Re: Article in THE ECONOMIST by Davidson

["Henry C.K. Liu" <hliu@xxxxxxxxxxxxxx>]

William F Hummel wrote:

>
> 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.

This is either a distortion or an ignorance of history.  Bretton Woods
died in 1971 a slow death of contradiction between US fiscal
irresponsibility and the gold standard.  The fact was that until the
collapse of the USSR, world trade was primarily Western trade subsidized
by the US.  The two separate segmeents of the global economy operated
through aid by each of the superpowers.  Trade was in all practical
terms non-existent.  The was true for the Japanese and German economic
"miracle."  The Marshall Plan was a political program, not a trade
regime, though trade served a function.  Trade friction developed
between the US's new allies and former enemies as the US grew confident
about winning the Cold War.  That trade friction was resolved with the
trade off between currency account deficit and capital account surplus
in favor of the US through dollar reserve status.  After the Cold War,
when globalized trade took off, this formula was expanded to cover the
entire world.

Prior to 1971, "Nobody objected to the large current account surplus
that the US ran at that time" because they all felt they earned their
trade deficit by being US allies and got paid for serving US
geopolitical and ideological interests.  It was payment for being
anti-communist.

>
>
> 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 suggest that you study the political economy behind the Plaza Accord.

>  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.

More and more policy makers in the exporting economies are beginning to
understand the futility of expert coupled with  capital account defict.
It distorts domestic development.  Also, "better employment condition at
home" is not factually operative in any exporting economy, as the
AFL-CIO will tell you.

>  Major trading partners also erect barriers to US
> capital outflows that could help reduce its current account
> deficit.

I don't understand this statement.

>
>
> 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.
>

No one is arguing for the absence of an international monetary standard,
only a more equitable one. The last sentence above is the equivalent of
"tyrany is tolerable because it delivers order".

Henry C.K. Liu