Long-Term Economic Questions
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Exorbitant Dollar Privilege
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.
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.
overvalued dollar for U.S. were heap energy, cheap imports including
foreign travel, low interest rates on all US debt including mortgages
and cheaper foreign expansion by US companies.
high valued dollar hurts
competitiveness of U.S. exporting companies, companies that compete with
imports and anyone working for these companies.
Economic Normality 1945-2015
page 2 and
World Changed and Good Jobs Disappeared
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, 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
But strong economic growth, stable inflation and the Fed's plan to gradually raise short-term interest rates is boosting the greenback. The WSJ Dollar Index, which gauges the U.S. currency against a basket of 16 others, rose to 88.63 Tuesday, its highest level in more than a year.
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 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 videoReadings
85 min video by author Professor Barry Eichengreen
The Dollar’s Privilege Is a Terrible Thing to Waste
Dollar Privilege Prediction 3/24/18
In 1971, Nixon suspended convertibility of the dollar to gold,
effectively ending the Bretton Woods system.
The European Central Bank the dollar makes up two-thirds of both international debt and global reserves. Oil and gold have long been priced in dollars. Iran, North Korea, and Russia and other developing are terror stricken by the loss of dollar needed to finance the global payments system.The dollar hegemony may be weakening. Political leaders are pushing back. Paying for European goods bought from European companies should be in Euros, not dollars. China recently challenged the dollar supremacy with a Yuan-based oil futures contract Russia all but eliminated her US dollar based investments because she perceived wreaking dollar. Upsetting US Actions
Pressuring non US companies trading with Tehran.
Editor's Note: While most of this by political Trump's posturing and return posturing by our economic adversaries. Foreign leaders posturing began when de Gaulle threw a fit. See Russia, China Rivals or Adversaries?