete in exports to capture needed dollars to service dollar-denominated foreign debts and to accumulate dollar reserves to sustain the exchange value of their domestic currencies. To prevent speculative and manipulative attacks on their currencies, the world's central banks must acquire and hold dollar reserves in corresponding amounts to their currencies in circulation. The higher the market pressure to devalue a particular currency, the more dollar reserves its central bank must hold. This creates a built-in support for a strong dollar that in turn forces the world's central banks to acquire and hold more dollar reserves, making it stronger. This phenomenon is known as dollar hegemony, which is created by the geopolitically constructed peculiarity that critical commodities, most notably oil, are denominated in dollars. Everyone accepts dollars because dollars can buy oil. The recycling of petro-dollars is the price the US has extracted from oil-producing countries for US tolerance of the oil-exporting cartel since 1973.
By definition, dollar reserves must be invested in US assets, creating a capital-accounts surplus for the US economy. Even after a year of sharp correction, US stock valuation is still at a 25-year high and trading at a 56 percent premium compared with emerging markets.
The Quantity Theory of Money is clearly at work. US assets are not growing at a pace on par with the growth of the quantity of dollars. US companies still respresent 56 percent of global market capitalization despite recent retrenchment in which entire sectors suffered some 80 percent a fall in value. The cumulative return of the Dow Jones Industrial Average (DJIA) from 1990 through 2001 was 281 percent, while the Morgan Stanley Capital International (MSCI) developed-country index posted a return of only 12.4 percent even without counting Japan. The MSCI emerging-market index posted a mere 7.7 percent return. The US capital-account surplus in turn finances the US trade deficit. Moreover, any asset, regardless of location, that is denominated in dollars is a US asset in essence. When oil is denominated in dollars through US state action and the dollar is a fiat currency, the US essentially owns the world's oil for free. And the more the US prints greenbacks, the higher the price of US assets will rise. Thus a strong-dollar policy gives the US a double win.
Historically, the processes of globalization has always been the result of state action, as opposed to the mere surrender of state sovereignty to market forces. Currency monopoly of course is the most fundamental trade restraint by one single government. Adam Smith published Wealth of Nations in 1776, the year of US independence. By the time the constitution was framed 11 years later, the US founding fathers were deeply influenced by Smith's ideas, which constituted a reasoned abhorrence of trade monopoly and government policy in restricting trade. What Smith abhorred most was a policy known as mercantilism, which was practiced by all the major powers of the time. It is necessary to bear in mind that Smith's notion of the limitation of government action was exclusively related to mercantilist issues of trade restraint. Smith never advocated government tolerance of trade restraint, whether by big business monopolies or by other governments.
A central aim of mercantilism was to ensure that a nation's exports remained higher in value than its imports, the surplus in that era being paid only in specie money (gold-backed as opposed to fiat money). This trade surplus in gold permitted the surplus country, such as England, to invest in more factories to manufacture more for export, thus bringing home more gold. The importing regions, such as the American colonies, not only found the gold reserves backing their currency depleted, causing free-fall devaluation (not unlike that faced today by many emerging-economy currencies), but also wanting in surplus capital for building factories to produce for export. So despite plentiful iron ore in America, only pig iron was exported to England in return for English finished iron goods.
In 1795, when the Americans began finally to wake up to their disadvantaged trade relationship and began to raise European (mostly French and Dutch) capital to start a manufacturing industry, England decreed the Iron Act, forbidding the manufacture of iron goods in America, which caused great dissatisfaction among the prospering colonials. Smith favored an opposite government policy toward promoting domestic economic production and free foreign trade, a policy that came to be known as "laissez faire" (because the English, having nothing to do with such heretical ideas, refuse to give it an English name). Laissez faire, notwithstanding its literal meaning of "leave alone", meant nothing of the sort. It meant an activist government policy to counteract mercantilism. Neo-liberal free-market economists are just bad historians, among their other defective characteristics, when they propagandize "laissez faire" as no government interference in trade affairs.
A strong-dollar policy is in the US national interest because it keeps US inflation low through low-cost imports and it makes US assets expensive for foreign investors. This arrangement, which Federal Reserve Board chairman Alan Greenspan proudly calls US financial hegemony in congressional testimony, has kept the US economy booming in the face of recurrent financial crises in the rest of the world. It has distorted globalization into a "race to the bottom" process of exploiting the lowest labor costs and the highest environmental abuse worldwide to produce items and produce for export to US markets in a quest for the almighty dollar, which has not been backed by gold since 1971, nor by economic fundamentals for more than a decade. The adverse effect of this type of globalization on the developing economies are obvious. It robs them of the meager fruits of their exports and keeps their domestic economies starved for capital, as all surplus dollars must be reinvested in US treasuries to prevent the collapse of their own domestic currencies.
The adverse effect of this type of globalization on the US economy is also becoming clear. In order to act as consumer of last resort for the whole world, the US economy has been pushed into a debt bubble that thrives on conspicuous consumption and fraudulent accounting. The unsustainable and irrational rise of US equity prices, unsupported by revenue or profit, had merely been a devaluation of the dollar. Ironically, the current fall in US equity prices reflects a trend to an even stronger dollar, as it can buy more deflated shares.
The world economy, through technological progress and non-regulated markets, has entered a stage of overcapacity in which the management of aggregate demand is the obvious solution. Yet we have a situation in which the people producing the goods cannot afford to buy them and the people receiving the profit from goods production cannot consume more of these goods. The size of the US market, large as it is, is insufficient to absorb the continuous growth of the world's new productive power. For the world economy to grow, the whole population of the world needs to be allowed to participate with its fair share of consumption. Yet economic and monetary policy makers continue to view full employment and rising fair wages as the direct cause of inflation, which is deemed a threat to sound money.
The Keynesian starting point is that full employment is the basis of good economics. It is through full employment at fair wages that all other economic inefficiencies can best be handled, through an accommodating monetary policy. Say's Law (supply creates its own demand) turns this principle upside down with its bias toward supply/production. Monetarists in support of Say's Law thus develop a phobia against inflation, claiming unemployment to be a necessary tool for fighting inflation and that in the long run, sound money produces the highest possible employment level. They call that level a "natural" rate of unemployment, the technical term being NAIRU (non-accelerating inflation rate of unemployment).
It is hard to see how sound money can ever lead to full employment when unemployment is necessary to maintain sound money. Within limits and within reason, unemployment hurts people and inflation hurts money. And if money exists to serve people, then the choice becomes obvious. Without global full employment, the theory of comparative advantage in world trade is merely Say's Law internationalized.
No single economy can profit for long at the expense of the rest of an interdependent world. There is an urgent need to restructure the global finance architecture to return to exchange rates based on purchasing-power parity, and to reorient the world trading system toward true comparative advantage based on global full employment with rising wages and living standards. The key starting point is to focus on the hegemony of the dollar.
To save the world from the path of impending disaster, we must:
Nope.
America, with its dastardly dollars, is the 'Hegemon' ...!
Yes Comrades, a return to state planning! Surely the aging and brutal kleptocrats of Beijing have more prescience than Wall Street!
BTW: At 6 trillion to 9 trillion our debt ratio is less than that of most of our major trading partners I believe, including Canada, Japan, and Germany.
LOL
Full employment that results from private sector growth doesn't cause inflation. However politicians just can't resist growing employment by growing the government, which will have a far different effect.
Yep, we have the lowest debt ratio of the G8 or whatever they call it nowadays. But let's try not to ruin the emotional impact of this article with facts, OK?
How could total worldwide exports be smaller than worldwide imports? Where is this $450 billion coming from? Because if one country imports something, logic would say that was exported from somewhere else. Does the $450 billion come because of shipping costs?
Yeah, right. More likely trade would cease with the entity making that demand and another market would be found "overnight". These guys really haven't a clue about how capitalism works, do they?
Socialist blather
Now, why do I somehow think that that silly-a$$ Iron Act wasn't exactly binding on America or Americans,in 1795.
You're really a Liu-Liu, Henry, you putz.
How could this be possible for a country that runs a multi-year export surplus. How would nations acquire the necessary currency to purchase the nations goods.
the global finance architecture will turn into a multi-currency regime overnight. There would be no need for reserve currencies and exchange rates would reflect market fundamentals of world trade.
Why not return to the gold standard so we don’t have to worry about exchange rates or US currency hegemony.
This almost invariably starts a fight when I say it, but that's a bad idea.
I know there is not enough gold in the world to back even the outstanding US currency with out a serious deflationary revaluation.
As for your first question...uhhh, good question. Damned if I know how Mr. Liu intends to square that particular circle, but it certainly seems as though we'd run out of yen with which to buy Japanese things, and right quick too.
Like someone already said, I pity anyone who invests through this guy ;)
There is an urgent need to restructure the global finance architecture to return to exchange rates based on purchasing-power parity...
Har de har har. And which goods and/or services would Mr. Liu like to propose we tie everyone's currency to?
I feel so sorry for money when inflation hurts it.
What dream world does he live in. At no point in history that I know of was there ever purchasing power parity. Trade imbalances have always existed. Poor nations have always struggled to purchase the goods of more wealthy nations.
This is such a bunch of crap and this looser knows it. US dollars are invested in almost every nations in the world. If I go to Brazil and buy land does that make the land a US asset? Can I take that land back to the US with me?
You are correct: it's a great deal for the US.
The reason we have such a deal has nothing to do with economics. Military muscle explains it all.
Importers will have to bid for the currency with other currencies, thereby raising the value of the perennial exporter's currency rather than the US dollar. That is precisely the point the author is making.
There IS enough gold in the world to redefine all currencies in terms of gold. All that is required is an INCONSEQUENTIAL revaluation.
Why do you think a tie to particular goods and/or services is either implied or required by Liu's pov. It isn't.
Aside: about a month ago I read some very thoughtful intelligent posts by you on the infinite monkeys thread. I even forget what side you were on, but I was particularly impressed with the eloquence with which you stated your pov. Both before and after, I have noticed that your posts on economics threads woefully lack such qualities.
Aside: about a month ago I read some very thoughtful intelligent posts by you on the infinite monkeys thread. I even forget what side you were on, but I was particularly impressed with the eloquence with which you stated your pov. Both before and after, I have noticed that your posts on economics threads woefully lack such qualities.
Now that's funny. I have more formal education in economics than I do in evolutionary biology. But are your objections to my arguments, or just to the perceived lack of eloquence? ;)
But, be that as it may, I must disagree with you when you say there is enough gold to cover extant currencies. Depending on who you ask, estimates of gold held in reserve by central banks and governments will vary, but about 950 million troy ounces is a good guess from the IMF. That amount of gold accounts for about a quarter of the gold in the world, so there are about 3.8 billion troy ounces of gold floating around out there, which at current spot prices of about $300 per ounce, is worth about $1.14 trillion. The problem is that M2 for the US is currently running about $5.5 trillion - that doesn't strike me as an "inconsequential" revaluation in any sense. And that's without even accounting for all the yen, Deutsche marks, pounds sterling, and dozens of other currencies in the world.
There's just not enough gold in the world to really cover all the dollars in circulation without a serious revaluation, let alone all the other currencies out there. Moving to a gold-based dollar is a great deal for people who already hold gold - their holdings would increase in value almost fivefold overnight, just based on the dollars alone that need to be covered. But the rest of us would get screwed pretty hard.
And Keynesian economics have been thoroughly discredited. Been there, tried that, got stagflation.
The author makes some interesting observations, but his suggestions and conclusions are garbage.
Whatever inter-currency exchange rates clear all products offered for export is the appropriate free market rates. This is nothing more than determining value by supply and demand on a level playing field (In the short run that would be bad for the US, but Liu's perspective is what is just and fair. I think it is also in the U.S. long-term interest, because the current approach is setting up a future generation to suffer the non-market consequences of an essentially militarily supported strong dollar)
Are your objections to my arguments, or just to the perceived lack of eloquence?
Neither. My recollection is that your posts lacked understanding. Nonetheless, these posts were over six months ago so my impression may simply be inaccurate.
Your gold supply numbers are accurate. Therefore, $1 would entitle the holder to, say, 1/8000th of an ounce of gold (using M3 rather than M2). Voila, a gold standard now exists. Rather than a $100 bill promising 100 “nothings” to nobody in particular in no particular time frame it would now promise 1/80th of an ounce of gold to the bearer on demand. Nothing else would have changed. Hence, the situation is “inconsequential” not “serious.” What IS important is what Vladimir Nuri calls the scarcity integrity characteristic of a good money system. (See, for example, his Fractional Reserve Banking As Economic Parasitism
It doesn’t matter what is used for money, as long as it’s scarcity integrity is maintained. Under the current system, some people are empowered to create and distribute it at will for the benefit of a few at the expense of everyone else. I agree with Nuri, that a properly constructed “electronic blip” system can serve this purpose even better than precious metals. But you are simply wrong to say that gold (or any other commodity, for that matter) cannot serve to back a currently un-backed currency. And you are also wrong to hold that the current system is superior to a gold backed one which, at least, provides SOME scarcity integrity.
Your gold supply numbers are accurate. Therefore, $1 would entitle the holder to, say, 1/8000th of an ounce of gold (using M3 rather than M2). Voila, a gold standard now exists. Rather than a $100 bill promising 100 "nothings" to nobody in particular in no particular time frame it would now promise 1/80th of an ounce of gold to the bearer on demand. Nothing else would have changed.
Everything would change. Assume for the sake of argument that right now, pre-gold standard, I can exchange one ounce of gold for $300 cash, or vice versa - that I can exchange use $300 cash to buy one ounce of gold.
But now, in dollar terms, once we've changed to your standard, the prices of those exchanges are way out of whack. Now, instead of being able to exchange my $300 cash for an entire ounce of gold, I can exchange it for only 3/80ths of an ounce of gold. With me so far?
Here's the problem. This is a great deal for those who already have gold. If I already had ten ounces of gold, instead of being able to sell it for $3,000 before, I can now sell it for $80,000 (at $1 per 1/8000 of an ounce, or $8000 an ounce). So the inevitable result is that the prices of everything else are also going to inflate to account for all the new pocket money in the hands of our instant gold millionaires.
But it gets worse for the rest of us. Suppose I want to buy gold, or need to buy gold if I use it for some industrial purpose. Before, I could exchange $300 for the ounce of gold I wanted/needed. Now, I have to scrape up $8000 to buy the ounce of gold that I want/need. Instant impoverishment for those who need to buy gold - you've just increased their costs in dollar terms by a factor of 25.
And that's exactly the situation that most of us find ourselves in - I don't have any gold at all, other than a few items of jewelry. All I have are paper dollars that I can exchange for gold if I want to or need to. But the minute I need to make that exchange, I'm well and truly screwed - I have to come up with 25 times more dollars to get the gold I want than I did before.
And this changes the price of everything. If we have a gold backed currency, then everything is tied to the value of gold. So assume for the sake of argument for a moment, that right now, a cow costs $600, or about two ounces of gold. If we change to a gold standard, that doesn't change the supply of gold, or the supply of cows, nor does it directly affect the demand for either. So I still have to come up with the cash equivalent of two ounces of gold after the changeover, just as before. But now, after the change over, instead of being able to exchange $600 cash for a cow (the cash equivalent of two ounces of gold), I have to come up with $16,000 in cash, because I don't actually have any gold.
See what I'm getting at? If, based on the supply and demand for cows and gold, a cow is worth two ounces of gold, that relative valuation doesn't change just because you declare gold to be redeemable for $8000 an ounce. The value of cows and gold will remain the same relative to each other. And as someone who holds cash and wants to buy a cow, I'm completely screwed.
You won't get many English majors at the protests.;^)
It's what they're used to on the jobs they can get. ;^)
1. gold would become suddenly more valuable vis a vis a paper/electronic “dollar”
2. people holding gold will have new pocket money, and, therefore, the paper/electronic “dollar” price of everything else will inflate.
3. those needing gold for industrial use will have to pay $8,000 per ounce for it.
1 is true; the first part of 2 is true but only in the same way that people would “have more money” if the stock market went up by 25 fold, no change in the ACTUAL money supply would occur and therefore your statement that the price of everything else will inflate is not true. 3 is also true (unless alternative commodities can be used).
Therefore, there would be a one-time benefit to current holders of gold, but none of your other fears would materialize. However, please, recognize, I DO NOT favor a gold standard as the ideal solution. It’s just substantially better than the current irrational system
A strong-dollar policy is in the US national interest because it keeps US inflation low through low-cost imports and it makes US assets expensive for foreign investors.
Import prices have little impact on inflation in an economy as big as ours, and foreign investors haven't been able to get enough of U.S. assets the last five years despite the strong dollar.
This arrangement, which Federal Reserve Board chairman Alan Greenspan proudly calls US financial hegemony in congressional testimony, has kept the US economy booming in the face of recurrent financial crises in the rest of the world.
Financial crises are about remaking parasite economies into productive ones, and are thus to be applauded.
It has distorted globalization into a "race to the bottom" process of exploiting the lowest labor costs and the highest environmental abuse worldwide...
There is absolutely no statistical evidence to support the "race to the bottom." The contrary, in fact: the research indicates that investment responds to property rights far more than wages, and goes to places where labor laws and environmental protections are stronger.
The adverse effect of this type of globalization on the developing economies are obvious.
Since 1970 tens of millions of people have been vaulted from the Third World to the First by more open markets. Globalization is the only hope the world's developing countries have, because it gives them a chance to be liberated from their brutally corrupt and oppressive governments.
"market fundamentals" are rubbish. What is fundamental is purely a matter of opinion.
"the dollar has been a global monetary instrument that the United States, and only the United States, can produce by fiat."
He says that like it's a bad thing. Perhaps the United States is generally a more trustworthy government, and its currency is therefore preferred.
"World trade is now a game in which the US produces dollars and the rest of the world produces things that dollars can buy."
In other words, we have reached Nirvana. We give the rest of the world pretty pieces of paper, and they give us things like microchips. I guess the rest of the world is just stupid.
"The higher the market pressure to devalue a particular currency, the more dollar reserves its central bank must hold. This creates a built-in support for a strong dollar that in turn forces the world's central banks to acquire and hold more dollar reserves, making it stronger. "
Say what? In order to hold down the value of the dollar they do things to hold up the value of the dollar?
"Everyone accepts dollars because dollars can buy oil."
Other way around. Dollars are accepted for oil because dollars can buy anything.
"Moreover, any asset, regardless of location, that is denominated in dollars is a US asset in essence."
B.S.
And WTF does "in essence" mean?
"It robs them of the meager fruits of their exports and keeps their domestic economies starved for capital, as all surplus dollars must be reinvested in US treasuries to prevent the collapse of their own domestic currencies."
Interesting idea of property.
If they wanted to prop up their own currency, the thing to do would be to buy it with the dollars they receive. But that's a useless exercise if nothing of value can be purchased with their own currency.
"The unsustainable and irrational rise of US equity prices, unsupported by revenue or profit, had merely been a devaluation of the dollar. Ironically, the current fall in US equity prices reflects a trend to an even stronger dollar, as it can buy more deflated shares."
First thing in this piece I can agree with.
"The world economy, through technological progress and non-regulated markets, has entered a stage of overcapacity"
Second right thing.
Oh crap, he's a friggin' Keynesian to boot. I think I'll skip commenting on the next lunatic section, except for: in order to say that anything is "fair" or "unfair", one must first specify the ethical standard by which that judgement is made. "Fair wage" proponents ( and "true" comparative advantage proponents) seldom do this, and with good reason: their ethical standard is antithetical to individual liberty and justice.
Divest yourself of US dollars and the "problem" you leap backwards through your own back side to first countenance and then to combat, is gone.
If people want to invest in US dollars, purchasing US currency on the free market, it means that the security of this investment is the world's consensus opinion.
Hate the exercise of human free will all you want, Lou baby, unless and until some socialst whacko system can compete effectively with freedom, the world will continue to invest in what works best, even if the tyrranical parasitic fat slug dictators you grovel for will not allow freedom itself to be imported.
This is one of the most common misperceptions about the gold standard. You do not need to back your currency on a 1:1 ratio. You could have, for instance, a 5:1 ratio. This would mean that 1 out of every five dollars was backed by Gold. Whenever someone came to the gold window and presented a dollar, and got a dollar's worth of gold out of the central bank, the central bank would, through issuing bonds, pull four dollars out of the economy. On the contrary, whenever someone came to the gold window with $1 worth of gold, they'd get $1, and the central bank would pump four more dollars into the economy.
This is how the gold standard in Germany worked in the 1920s: they had a 3:1 ratio. Most countries use a ratio other than 1:1. But you have to be disciplined, and remove the other dollars or add the other dollars to the economy.
Financial crises are about remaking parasite economies into productive ones
Au Contraire. Financial crises, which are always accompanied by a bailout of the CREDITORS, make the parasitic banking cartel even more so!!
He says ["the dollar has been a global monetary instrument that the United States, and only the United States, can produce by fiat."] like it's a bad thing.
It IS a bad thing from the perspective of other countries. Actually, it's a bad thing for everybody other than the money creators and their favored borrowers (primarily the US government).
Perhaps the United States is generally a more trustworthy government, and its currency is therefore preferred.
The fact that we can blow the whole ball of wax to smitherines has something to do with it!
We give the rest of the world pretty pieces of paper, and they give us things like microchips. I guess the rest of the world is just stupid.
No, but they know whose “ball” it is and who, therefore, gets to call the shots.
In order to hold down the value of the dollar they do things to hold up the value of the dollar?
You misunderstood. The original statement that you think you are parodying said that a country whose OWN currency is under pressure is forced to protect it by holding dollars, thereby further strengthening the dollar.
Dollars are accepted for oil because dollars can buy anything.
Dollars are accepted for everything because we are the Big Enchilada.
Rather than hijack this thread completely, how about we agree to disagree for now and meet up on one of the forthcoming gold-standard threads. For now, suffice it to say that I disagree most strongly, and my previous post only outlines a few of my concerns with gold-backed currency, and that I have many, many other objections as well.
I'll pop round to go through it once again if I see a chance. There'll be one of those threads sooner or later - it's as inevitable as the tides around here ;)
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