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The Dollar Racket

A descri ption of US monetary policy and its global effect

Date : 09/12/2020

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Francis

Uploaded by : Francis
Uploaded on : 09/12/2020
Subject : Economics

The Triffin Dilemma and the Dollar Racket

There was always a fundamental incompatibility between the attainment of 1. global economic stability and 2. possession of a single national currency to perform the role of the world s reserve currency. As a global reserve currency the US dollar has to be the anchor of the world s trading system. However, as a domestic currency the dollar needs to have sufficient flexibility for internal economic policy. Thus at the heart of the dollar s value and use there is this contradiction for the dual roles of this currency.

During the Bretton Woods golden age which lasted from 1944 until 1971, the US$ was fixed against gold at $35 per oz. However the cost of US wars of choice in Korea and Indo-China, as well as ambitious social programmes like LBJ s Great Society , saw a global build-up of surplus dollars accumulating in central banks around the world. These surplus dollar countries then began trading in their surplus dollars at the gold window at the Federal Reserve Board (the US Central Bank). This was a situation which the US could not tolerate as gold was flying out of the US to various overseas central bank venues.

Thus it was that on August 15, 1971, President Nixon suspended dollar/gold convertibility for a temporary period, which in fact morphed into a permanent arrangement an arrangement which persists to this day. The gold standard was replaced with the US$ fiat standard. The dollar was to be regarded as being as good as gold, which was rather more like an act of faith than rational economic policy.

The maverick Belgian economist Robert Triffin first drew attention to this anomaly during the 1960s in his seminal work Gold and the Dollar Crisis: The Future of Convertibility. He observed that having the US dollar perform the role of the world s reserve currency created fundamental conflicts of interest between domestic and international economic objectives.

On the one hand, the international economy needed dollars for liquidity purposes and to satisfy demand for reserve assets. But this forced, or at least made it easy, for the US to run consistently large current account deficits.

He argued that such a policy of running persistent deficits would eventually put pressure on the dollars convertibility and ultimately lead to the demise of the Bretton Woods system of international exchange which is exactly what happened in 1971.

This arrangement led to what in effect were tangible advantages for the US, at least to the current situation.

A controversial benefit (among others) of the dollars international currency status is the real resources that other countries provide the United States in order to obtain our dollars. It costs only a few cents at the Bureau of Engraving to produce a $100 bill, but other countries have to pony up $100 of real goods and services to obtain one. (The difference between what it costs the government to print the note and a foreigner to procure it is known as seignorage after the right of the medieval lord, or seigneur, to coin money and keep for himself some of the precious metal from which it was made. About $500 billion of US currency circulates around the world outside the United States, for which foreigners have had to provide $500 billion to the US for actual goods and services. (Barry Eichengreen Exorbitant Privilege pp.3/4)

Nice work if you can get it. International trade as denominated in US$ s meant that the US$ qua world reserve currency could use its dollars to buy foreign assets and pay for them in dollars. These dollars were then held by foreigners who could no longer convert surplus dollars into gold but could only purchase US Treasuries (Bonds) and other US dollar-denominated assets which were never going to be repaid. Surplus dollar countries would sell their hard-earned dollars to purchase US Treasuries which pushed up the value of the dollar and kept US interest rates low and the US in turn would buy goods and services from these same surplus countries. It worked rather like this: a foreign computer company say Japcom - sells you a computer by lending you the money to buy it! The ultimate free lunch.

But of course there s always a catch! The effect of a strong dollar which raised domestic US industries costs, lead to the hollowing out of the US domestic economy which ultimately could not compete with more efficient overseas competition. The last thing that the US rust belt needed was/is a strong dollar which had the effect of making its export industries less competitive. This left the US in an economic quandary. Namely, that the United States must on the one hand simultaneously run a strong/dollar, policy and on the other a weak/dollar policy, or put another way must allow for an outflow of dollars to satisfy the global demand for the currency, but must also engineer an inflow of dollars to make its domestic industries more competitive. As explained thus: when the Fed cuts interest rates, investors sell dollar-denominated assets and buy foreign assets, which tends to weaken the dollar`s exchange rate.

Having it both ways! Which of course is hardly possible.

Moreover, it is a moot point as to whether the rest of the world will continue to support this exorbitant privilege in perpetuity. So far, the Vichy-Quisling-Petainst regimes in Europe and East Asia have to touch their forelocks and prostrate themselves before their Lord and Masters, but it would be wrong to imagine that this can continue as a permanent arrangement. Ironically, however, the US hegemon treats its friends and allies considerably worse than its putative enemies. Such is the nature of geopolitics.

Like the man said:

A nation does not have permanent friends or allies, only permanent interests.

British Statesman, Henry John Temple, 3rd Viscount (Lord)...Palmerston, (1784-1865).


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