The future of the US dollar
Posted on behalf of the author, RC Weakley:
At this point hysteresis is all that is holding the US dollar as the global reserve currency. That has been the case since Nixon. What we have done since then has only dug us into a deeper hole when events finally happen that will throw the dirt in on top of the US. So, no American workers will not be better off when the US dollar fails, at least in the short term. The cost of oil will skyrocket as will all global commodities which we must import. Establishing a self-sufficient economy will take at least a decade. Eventually American workers might be better off under some sets of conditions, but not nearly all possible scenarios. The US will need a stable government with institutional depth and breadth. We will need a far better educated electorate than we have now.
Large mistakes come at a high cost usually on a long term installment plan with carried interest. The Treaty of Versailles cost global destruction and over six million lives and every nation party to that miscalculation is still in denial. Keynes nailed the Economic Consequences of the Peace in 1919. He attempted to reason with the players over the reserve currency with Bancor notes instead of dollars. US bankers had their way just as they had in 1919.
At this point hysteresis is all that is holding the US dollar as the global reserve currency. That has been the case since Nixon. What we have done since then has only dug us into a deeper hole when events finally happen that will throw the dirt in on top of the US. So, no American workers will not be better off when the US dollar fails, at least in the short term. The cost of oil will skyrocket as will all global commodities which we must import. Establishing a self-sufficient economy will take at least a decade. Eventually American workers might be better off under some sets of conditions, but not nearly all possible scenarios. The US will need a stable government with institutional depth and breadth. We will need a far better educated electorate than we have now.
Large mistakes come at a high cost usually on a long term installment plan with carried interest. The Treaty of Versailles cost global destruction and over six million lives and every nation party to that miscalculation is still in denial. Keynes nailed the Economic Consequences of the Peace in 1919. He attempted to reason with the players over the reserve currency with Bancor notes instead of dollars. US bankers had their way just as they had in 1919.
I would say “inertia” and “lack of a substitute” instead of hysteresis but that is quibbling over terms. When the dam of confidence in the US dollar finally breaks it will cause lots of problems domestically but there is no getting around it. The dollar has to drown before changes are able to be made, at least from a political point of view. Since the US produces a surplus of oil we will have the energy that we need but since the price is set internationally the price will definitely skyrocket. We don’t need to make an economy that is totally self sufficient but we will need to be able to compete. To do this we will need to pay workers less hopefully without lowering their standard of living. This would be possible if we can produce affordable housing and affordable healthcare. Neither is impossible it just takes thinking outside the box and the collapse of the dollar might provide the impetus. At least we don’t have others to blame (as in the Treaty of Versailles), we negotiated this outcome ourselves.
Well said. Thanks.
PreCambrian:
Where do you guys get the idea Labor is the issue in the costs of Manufacturing, etc.? You do not cut their pay, you look for the waste. Think about it before you answer.
Well it definitely isn’t the only cause. Labor’s share of GDP has fallen from 65% to 60% over the years and business margin has increased abnormally. https://fred.stlouisfed.org/series/LABSHPUSA156NRUG
5% of US GDP (or .05 x $24T = $1.2T) could go back to labor. But to increase manufacturing will take capital investment which few companies will make right now because it is easier to make money with financial deals that actually producing something.
I do think, and as an engineering in manufacturing and processing for the last 35 years, I know that companies and their employees are always looking to eliminate waste, the low hanging fruit. But if you think that labor costs aren’t an issue then you aren’t looking at manufacturing in the United States. Our most successful exports are those with a low labor component (oil & gas related, and agricultural related) while those with high labor costs have moved to other countries.
Pre:
Break the costs of a product out. Labor to make the product is a small portion and has been decreasing for decades. Everything thing else is Overhead or Materials. If you are an engineer, you should know this. If you wish to eliminate the larger costs, lose the Labor if you can.
When all the high labor cost products move their manufacturing overseas, the cost of labor as a percentage of price will be reduced. That is all that can survive in the United States. The US is not going to be a low labor cost producer (hopefully) but reducing costs such as the 17% of GDP spent on healthcare (probably the worst waste of money in the US) down to 10% and reducing housing costs by 25% (see https://www.jchs.harvard.edu/sites/default/files/brief_international_housing_carliner_marya.pdf) is the equivalent of a raise for workers if their cost of living goes down and their income stays the same. There are other consumer friendly policies (such as the reduction of credit card and debit card processing charges, strict anti-trust enforcement, etc.) that can be done which won’t increase business costs, will decrease consumer costs, and result in a better competitive position. Unfortunately I don’t expect to see these carried out.
Bill H,
FOREX favorable dollar trade lower all costs, not just labor. Exchange rates matter and where they matter most then labor demand will move to there. Hidden costs of environmental and labor regulation and unregulated systemic risks follow. How much does a US firm risk for lead poisoning Chinese children?
Location of production labor has systemic benefits for the host. Education and standard of living rise and fall together. Pride and self esteem matter too. Our species live in ecological compartments that determine behavioral, mental, economic, and physical health. The US population is far more compartmentalized demographically across many different boundaries (income, political and religious belief systems, ethnicity and race) than China. The service economy is servitude instead of makers and the for profit FIRE sector is debt peonage instead of security for most folk.
Sure Ron:
That is what I did, go into a manufacturer and start talking about FORTEX. See how far you get with that conversation.. I am not going to tell you much more than this. You need to rethink your spiel here.
@Bill,
Fortex is the world’s leading multi-asset trading platform, with $12 billion in currency trades and 500000 tickets a day for tens of thousands of traders. It is a trading platform.
FOREX is the underlying exchange of currencies with particular attention to the exchange rates of currencies when taken in the context of trade policy.
https://www.bis.org/publ/work684.htm
Triffin: dilemma or myth?
Summary
Focus
Economist Robert Triffin held that there is an inherent conflict in a national currency also serving as a global reserve currency, because domestic and international policy goals do not generally match. The paper seeks to set the record straight about Triffin’s argument and its application to current policy debates.
Contribution
Triffin’s work is regularly cited as an argument against the US dollar’s de facto role as pre-eminent global reserve currency. The paper adds context to the discussion by pointing out gaps in Triffin’s reasoning, as well as limitations and flaws in modern extensions of his dilemma.
Findings
Triffin gained enormous influence by arguing that the gold shortage and the increasing use of the dollar as official reserves would inevitably lead to a run on US gold holdings, and threaten deflation. Although the dollar gold standard did eventually collapse, we argue that better and feasible US policies could have kept it going.
This history serves as a backdrop to our critical review of two later extensions of Triffin. One holds that the dollar’s reserve role required US current account deficits. This current account Triffin is popular, but anachronistic, and flawed in logic and fact. Nevertheless, it pops up in debates over the euro’s and the renminbi’s reserve roles. A fiscal Triffin holds that global demand for safe assets will either remain dangerously unsatisfied, or force excessive US fiscal debt. Less flawed, this story posits implausibly inflexible demand for and supply of safe assets.
Triffin’s seeming predictive success leads economists to wrap his brand around dissimilar stories. Yet Triffin’s dilemma in its most general form correctly points to the conflicts and difficulties that arise when a national currency plays a role as an international public good.
{ PDF of full paper at link above }
I am probably nit picking, but I would classify the dollar as the world’s dominant currency. The Bretton Woods agreement after WWII had the US peg the dollar to gold ($35/ounce) and all the other major currencies were pegged to the dollar. The U.S. maintained a gold reserve to back the dollar and all other countries maintained a dollar reserve to back their currencies (hence the term the dollar is the world’s reserve currency) Trade balances were settled with gold exchanges. Since the agreement broke down in 1971 the dollar was technically no longer the world’s reserve currency. But yes, it is the most trusted currency and that status could be in jeopardy. Nothing against your post, just a little clarification.
Yes sir and totally agree.
The problem arises when our surplus trading partners hold their profits in US Treasuries which strengthens the dollar in FOREX against their own currencies insuring continuing trade deficits and fiscal deficits for US to offset those trade deficits. It is a great system for all those invested in securities and financialized intellectual property rights. The finance sector has a far bigger position in US Treasuries than China. With Britain it was the end of colonialism that eroded the pound although cost of maintaining colonialism had already gotten out of hand. Britain went from being a major producer to bankers and middlemen which proved to be an unsustainable economic model in any political order.
@rc,
So what do you imagine the impact on the dollar will be when the Trump administration implements the roundup, incarceration and deportations of over 10 million people, the building of a Southern border wall, and massive tax cuts for business and the wealthy? Trump has already announced that his administration will have a blank check for his immigration policy.
@Joel,
IF he were able to do what he seemed to promise then the initial effect would be more a matter of domestic inflation and a further loss of jobs. Much of dollar FOREX depends upon purchase of US treasuries by our surplus trading partners, which is to say that it depends more upon what China and India do that what Trump does.
@rc,
And you think China won’t be affected by what Trump does? Interesting.
@Joel,
I believe that China may react to Trump just to show who is boss, but I also believe that China can do more to affect Trump than Trump can do to affect China. China is close enough to supporting its production with internal demand that its relationship with the R0W (excluding the US) can be sufficient to support China’s ongoing economic expansion. Trump’s plan may backfire so far as to break the Triffin’s back crashing the dollar in FOREX and causing great economic and political disruption in the global North.
With Trump as with climate change I disagree with the mainstream thought not because I believe they a wrong about the existence of risk, but because I believe that risk to be far great than the mainstream thought estimates.
@rc
In all my years of studying economic theory, I never stumbled across Triffin. Thanks, I will have to check out his work. At first glance he reminds me of Eccles.
@Markg,
Well yeah except that Eccles sided with the US bankers instead of Keynes at Bretton Woods. However, Eccles had been a Keynesian during the Great Depression and kicking off the New Deal. Once out of the woods then the leopard changed its spots.