Home > Uncategorized > Origins and consequences of US monetary hegemony

Origins and consequences of US monetary hegemony

from Asad Zaman

The two World Wars in the 20th century depleted the gold stocks of European governments and made a return to the (UK Sterling based) gold standard impossible. This led to the Bretton Woods conference of 1944, where leaders of the world came together to find an alternative, non-gold-based, global trading system. John Maynard Keynes brought a proposal for a symmetric trading system, but it was rejected in favor of the dollar standard, which transferred global hegemony from the UK to the USA. The US had enough gold reserves to guarantee convertibility of the USD into gold at $35 per ounce, and this system worked fairly well until the Vietnam War led to excessive expenditures of dollars and an insufficiency of gold to redeem them.

In 1971, President Nixon renounced the Bretton Woods agreement and de-linked dollars from gold, leading to a world of unbacked currencies with floating exchange rates. The Nixon shock created massive uncertainty about how the world would function with fiat currencies. The Hunt brothers thought the system would collapse, leading to a return to gold and silver. They nearly succeeded in buying up most of the silver in the world – see Speculative Financial Attacks. The US was aware that loss of confidence in unbacked dollars could lead to financial disaster. To prevent this, they engineered a deal with Saudi Arabia to ensure that petroleum would always be sold in dollars, effectively replacing gold backing with petroleum and creating the Petro-Dollar.

This system is hugely favorable to the US, as it can print paper and buy real goods from around the world. All other countries must export to earn dollars and participate in global trade. This effectively creates a financial colonization of the world where all countries must pay tributes to the US in the form of goods. The IMF is there to help countries that fall behind in their payments, but this often leads to deeper debt enslavement. The current global trading system results in immense disparities between American levels of consumption and the rest of the world.

With the decline of US power   read more

  1. rsm
    February 13, 2023 at 6:31 pm

    《All other countries must export to earn dollars and participate in global trade.》

    Why neglect dollar loans, swaps, and other derivatives whose traded volume exceeds real goods by a factor of ten, at least (as BIS statistics will verify)?

  2. ghholtham
    February 14, 2023 at 12:10 am

    It is quite true the US as owner of the world’s reserve currency enjoys the advantage of seigniorage that allows it to run larger payments deficits than other currencies. The advantage is moderated by floating exchange rates. When the US overdoes the deficit the dollar eventually declines. The dollar has depreciated considerably since the 1960s. The dollar used to buy several hundred yen for example; now the yen is “low” when at 140. Some European countries have seen similar gains. The UK is the big exception. The pound was worth 4 dollars before WW2; now just 1.20. Imperial overreach gets you in the end: Spain in the 17th century, UK and Soviet Russia in the 20th.

    • rsm
      February 14, 2023 at 12:27 am

      How big is Japan’s deficit?

  3. ghholtham
    February 14, 2023 at 4:13 am

    Japan has a current account surplus of 2.9 per cent of GDP. In recent decades it has averaged 2.5 per cent of GDP.

    • rsm
      February 14, 2023 at 5:40 am

      Since Japan’s deficits have hovered around 40% of GDP over that same period, is Japan printing significantly more money to fund its budget than the comparatively tiny current account surplus could possibly pay for?

      In other words, has the US been printing much less money than Japan, but enough to continue to buy Japanese exports?

      Also why has the broad dollar index risen since 2008 despite unprecedented trillion-dollar US deficits?

      Basically, does the story about US dollar decline ignore worldwide dollar demand that is much more fulfilled through financial instruments than actual real trade volumes (the latter being but a small fraction of the former)?

  4. ghholtham
    February 14, 2023 at 7:35 am

    What deficit are you talking about? The Japanese government has run large deficits but in single digits, nowhere near 40 per cent. The fact that the current account is in surplus means the Japanese private sector has been saving more than the government borrows, i.e. it is happy to hold government paper as an asset.
    The dollar has been strong because, as you imply, there is a strong net demand for dollar-denominated assets, equities as well as bonds. This has co-incided with the rise to dominance of the “tech” giants like Microsoft and Apple. A country can sell assets, paper or real, as well as goods and services. In the US case the capital transactions have outweighed the current account transactions in the last couple of decades. Dollar decline happened earlier, in second half of the 20 th century. It’s quite complicated; Apple can make gadgets in Taiwan and sell them in Europe for Euros but it buys dollars if it repatriates profits or buys US assets and foreigners investing in the company buy dollars too.

    • rsm
      February 14, 2023 at 11:21 am

      You’re right; I was looking at Government Spending as a percent of GDP (an OECD statistic I can link to if required); but can my larger point still stand, that the current account is pretty irrelevant (except politically!) because the Japanese private sector invests dollars in US financial (and real estate, businesses, etc.) markets?

      Am I right (this time) that the Bank of Japan holds almost half the national debt, and continues to buy more? If households by my source hold just 1.2% of the national debt, how many Japanese are actually happy to be holding government paper as an asset? How many private Japanese portfolios hold US stocks?

      “The Bank of Japan made an offer for unlimited government bond purchases Monday, moving to curb a surge in long-term interest rates in the world’s third-largest economy.” – apnews.com (“By YURI KAGEYAMA February 13, 2022”)

      Gerald said: “In the US case the capital transactions have outweighed the current account transactions in the last couple of decades. Dollar decline happened earlier, in second half of the 20 th century.”

      So, has financialization rescued the dollar from bond vigilantes? And does Japan prove the central bank can support the currency indefinitely?

      • ghholtham
        February 15, 2023 at 12:48 am

        Yes the BoJ has, in effect, monetised much of the debt by buying it so the public is left with cash. If they diversify into foreign, including dollar, assets the yen stops appreciating and can go down, as happened recently.
        The usual situation is that capital flows are much more influential than trade balances on exchange rates in the short to medium term – for the volume reason you mention. But there are limits. When a country’s foreign debt gets too large markets get worried and the exchange rate falls. A country like the US has enormous latitude but even it can overdo things as in the late 1980s. The Reagan borrowing initially drove the dollar up but cumulating deficits triggered a scare and the dollar fell for several years. Investors have to believe that the ratio of foreign debt to GDP will stabilize at some level, not explode indefinitely. A country like Ghana or Greece is on short leash, the US on a very long one, the longest, as Asad was saying.

      • ghholtham
        February 15, 2023 at 12:54 am

        Btw, government spending at 40 per cent of GDP is a normal figure for a civilised country. In France and Scandinavia it is higher. Government acts to counter externalities present in a pure market economy. A recent blog on this site complained that economists, and by implication everyone else, ignored externalities. The size of the government sector in regulation and service provision disproves that blanket assertion.

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