Econintersect: Global Economic Intersection contributing author Michael Pettis has an article published September 7 in Foreign Policy which says the U.S. would benefit greatly if the dollar were no longer used as the world reserve currency. Pettis presents an argument which includes the idea that the current credit bust crisis in the U.S. could have been avoided, or at least have been less severe, if the dollar were not the reserve currency.From the article:
According to most political commentators, there are two main privileges accruing to the United States as a function of the dollar’s reserve status. First, it allows the United States to consume and borrow beyond its means as foreigners acquire U.S. dollars. Second, because foreign governments must buy U.S. government bonds to hold as reserves, this additional source of demand for Treasury bonds lowers U.S. interest rates.
Both claims are muddled. Take the first. It may be correct to say that the role of the dollar allows Americans to consume beyond their means, but it is just as correct, and probably more so, to say that foreign accumulations of dollars force Americans to consume beyond their means.
Pettis demonstrates that the current account imbalances that resulted from global reactions to the reserve currency status of the dollar have created artificially high savings rates in current account surplus countries. This forces dis-savings (deficits) in the countries with negative current account balances. In the current state of affairs, the biggest players on the two ends of the spectrum are the U.S. and China. The status of the dollar as the world’s reserve currency has locked the two nations into extreme current account positions. Pettis says the monetary imbalances are only resolved if Americans consume beyond their means.
And what we have seen in the last decade is the resolution of what monetary policies have preordained.
Pettis says that Americans mistakenly view the status of the dollar as a privilege. Instead he concludes that it is, in fact, a burden that drives public (federal) debt higher and reduces the potential output of the U.S. economy. Pettis writes:
The fact that the world has a widely available and very liquid reserve and trade currency is a common good, but like all common goods, it can be gamed. When countries use the dollar’s reserve status to gain trade advantage, the United States suffers economically — without the benefit of exorbitant privilege. What’s worse, the greater the subsequent trade imbalances, the more fragile the global financial system will be and the likelier a financial collapse.
The rest of the world, according to Pettis, is perfectly willing to enjoy the extraordinary benefit they derive from having the dollar as the world’s reserve currency and are also perfectly willing to let the U.S. foot the entire bill and even to risk a complete financial collapse.
Source: Foreign Policy
