Will Exorbitant Dollar Privilege Continue?
Return to Exorbitant Dollar Privilege  2/18/19   Please link to, use to educate and share.


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 and


 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.

Indeed, while the 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).

Finally, one is inclined to inquire after 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,

14). 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).