Re: Article in THE ECONOMIST by Davidson

[William F Hummel <wfhummel@xxxxxxxxx>]

Hummel wrote:

>> The international dollar is quite analogous to the fiat money
>> that any central bank issues within its own monetary domain,
>> which it does by purchasing assets from those who want to hold
>> its currency as a store of value or for use in trade.  There is
>> little or no need for a central bank to concern itself with
>> redeeming its currency.
>>
>> Because the dollar has become so vital to international trade,
>> the US can issue liquid claims on itself to the rest of the world
>> that may never have to be redeemed so long as it maintains the
>> purchasing power of the dollar domestically.  While this gives
>> the US a unique advantage in terms of borrowing in its own
>> currency, the existence of a safe reserve asset is a great
>> convenience to other countries.

Hugh Whinfrey wrote:

>I do understand this point-of-view William. It works well
>for the US, and more power to the country for having
>pulled it off. The suggestion that it also benefits other
>countries is where some folks take rabbid offense, i.e. the
>argument seems to go that the rest of the world would
>starve and freeze if the US didn't buy all their food, oil, etc.
>Which is to say that the sophisticated abstractions involved
>mask an underlying plain truth inequity that folks outside
>the US have long since recognised and are working to correct
>- i.e. the Euro is the fruit of one such effort to correct it. The
>Gold Dinar being advanced by Malaysia is another such effort.
>
The US didn't engineer the dollar supremacy.  It was the only
currency in which international exchange could readily take place
in the period immediately after World War II.  The Bretton Woods
monetary system that formalized the dollar as the international
currency was freely joined by other nations because it was in
their own interest.  It worked well for almost every nation until
its demise in 1971.  During that period the US in effect lent
long and borrowed far less short from the rest of the world,
thereby providing the dollar assets needed by other countries.
Nobody objected to the large current account surplus that the US
ran at that time.

The dollar standard became so useful to other countries by 1971
that it remains to this day, That's true in spite of the fact
that since about 1980 the US has been providing dollars on
balance through current accounts deficits rather than capital
outflows.  I don't advocate the US continuing large current
account deficits, but it's a two way street.  Other countries
fight hard to maintain their trade surpluses with the US since it
means better employment conditions at home.  The opposite side of
the coin is the steady hollowing out of the manufacturing sector
in the US.  Major trading partners also erect barriers to US
capital outflows that could help reduce its current account
deficit.

It's understandable that many outside the US look at its current
account balance and equate that to lavish over-consumption.  It's
true that the US has a unique advantage in terms of borrowing in
its own currency, making it much easier to avoid financial
crises.  However I suggest that those who envy the US position
take a closer look at their own policies.  They should also
consider how much less efficient world trade would be if there
were no international monetary standard.  The inequities that
folks outside the US see may then appear more superficial than
real.

William F Hummel