Re: Stiglitz

[Clifford Poirot <cpoirot@xxxxxxxxxxx>]

From: pdavidso [mailto:pdavidso@xxxxxxx]


>As long as the rest of the world see the US $ as the safe
harbor for liquidity, the US can print $s with impunity.

I think the operative point is the condition "as long as the rest of the
world". My point is that continuing, large structural deficits by the US
will eventually cause the rest of the world to see other reserve currencies
as harbors for liquidity.

>I believe there is
an estimte that approximately 1/3 of all the Federal Reserve Notes prin ted
are being held outside of the US.  This should suggest how much the
population
of other countries distrust their own currencies.

Yes, but which countries hold all these Federal Reserve notes. My off the
cuff guess is that currency substitution is not that strong in the Euro
zone-but rather in countries where large structural deficits and poor fiscal
policies, combined with a lot of other factors, have resulted in currenchy
crises. These same residents no doubt also hold Euros and other currencies.
This was certainly the case in Southeastern Europe in the 90's-often people
preferred marks to dollars.

>In fact there are statistics that can be gotten on how many nations have
formalized dollarization p[lus how many nations have informally adopted
dollarization -- the firues are suprisingly high! And this with the US being

the biggest debt in the world by far and away -- and still dollar hegemonY!

How come?

I think part of it is habit-we have been the reserve currency since the end
of WWII. Part of it is that in the past there has been no real rival to the
dollar. Part of the answer is political. A long protracted US committment in
Iraq that undermines long standing political alliances and contributes to
long term **structural** deficits could lead to a strengthening of the Euro
vis. the dollar.

>The question of high or low interest rates on dollar assets -- has nothing
really to do with the volume of dollars printed -- it depends almost
entirely
on what former Saint Alan (Greenspan) and his colleagues decide to do--- !

I do not believe that Greenspan can set the interest rate that banks charge.
The most he can do is make it easier or harder for banks to make loans.



>>A point that I have tried to have answered from the deficit proponents on
>>this forum for several years, and which I have never really seen answered
is
>>"do you really believe the US can run huge **structural** deficits year,
>>after year, after year, without paying some price **IF** US dollar
hegemony
>>is not maintained?

>And Cliffr , my answer to your "when did you stop beating your wife"
question
is I do not beat my wife.

Paul, have I misunderstood you and mistaken what you have said for what
other people have said? If so, my apologies. Perhaps you can clarify your
position on deficits. I recall you quipping at the PKT conference a few
years ago that Hyman Minsky once said you (Paul Davidson) had never met a
deficit he didn't like. Frankly, you convey that impression and that is the
understanding I have formed from much of what you have said and written.
When you say (or at least imply) that the US can run any amount of external
debt it wants, and get rid of it just by printing dollars, that is what I
think you are saying. So, please clarify for me.

There are people on this list who have been quite clear that they believe US
deficits should be as much as two to three times their current size and
blame the 01 recession on the budget surpluses of the last Clinton years.
There are those on this list arguing for even larger tax cuts.

I recall way back when, discussing the surplus. I pointed out that surpluses
were just estimates, we miscalculated, and would rapidly disappear. Were it
not for dollar hegemony the US would have to pay higher interest rates in
order to get people to buy its bonds.

>if by dollar hegemoney you mean the dollar standard-- given the current
system, if the world suddenly abandoned the dollar standard , then the asset

side of the balance sheets of most of the central banks of the world would
collapse-- wiping out their net worth and causing financial chaos.

The world does not have to "suddenly" abandon the dollar standard. It merely
needs to slowly start drifting towards other currencies in order to require
the US to raise rates to attract capital flows to its debt obligations.

But an announcement by the US government in response to mounting deficits
and fiscal pressures that it is going to simply print more greenbacks to pay
back bondholders, rather than fixing the tax structure that a certain frat
boy from Texas ruined, could be the event that led to the collapse of dollar
hegemony. This would indeed throw the world into a crisis.

But we've been there before as Kindleberger points out in "The World in
Depression": the collapse of British hegemony, and its unwillingness and
inability to continue its role as international lender of last resort left
the world in a liquidity crisis. I think the US is in danger of traversing
the path of the late British Empire.