Re: De facto Power of the Dollar

[William F Hummel <wfhummel@xxxxxxxxxxx>]

John Gelles wrote:

>"As long as there are sovereign nations who
>choose to issue their own currencies rather than
>agree to a world-wide standard currency, we can-
>not expect to avoid those problems [i.e., problems
>associated with a de facto standard, like the US$,
>-- and how it may favor its sovereign controller].
>The political hurdles to achieve a world bank with
>a single currency are too high [to be contemplated
>by]... any but the most optimistic."
>        -- William Hummel
>
>The power of the sovereign nation controlling the
>US$, to monetize its dollar debts -- if it must -- is
>singled out by Henry Liu as evidence of weakness
>of the rest of the world to finance local prosperities.
>
>Yet annual surveys reveal that higher living stan-
>dards than its own, prevail outside the USA. And
>we know the day will come when international
>trade will largely be financed by non-US$ money.
>
>Hummel may imply that an "eartho" might some
>day be better money than a $, yen or euro. This,
>in turn, implies that central banking can be di-
>vorced from the sovereign strategic interests of
>continental super-powers -- and that a United
>Nations organization could inform such interests
>on behalf of the world's people.  Maybe so.
>
>Meanwhile, the US crusade, to reduce world
>terrorism and the threat of Islamic fascism, has
>raised the budgetary spending needs of the USA
>well beyond its power to tax and borrow money.
>
>It is compelled to monetize, today, tomorrow's
>war (crusade) production.  It appears unwilling
>to do so.  So it waits.  The result will most
>likely be political instability within the USA.
>Constancy of strategic purpose will be lost.

The Fed monetizes US debt in response to the demand for additional
currency in circulation or the demand for reserves to support bank
lending.  It must do so in order to ensure the liquidity of the
payment system and to control the short term interest rate.

However most of the money supply consists of bank-issued credit, not
Fed-issued fiat money.  The amount of bank money is a function of the
demand for loans from the public.  Thus the transaction money supply
is not under the control of the Fed as Gelles seems to imply.  Unless
the Fed is willing to abandon control of the short term interest rate,
it has no way of "pumping" transaction money into the economy.

Government spending is matched on average by taxes and the sale of
Treasury securities.  Deficit spending will increase the net financial
wealth of the public in the form of an increase in Treasury securities
outstanding.  Those securities are readily tradeable for transaction
money, but they are not money themselves.  However the wealth effect
from an increased holding of those securities can stimulate demand.

The point here is that liquidity is never a problem in a well-managed
fiat money system.  The call for more money is really a call for a
more equitable distribution of wealth, which is what I believe Gelles
has been arguing for.

William F Hummel