Will Exorbitant Dollar Privilege Continue?
Return to Part 1  Exorbitant Dollar Privilege  
   Please link to, use to educate and share. 4/19/20

Thoughts from the Experts

Susan Strange, British Professor of International Politics, believes
US international
Monetary Hegemony rests on the pillars of production,
 security, information/ideas, and finance.

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.

Special Drawing Right
will take over.
U.S. Creditor Concern over inflation and political instability cause by income inequality.

Financial Geopolitics Video ─ How Long Can the US Keep Going? Contending Perspectives


No G10 country comes close to the US "exorbitant privilege," given a rising Dollar & falling yields in the face of massive monetary & fiscal easing. Commodity exporters like NZ have declining yields due to the big global demand shock, which is what their falling currencies signal. 4/19/20 RobinBrooksIIF


Breaking News 9/16/18
Europe Finally Has an Excuse to Challenge the Dollar

The plan for a “special purpose vehicle” to bypass U.S. sanctions on Iran Europe Finally Has an Excuse to Challenge the Dollar.
It could test American dominance of the global financial system.

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

from STRATFOR  this post authored by Mark Fleming-Williams

"In December 2017, U.S. President Donald Trump signed into law his country's first major tax reform since the Reagan era.  It will have important ramifications itself, and it will inform the wider trends that occur over decades. It will

1. lead to a repatriation of sizable amounts of cash by U.S. corporations

2. provide a stimulus for the domestic economy

3. increase the country's debt.

1. Melting the Cashbergs

Under the previous system, U.S. corporations had incentives to hold their spare cash offshore in tax havens.  Technology firms found they could choose where they booked their profits because the product was not physical, making its location harder to pinpoint. opted for tax-efficient locations. Biggest gainers Netherlands, Bermuda, Luxembourg, Ireland, Singapore and Switzerland.

The main beneficiaries of this trend have been companies that rely heavily on intellectual property, such as technology firms like Apple, with an offshore stash of an estimated $216 billion, and Microsoft at $109 billion.

A new tax law implemented after the December 2017 was designed to close these loopholes. Lawmakers sweeten the change by allowing a reduced tax repatriated earnings of between 8 and 15.5 percent. Apple will need to pay a one-off $38 billion bill. Change will be relatvely painless- except for, naturally, the countries that have been playing host to these vast sums of money.

2. Positive domestic economic boost from lower corporate tax rate from 35 to 21 percent.

    A. United States competitive increases as more foreign companies with small markets
          move production to US.

   B. Profit windfall from lower taxes can use extra funds to buy back their own shares,
        driving up stock prices, increase production efficiency, invest in new in new technologies,
        and increase in research and development investments.   Apple recently pledged an extra
        $30 billion in its U.S. operations. PR?

3. Decreased tax revenue means more borrowing.
Increased spending on entitlements and defense also increases debt.
         Debt-to-GDP ratio, currently around 77 percent, is predicted by Goldman Sachs
         to be 85 percent by 2021,While high by historical U.S. standards, it is modest
         compared to some other advanced economies.
Dollar privilege softens debt cost as it creates lower interest rates.
Debt's danger is doubt debtors' ability to pay which requires
         higher interest rates to cover higher risk.
Is this effect is already evident
         as interest rates on U.S. bonds have jumped from 2 percent in 9/17 to
         nearly 3 percent in February) Is this increase a negative debt outlook implied
         by the tax reform and increased spending. Rate was down slightly by 2/19.
 Economic growth a trickle down will determine the answer.

4.  As the pre-eminent global currency the US has a distingue advantage.
      1. Those looking for safety keep their savings in US dollars and 64 percent
          of global currency reserves are denominated in the greenback.
          These people buy U.S. debt and this did not change with the Great Recession.
      2. The pound fell after WW2 after 150 years as global reserve currency.
It survived various economic stresses for its issuer: United Kingdom's debt levels
           remained above 100 percent all the way through until 1860, but investors remained
           committed for nearly a century more. Pound problems began when by 1890,
           the United States became the world's largest economy. Its descent was evident
           by 1918, as London owed Washington massive World War I debts. To maintain
 her pound privilege the Bank of England raise interest rate causing a major
           recession  and a general nation wide strike in 1926.
The pound was done by
           1947 as another world war and lost overseas possessions made her something
           of an economic  basket case  suffering currency crises in 1947, 1949,

      1951 and 1955. But even the process was gradual as the global reserve inertia
           possessed and the energy required to change to the dollar were are substantial.

5. Predicting the Future
    a. The United States is not dependent on foreign resources and demand.
        These Inherent attributes are very important.
        It is large fertile nation with a wealth of natural resources.
        It also has inherent connectivity in the form of an extensive internal river system. 
        Access to the Atlantic and Pacific Oceans make her provides maximum maritime
        access to the world's key power centers and isolation from military challengers.
        It can maintain a giant somewhat sparse population. The  United States dollar
        has a strong claim to being privileged because she is  the world's largest economy
        fulfilling her inherent potential.
    b. "it's about time" for the interest rate cycle to reverse and this could be costly. 
    c. China's Renminbi could be a challenger. This article explores this this possibility
         along with US growth potential. "How Tax Reform Will Net The U.S. Big Returns
         from STRATFOR authored by  Mark Fleming-Williams
    d. Dollar Privilege reinforced by Great Recession financial crisis.

Update 2/18/19

The U.S. Dollar's Global Roles: Where Do Things Stand?  from Liberty Street Economics  -- this post authored by Linda S. Goldberg and Robert Lerman

The dollar share in official global reserves has gradually declined, falling from as high as 70 percent in 1999 to about 63 percent at the end of 2017, with early gains for the euro and later gains for a broader group of currencies.

The RMB’s status as a reserve currency has risen, but remains low.

The dollar’s share in bank external claims has risen, largely at the expense of the euro,

Volumes through U.S.-based dollar wire transfer and settlement systems have continued to rise.

Since the global financial crisis there has not been a widespread change in the international monetary architecture. The dollar’s  remains dominant. Recent trends bear watching as a currency’s dominant status is not immutable.



Crisis Increases Dollar Strength

Still No Challenges

The U.S. Dollar’s Global Roles: Where Do Things Stand?

The U.S. Dollar’s Global Roles: Where Do Things Stand?


Twin Deficits and the Fate of the US Dollar:
A Hard Landing Reexamined

Confronting Chinese currency manipulation?

One of the most widely cited strategies for reducing the likelihood of a hard landing involves confronting Chinese currency manipulation.

Proponents of this strategy argue that by hastening an appreciation of the yuan relative to the dollar, U.S. exports will become more competitive, which will act to reduce the trade deficit, and thereby serve to improve investor confidence along with the precarious climate of uncertainty. But as we shall see, this strategy involves significant tradeoffs – for the United States, Asia, developing countries, and the International Monetary Fund. (IMF) – that are likely to undermine its viability and effectiveness.

While the obvious benefit of such a strategy for the United States is
the potential improvement in its balance of trade, there could also be significant costs. First, such a strategy may, at least in the short run, end up having the opposite effect of that which is intended. As we have seen, the responsiveness of U.S. imports to fluctuations in the exchange rate is far from instantaneous. In considering the extent to which imports currently exceed exports, the higher dollar price of imported goods – resulting from an appreciation of the yuan – would in fact worsen U.S. trade performance, and contribute to even larger deficits (Chinn and Steil 2006). In the short run, a significant appreciation of the yuan could also be detrimental to the United States by cutting off the large amount of capital inflows that are necessary to finance its deficits. China’s policy of sterilized intervention

– and its resultant success in maintaining a devalued exchange rate

– is contingent upon its ongoing purchase of U.S. Treasury bonds.

Thus, if the yuan were allowed to appreciate, China would no longer have any need to purchase the vast number of Treasury bonds on which the United States so heavily depends.

In forcing China to appreciate, the United States also runs the risk of solidifying its position as a “coercive hegemony.” Already facing much anti-American sentiment around the world, the United States can ill afford to increase resentment by coercing China to pursue an economic agenda that is counter to its own autonomous policy goals. Yet, scholars like Goldstein reject the notion that confronting China would cause a hardening of its position, and argue that Chinese currency manipulation should be subject to the same kinds of criticism that are leveled at its military-build up.

China's mounting costs and the waning benefits (of maintaining an inflexible exchange rate system) will ultimately force China to reconcile its employment concerns with those of a moribund financial system (Rajan 2005), allowing China to maintain its own commitment to a gradualist approach to currency reform is much preferable to a coercive policy that calls for immediate adjustment. A policy that begets immediate adjustment is also likely to have adverse consequences in Japan. In considering that the economic relationship between China and Japan is more complementary than competitive, such a policy would conflict with Japan’s status as a net importer of Chinese manufactured goods, and its own comparative advantage as an exporter (to China) of raw materials and goods used for processing, such as steel and machinery. As highlighted above, a rapid appreciation of the yuan would hurt China’s export performance, and cause a general slowdown in the Chinese economy. Because processing makes up a significant proportion of China’s trade, such a slowdown would likely reduce the demand for Japanese exports in certain key industries (e.g. the steel and machinery industries). Indeed, for the Japanese economy, which has become increasingly reliant upon exports to China, a policy that induces an immediate appreciation of the yuan would almost certainly have a net negative effect (Kwan 2003).


In responding to employment pressures, China continues to rely considerably upon the performance of its export sector – which is in turn heavily contingent upon a devalued currency. A rapid appreciation of the yuan might very well serve to remedy operational and allocation inefficiencies in the financial sector, but such benefits are outweighed by considerations of a potentially dramatic slowdown in the Chinese economy – and the social and political instability that might result.

Finally is the effect that such a policy might have on developing countries. It is certainly true that, like China, much of
the developing world relies on export-driven growth to fuel their economies. Many developing countries may therefore welcome an appreciation of the yuan, at least insofar as it makes their own exports more competitive relative to Chinese goods. A policy that results in an appreciation of the yuan may also reduce the flood of cheap Chinese imports that have often overwhelmed the nascent markets of developing countries, such as in Mexico or many African nations, for example. These positive outcomes are certainly deserving of consideration. But as we have seen, there is ultimately no guarantee that the kind of solution offered by scholars like Goldstein will produce the desired effects. Quite to the contrary, a rapid human rights abuses (Goldstein 2006). In dismissing the argument that citing China as a currency manipulator would provide the U.S. Congress with the justification it needs to enact protectionist legislation, Goldstein insists that the United States adopt a “tell-it-like-it-is” policy (Goldstein 2006, 13). But again, such a policy does not bode well for fostering diplomatic solutions or improving American sentiment. And it fails to provide China with a reasonable avenue for promoting its own agenda of ensuring political stability and promoting employment for its citizens.

Indeed, Chinese currency manipulation is a crucial part of this agenda,
and should not be considered akin to its military ambitions or alleged human rights abuses. To his credit, Goldstein acknowledges that trade retaliation is not the smartest lever to deal with currency manipulation, and that unilateral action by the U.S. may provoke just such a response (Goldstein 2006). His solution, therefore, is to “multilateralize” the issue by pushing the IMF to fulfill its original mandate to “exercise firm surveillance over the exchange rate policies” of its member countries, particularly China (Goldstein 2006,

Yet, it is doubtful that such a solution would actually address the problems at hand. From the perspective of many countries around the world, the IMF is simply a puppet or manifestation of coercive U.S. hegemony. Pressuring the IMF to recall its original mandate at a time that best suits U.S. interests is unlikely to improve the status of either actor.

I have already alluded to some of the tradeoffs for China in allowing their currency to appreciate. There is no question that the process by which China abides in maintaining an artificially devalued exchange rate comes at significant cost. Indeed, China’s sterilized intervention may lead to inefficiencies in the financial sector and significant problems of resource allocation (Mohanty and Turner 2006). Many scholars emphasize, in particular, the substantial opportunity costs that arise from China’s large accumulation of dollar reserves. For example, Zheng and Yi point to increased risks for the Chinese financial system, mounting inflationary pressure, and large losses of wealth incurred by a weakening dollar
 – all a result of China’s heavy foreign exchange accumulation and a consequent rise in speculative capital inflows (Zheng and Yi 2007, 23).

The policy proposals that Zheng and Yi offer to mitigate these risks, however, run counter to one that simply labels China as a currency manipulator. Their analysis, in encouraging only “gradual liberalization” and “small-scale diversification” (out of the US dollar), judiciously recognizes the tradeoffs that China faces in terms of having to ensure political stability and address “huge employment pressures” amid a “fragile financial system” appreciation of the yuan could induce severe instability in China that could have potential spillover effects among both industrial nations and developing countries throughout the region. And in the event that China was to harden its stance against liberalization, the possible protectionist leanings that might result in the U.S. from labeling China as a currency manipulator would only serve to foster anti-American sentiment among developing countries.

In conclusion, a strategy that aims to unilaterally confront Chinese currency manipulation is likely to be ineffective, and yield undesirable outcomes overall. And as Kirshner’s analysis suggests, true multilateral solutions (i.e., those that do not involve using the IMF as a tool for one’s own agenda) that involve cooperative action on exchange rates are probably beyond reach (Kirshner 2004). Nevertheless, the risk involved in a hard landing for the U.S. dollar requires planned action. The scale of global economic problems today may create an incentive for cooperation in the future, and so efforts to establish coordinated action on exchange rates should by no means be ignored. But the magnitude of the risk is such that the United States would do well to start with targeting solutions that fall directly within its immediate realm of control. Ultimately, in seeking to avert the possibility of a hard landing, a much more appropriate means would utilize “the chief policy tool that we can deploy with some confidence” –reducing the federal budget deficit (Bergsten and Truman 2007).