Bretton Woods has led to a US life of luxury and the economists’ joke that the American consumer drives the world economy. It was a nice run. But once we have to print money to service the astronomical debt, it will devalue both the treasuries and the dollar, reducing our purchasing power and putting us to work for others — like they have been doing for us.
Let’s hope we have robots and automation by then :)
For the past 5 months the Federal Reserve has increased its treasury holdings by $250 billion[1], after selling them steadily for the past 2 years as part of QE reversal. Everything I've read said that the recent inability for the Treasury to clear short-term bonds is a technical issue. But I wonder if these two matters are purely coincidental. Perhaps the removal of the SS Trust Fund buffer is starting to catch up with our massive and dramatically increasing (since the Trump tax cut) deficits? Any linkage would have to be indirect, I suppose, but still....
Also, the trade deficit doesn’t measure services, of which the US has a surplus last I checked.
I’ve heard wages are very low. 44% of Americans earn $18,000/yr.
From March 2019: "The recent jump in paychecks has come with an unusual characteristic, as workers at the lower end of the pay scale are getting the greater benefit."
Ref: https://www.cnbc.com/2019/03/13/workers-at-lower-end-of-pay-...
From October 2019: "According to analysis by Nick Bunker, an economist with the jobs site Indeed, wage growth is currently strongest for workers in low-wage industries, such as clothing stores, supermarkets, amusement parks, and casinos. And earnings are growing most slowly in higher-wage industries, such as medical labs, law firms, and broadcasting and telecom companies."
Ref: https://www.theatlantic.com/ideas/archive/2019/10/labor-depa...
And Goldman Sachs says the same as of November, check out page 7 specifically: https://www.goldmansachs.com/insights/pages/outlook-2020-f/U...
However, without this trade deficit, US dollar will start declining as the major reserve currency. There just won't be as many dollars around in the world for other countries to hold.
As you surmised, yes, that will be pretty bad for the US.
US consumers buy stuff with US dollars. Where do those US dollars go if the consumers spend them on imported goods? They end up invested in the US (or, depending on your political bent, "the Chinese buy up all of our companies").
The net international investment position (the amount of stuff the US owns abroad minus the amount of stuff other countries own in the US) is about -$11tn as a result of the persistent current account deficit and capital account surplus.
It sort of does, in that we export USD. Using USD outside the US requires holding USD. Inflation means you need a continuing flow of USD to maintain that balance. Thus, on net the US is actually selling USD for goods.
“Federal Reserve data from 2017 showed that the number of $100 bills exceeded the number of $1 bills. However, a 2018 research paper by the Federal Reserve Bank of Chicago estimated that 80 percent of $100 bills were in other countries.“ https://en.wikipedia.org/wiki/United_States_one_hundred-doll...
This is countered by people in the US holding foreign currency, but the US is very much exporting currency on net.
a. non-renewable resources like copper ore
b. renewable resources like hydroelectric power
c. the result of low-skill labor, such as assembling plastic toys
d. the result of high-skill labor, such as assembling jet aircraft
e. data that can be licensed, with trivial cost to produce each copy
To be in the best shape we need to have a mix that allows independence, employs people of all skill levels, and generally gives high profit.
In the current account you're just looking at the value of goods and services going each way across the border. In the capital account you're looking at investment going one way and the returns flowing back.
How true is that when the only thing that has happened is that the trade deficit is smaller? There is still an outflow, and meanwhile all of the US dollars that moved into foreign hands over the past century are all still out there.
It's more like a reduction in growth rate rather than the cessation of growth, and not a decline at all.
If it went to a trade surplus, sufficiently large to pull back a significant proportion of the dollars already out there, that would be much more of a concern.
Not to mention that there is no other currency out there to be the global reserve currency.
The euro? No thanks say the Germans, who want to continue to run trade surpluses.
The yuan? No thanks say the Chinese, who want to control their exchange rate.
The yen? See the euro.
Sdrs? Not sure how a basket of currencies with no central bank to manage crises is a good solution.
The pound? Thanks, but we have enough issues right now, bugger off.
Any other currency? The market isn't big enough.
This is accurate. However, let's not fool ourselves. Having a single large reserve currency is not the only trading solution out there.
Most countries in close proximity, like south east asian countries for example, can easily trade in their local currencies. In fact, the more that China becomes the biggest importer of goods in Asia, the more irrelevant the dollar would become.
For more on that, this is an excellent read:
https://www.worldcat.org/title/absent-superpower-the-shale-r...
Periodic reminder that contrary to forum wisdom, Germany cannot just do whatever it wants in Europe (and France will certainly see to that).
When it comes to monetary policy: the Governing Council of the ECB has 25 members, two of which are German.
But I imagine aiming to be a reserve currency would be a political as well as a monetary decision.
In a true crisis scenario international trade can fall back to a fixed standard (gold, crypto, whatever) for settling things.
In practice though I'd be surprised if all those countries were really unhappy with their currencies becoming the reserve. Being the reserve creates demand for paper which can be exchanged for real goods - a substantial win for the creators of the currency.
One of the big reasons to use the US dollar as the global reserve is the US government exerts itself to make that happen. If they stopped, others would cheerfully fill the gap. The real point of resistance is replacing the SWIFT system.
"...I do not think that the role of the dollar provides for the US any “exorbitant privilege”, contrary to what many suppose. Rather, I have argued, it creates an exorbitant burden for the US economy, one that forces the US to choose between higher debt and higher unemployment whenever a country takes steps to force up its savings rate or, which is pretty much the same thing, to force up its current account surplus." https://carnegieendowment.org/2012/11/17/is-there-asian-rmb-...
Let's say that being a single nationalistic reserve currency gives inordinate power in the hands of a few.
Some societal benefits are:
- There will never be shortages or famines like the Irish potato famine. You need potatoes, you print money and go get them
- There will never be shortages of labor. You need services and companies to support the massive infrastructure, you pay cheap labor and get them. This is why even very small counties in the US can handle online utility payments while it's not common in Germany or Japan
- Any time there is a recession, just print money out of it without worrying about inflation. For ALL other countries, the more they print, the lesser their currency goes in valuation. Think Argentina, Asian countries. US has been printing quite a bit as well but all those extra dollars don't cause inflation. They just provide liquidity. The inflation is exported to other countries. This is why so many countries have so many dollars in reserves now
- This printing press minus the inflation is the reason the US nominal GDP is so high. A haircut in US is the same as haircut in India. But a $70 haircut counts more towards GDP than a Rs 70 haircut
- This currency is also the reason why so many countries give visa on arrival to US citizens. Those countries need dollars and they want to make it easy for people to give it to them. The freedom to travel around the world with such a strong currency is uniquely American. Perhaps only bested by the British in the past
- US currency goes through US banks. Which means it is under US purview. This is how the US imposes sanctions on whoever they don't like. This is enormous power honestly. Japan and Korea are in a trade war but they can't really impose sanctions on each other as much as US on Iran.
Overall, being the reserve currency is an undue advantage that the US has. The standard of living in the US is abnormally high because of it.
The US has been printing lots of dollars, with little inflation, because the rate of demand has matched the rate of printing. But it would be easy to print more dollars than are in demand, and that would cause inflation on the dollar just like any currency.
> - This currency is also the reason why so many countries give visa on arrival to US citizens. Those countries need dollars and they want to make it easy for people to give it to them. The freedom to travel around the world with such a strong currency is uniquely American. Perhaps only bested by the British in the past
This is nationalist nonsense. The US wasn't the strongest passport in 2019[1] and hasn't been in the past 4 years[2][3][4].
[1] https://www.atlasandboots.com/best-passport-to-have/
[2] https://www.telegraph.co.uk/travel/news/powerful-passports-2...
[3] https://www.telegraph.co.uk/travel/lists/most-powerful-passp...
[4] https://www.weforum.org/agenda/2016/09/how-powerful-is-your-...
Hint, global assets are all available for purchase on dollars. As more and more products get built in China and other countries and they are all willing to accept dollars for them, the rate of demand for dollars increases.
As for visa on arrival, most countries on it are similar GDP-wise. Which means their citizens have a low cost to convert to USD and their capital accounts are open so citizens can freely chnage into USD.
So their domestic currencies are almost as good as USD (or even Euros to some extent)
> Hint, global assets are all available for purchase on dollars. As more and more products get built in China and other countries and they are all willing to accept dollars for them, the rate of demand for dollars increases.
This doesn't contradict anything I said.
Yes, I understand why demand for dollars is going up. No, that doesn't mean we can just print dollars faster than demand and expect no inflation.
> As for visa on arrival, most countries on it are similar GDP-wise. Which means their citizens have a low cost to convert to USD and their capital accounts are open so citizens can freely chnage into USD.
So would it be fair to say that you're retracting your statement that this is "uniquely American"?
There will, because the potato famine wasn't caused by lack of money, it was caused by monoculture, historically poor land management practices encouraged by foreign interests, and genocidal tendencies on the part of the English.
If the Irish people had the ability to arbitrarily print money the way you suggest, they still would have been starving because the English would have taken the money AND the food.
A low levels of quantitative easing, it won’t matter much, but there is definitely an inflection point.