Exorbitant Dollar Privilege

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The 1944 Bretton Woods international monetary system added the U.S. dollars to Gold as the only world trade currencies. The US had most of the world's gold and the added  dollars to world currency would foster world trade. Participating countries hoped to stop trade wars created by currency devaluations to increase exports and tariffs to decrease imports.  These government economic policies had slowed 1930's world economic recoveries.  France believed this "America's exorbitant privilege"[2] resulted in an "asymmetric financial system" where foreigners "see themselves supporting American living standards and subsidizing American multinationals" with cheap credit. Economist Barry Eichengreen said: "It costs only a few cents for the Bureau of Engraving and Printing to produce a $100 bill, but other countries had to pony up $100 of actual goods in order to obtain one".[2] Economists as always disagreed on the amount of this advantage by measuring the US increased return on assets from a negative  -1% to positive 7%.
 

 
  The US dollar was acceptable as a substitute for gold because 1) US war sales of foodstuffs and arms to the Axis grew the U.S. economy and moved most Axis gold to the U.S.  2) Gold was valued at $35 per ounce and other currencies were a little undervalued in terms of gold. This  allowed countries to sell natural resources and the few goods they produced to the large U.S. market at low prices 3) U.S. manufactures didn't mind because England, France, Germany and Japan had lost much of their industrial base and produced little for export. With little world competition U.S. exporters had Oligopoly power. This power allowed U.S. exports to be priced at a relatively high price resulting in high profits for US companies and high salaries for their workers.  4) US loaned dollars to exporting nations which were returned for high quality U.S. manufactured goods and private and public financial assets. 5) Eventually the Marshal Plan added even more dollars into the world currency system which also flowed back to the US. And only the U.S. could print dollars. This was acceptable as long as the US could convert dollars to gold at  $35 per ounce. This dollar exchange standard worked for two decade.
 
 
 
The value of the convertible dollars became problematic during the 1960's because of these US deficit problems. 1)  President Johnson's war on poverty: Head Start, Job Corps, Food stamps, Medicaid, Funded Education, Job training , Direct Food Assistance and Direct Medical Assistance for about four million poor people. 2) Vietnam War borrowing cost of $500 billion and 3) Countries were unhappy using the U.S. dollar. Why?

The US gold reserve of $30 billion were already backing much more in existing dollars. and the U.S. government refused to slow US economic activity to protect the dollar  by raising taxes.  International pressure on the dollar created by inflation caused massive gold outflows. This resulted in the Nixon Shock which severed the dollar link to gold and eventually creating a floating value for gold and a US fiat dollar system. A new negotiated gold value for the was needed.

Britain continued to prop up the pound against a market that clearly wished it to be lower. The currency simply did not warrant the value that Britain wished it to have, yet successive Chancellors* refused to allow it to float freely, fearing a sterling collapse. In 1976, the Chancellor of the Exchequer called in the IMF to help arrest persistent runs on sterling. On the advice of the IMF, the Chancellor imposed austerity measures, which reduced inflation and improved economic performance. The IMF’s loan was never fully drawn. The pound recovered – but only temporarily. Against a background of rising unemployment, the famous “Winter of Discontent” in 1978 sounded the death knell for the Labor government. In 1979, the Conservatives under Margaret Thatcher won the election.  Many feel U.S. debt would cause the US dollar to have the same fate.

To cushion the shock on U.S. exporters, a 10% surtax on all imports was instituted.  Japan soon increased the Yen's value against the dollar by 7% meaning the US dollar price of Japanese goods had increased by 17%. Others would be forced to follow. Eventually individual countries negotiated an increase of the dollar value of their currencies by 3% to 8% depending on their US negotiation power. The dollar price of gold was also increased by 9%. So US imports became more expensive by 12% to 17% and import prices decreased by the same amount. In 1973 the value of the weaker dollar was set at $42 and then allowed to float with other currencies. This meant Bretton Woods finally collapsed. Nixon was happy because printing dollars to pay for stuff was now allowed. No gold needed.  Nixon also abolished the International Monetary Fund’s international capital constraints that had allowed Arab oil producers to recycle their petrodollars into New York banks. The global ‘Petrodollar’ was born and would grow as countries with their own currency still needed dollars to buy oil. This massive invasion of petro dollars into the US Banking System would end up in a world economy that really didn't need them. Deep-Do-Do would result. See Long Decline-the Great British pound, Plaza Accord Smithsonian Agreement

Of Debt, Detriment and Exorbitant Privilege
 

 
Advantages of overvalued dollar for U.S. were cheap energy, cheap imports including foreign travel, low interest rates on all US debt including mortgages and cheaper foreign expansion by US companies.
Disadvantage is
high valued dollar hurts competitiveness of U.S. exporting companies, companies that compete with imports and anyone working for these companies. Source See Economic Normality 1945-2015   page 2   and World Changed and Good Jobs Disappeared 
 

On the Supply of, and Demand for, U.S. Treasury Debt

 

  What’s good for the global economy (and for many Americans) is bad for U.S. manufacturers and their workers as their products would suffer a permanent price disadvantage. For them, the global dollar is not a privilege. It’s a stubborn curse. Since 1976, the United States has not had one annual trade surplus. The New Normal of ever  increasing manufacturing wages was over and another New Normality had begun. It’s trade deficits were not the result of poor U.S. competitiveness. In reality, our deficits were required to supply the world with a currency for international trade and investment. The many advantages of being the world's currency would continue and  politicians began looking for solutions to work force problems caused by Free Trade. Source
 
 
 

Exorbitant Privileges Continues because the dollar has not faced any significant competition from  the  Japanese Yen, English Pound , Euro, and Chinese Renminbi because of their weak economies and weak government in relation to US. The Special Drawing Rights (SDR) system of the International Monetary Fund has not gained traction. For know, no alternatives exist.

Current system is unsustainable according to those experts believing the system favors the United States too much. Alternatives will emerge to correct imbalance existing since the 1971 Nixon shock. Source

British scholar of international relations  Susan Strange believes US international Monetary Hegemony
hegemony rests on the pillars of production, security, information/ideas, and finance. Professor of International Politics
Daniel W. Drezner feels the US does not have to worry about these pillars failing, especial finance, but rather that internal political uncertainty will force external pressures to combine and bring down the U.S. dollar hegemony. Megan Greene  managing director and chief economist at Manulife Asset Management feels the U.S. will tire of having th dollar the world's trade currency and give it up, china and Europe will not want the responsibility and IMF Special Drawing Right will take over. Some feels U.S. creditor acceptability of higher inflation and political instability cause by income inequality stability should be of concern.

Notes from  The New Financial Geopolitics ─ How Long Can the US Keep Going? Contending Perspectives 86 min video

 
  Readings

Positive Dollar Privilege Prediction

Advantages and Disadvantages of Exchange Rate Systems

Exorbitant Privilege: The Rise and Fall of the Dollar
85 min video by author Professor Barry Eichengreen

The Dollar’s Privilege Is a Terrible Thing to Waste
Steven Englander, Bloomberg View

Dollar Privilege Prediction 3/24/18

" How Tax Reform Will Net the U.S. Big Returns"

 

In 1971, Nixon suspended convertibility of the dollar to gold, effectively ending the Bretton Woods system. But even after this,