Jump to content
Head Coach Openings 2024 ×
  • Current Donation Goals

    • Raised $2,716 of $3,600 target

Why the Dollar Rules the World — And Why Its Reign Could End


Muda69

Recommended Posts

https://mises.org/wire/why-dollar-rules-world-—-and-why-its-reign-could-end

Quote

President Donald Trump wants a lower US dollar. He complains about the over-valuation of the American currency. Yet, is he right to accuse other countries of a “currency manipulation”? Is the position of the US dollar in the international monetary arena not a manipulation in its own right? How much has the United States benefitted from the global role of the dollar, and is this “exorbitant privilege” coming to end? In order to find an answer to these questions, we must take a look at the monetary side of the rise of the American Empire.

Trump is right. The American dollar is overvalued. According to the latest version of the Economist’s “ Big Mac Index,” for example, only three currencies rank higher than the US dollar. Yet the main reason for this is not currency manipulation but the fact that the US dollar serves as the main international reserve currency.

This is both a boon and a curse. It is a boon because the country that emits the leading international reserve currency can have trade deficits without worrying about a growing foreign debt. Because the American foreign debt is in the country’s own currency, the government can always honor its foreign obligations as it can produce any amount of money that it wants in its own currency.

Yet the international reserve status comes also with the curse that the persistent trade deficits weaken the country’s industrial base. Instead of paying for the import of foreign goods with the export of domestic production, the United States can simply export money.

American Supremacy

The performance of the US economy in the 20th century owes much to the predominant role of the US dollar in the international monetary system. A large part of attaining this role was the result of the political and military supremacy that the United States had gained after World War I. Still today, the position of the US dollar in the world of finance represents a major underpinning of the prosperity at home and provides the basis for the expansion of the US military presence around the globe.

After each of the two world wars in the 20th century, the United States emerged as the largest creditor country, while the war had ruined the economies of the war-time enemies along with that of the major allies. After the end of the Cold War, this pattern would experience a repetition. The United States, so it seems, has been, since then, the only remaining superpower.

....

Changing of the Guard

The easy monetary policy of the United States has accelerated the de-industrialization at home and has fostered industrialization abroad (predominantly in China and in the rest of Southeast Asia); it has produced a situation that stands in sharp contrast to the end of World War I and World War II. Under the new BW2 system, the United States is no longer the largest creditor with the largest industrial base, but instead has become the largest international debtor. Imperial politics requires expansive monetary policy, and the consequence of it shows up in persistently high trade deficits and a deteriorating external investment position (Figure 4).

mueller4.png

Figure 4: United States net international investment position, 1976–2019 (in million US-dollars). Source:tradingeconomics.com

Being the issuer of a global currency provides huge benefits that come with a curse. Increased private and public consumption possibilities come from the privilege of getting goods from abroad without the necessity of producing an equivalent amount of tradable export goods. While other countries have to export in order to pay for their imports, the sovereign who emits a global currency is exempt from adhering to the most fundamental law of economic exchange. This sets domestic resources free for the expansion of the state, particularly military power. The more such an imperial power extends its military presence, the more its currency becomes a global currency, and thereby new expansionary steps can be financed. Expansion becomes a necessity.

Over time, however, the divergence widens between the weakening industrial base at home and the extended global role. With goods coming from abroad for which there is no immediate need to pay with sweat and effort, the domestic culture changes from an ethics of production to hedonism. Creeping corruption cronyism undermines the political system. With resources set free because of imports, the production of goods at home shifts to fancy activities. The cycle of "panem et circenses" has been the fate of all empires.

The current global position of the United States is similar to that of Spain in the period of its decline. Already economically hollow, Spain tried desperately to hang on to its outposts and "possessions" around the globe while the domestic economy transmogrified into a public-service and militarized economy. In the end, the United States gave the coup de grace to the Spanish Empire by taking away Cuba, Puerto Rico, and the Philippines. A new phase of US geographic expansion and dominance began and in 1898 and the stage was set for the United States to become the imperial power of the 20th century.

History, and in particular economic history, always shows both: common features and differences, and indeed, the American Empire is different from some of the former empires. Yet what the United States has in common with the former imperial states is that at some point the military extension becomes too complex to be handled efficiently and thus becomes too costly.

The discrepancy between the relative position of the US economy in the world on the one hand and the relative position of the United States as to its military presence and the role of the US dollar on the other hand is moving toward a cracking point. This leads to the conclusion that in a world where the economic strength of the United States is diminishing relative to other countries and regions, there will be less and less of a place for the US dollar privilege.

Different from the factors that justified the expectation of a coming demise of the dollar in 2007, the American currency has experienced a new spring due to the financial crisis of 2008. With little else in place for shelter, the US dollar served as a safe haven. It remains to be seen if this will also be the case when the next financial disaster happens.

Looks like history is doomed to repeat itself.

 

  • Disdain 1
Link to comment
Share on other sites

×
×
  • Create New...