Re: [TNF] US Dollar is sliding

["Gunnar Tomasson" <gunnar.tomasson@xxxxxxxxxxx>]

Re. the following:

Why have the WTO and its predecessors had such a contentious
history over tariffs, duties, and a host of other impediments to
imports?  I think it's clear that every nation seeks to protect
its local industries and its employment levels with such tactics,
at the expense of its trading partners.  The US does it along
with all the others, but for some reason it has on balance lost
that battle.

Comment:

The reason the US "lost that battle" is rooted in the "free-lunch" aspect of
the US dollar's reserve currency status.

At first glance, it would seem that - as I recall Friedman suggesting in a
Newsweek column in the 1970s - the rest of the world holds the short end of
the stick in exchanging REAL goods and services for IOUs which cost the US
nothing to produce.

But, as Friedman has noted on other occasions, there is NO "free lunch" - in
the present case, the "cost" has been absorbed, first, by "local industries"
which cannot compete with the proverbial "sweatshops" in Asia and, more
recently, by plunging "employment levels" in erstwhile Goldilocks sectors of
the US economy.

Gunnar


----- Original Message -----
From: "William F Hummel" <wfhummel@xxxxxxxxx>
To: "Gunnar Tomasson" <gunnar.tomasson@xxxxxxxxxxx>
Sent: Sunday, May 04, 2003 4:31 PM
Subject: Re: [TNF] US Dollar is sliding


Gunnar wrote;

>Re. the following:
>
>As a social science, economics must first
>> and foremost understand the institutions that comprise the real
>> world.
>
>> It is often said that the US needs to borrow from abroad to
>> support its deficit spending.  That puts the cart before the
>> horse.
>
>Comment:
>
<quote snipped>
>
>In other words, the ACTUAL chain of causality ran from U.S. deficits to
>build-up of claims on the U.S. by its Rest-of-the-World creditors.

I agree that explains how the US dollar became the world's
reserve currency.  However it has little to do with the point I
made about how international trade practices affect the growth of
dollar reserves around the world over the past twenty years or
so.

Why have the WTO and its predecessors had such a contentious
history over tariffs, duties, and a host of other impediments to
imports?  I think it's clear that every nation seeks to protect
its local industries and its employment levels with such tactics,
at the expense of its trading partners.  The US does it along
with all the others, but for some reason it has on balance lost
that battle.

Now it is certainly true that the current account deficit is what
fuels the growth of dollar-denomiated assets held by other
nations.  That deficit is driven mainly by the trade deficit.  So
one must explain how the international monetary order forces
other nations into a trade surplus with the US.  Could it just be
that domestic political issues are at the root of those trade
surpluses?  Is the large trade surplus that Japan has run for
many years due to the hegemony of the dollar?  And how about the
enormous trade surplus that China has created?

To see these trade surpluses as CAUSED by US deficit spending is
to look through the wrong end of the telescope.

William F Hummel