A Mediterranean Battlefield - Syria

[David Guyatt]

[quote=David Guyatt]

I think we could break thru exaggeration, spin and over-simplification if you could point to me one negative impact "de-dollarization" has had on the US economy.

That's generous of you, Cliff, allowing me to "break through" the log jam of "exaggeration, spin and over-simplification" by pointing out one negative impact of something that hasn't yet happened. Never let it be said that you set the bar too high.

Ah. Then your "smell the fear" comment was nothing more than wishful thinking?

The prospects of the future often causes fear today.

But yes, since I am not Mystic Meg then it has to be wishful thinking, albeit combined with past professional experience and lots of research.

Jared Bernstein thinks the dollar's reserve currency status is a drag on the US economy.

http://jaredbernsteinblog.com/full-emplo...nnections/

But Paul Krugman disagrees, argues DRCS is no big deal either way.

http://krugman.blogs.nytimes.com/2014/10...rs-virtue/

emphasis added

Punished for the Dollar's Virtue?
October 7, 2014 3:48 pm October 7, 2014 3:48 pm

I rarely disagree with Jared Bernstein, and actually agree with most of his latest post. Yes, the persistent US trade
deficit is a problem for achieving full employment, and we should have a weak-dollar, not strong-dollar policy.

But is the dollar's reserve-currency status the root of the problem? I have long argued that reserve-currency status is
a much overrated phenomenon it's not actually a significant benefit to the country that issues the currency, even aside
from the employment issues. But I'm also not convinced that it's that big a deal when we try to understand persistent
trade deficits. After all, we're not the only country that has run persistent external deficits:

We do have things that cause a global savings glut to spill into America a big, deep financial market, with lots of
players willing to create what look like safe assets, a general sense that America is the refuge of last resort, and
so on. But Britain offers many of the same things, and has in fact a comparable record of persistent capital inflows
and deficits; while Australia has run really big external deficits for a very long time.

As a policy issue I don't think this matters too much we should seek a weaker dollar. But I don't think phrasing it
in terms of the reserve currency status is helpful.

Bless them both and all those who sail in them.

One wonders if these views simply reflect the recognition of the changing reality and seek to avert growing concerns about the future? That would be my suspicion anyway.

Anyway, since he claims he has "long argued" I'd be very impressed if you can find an article from Krugman ten years or so old, where he offered the same hopeful analysis? Somehow I doubt it. My guess would be that his view developed this side of the 2008 banking crisis when it became evident that the US was economically well and truly fucked for the long term.

And Krugman's argument about other nations having persistent external debt is both true and fallacious. It's not persistent external debt that is the real problem - governments have always suffered their nations to have debts that are funded by future receivables from the tax take. However, the real problem is unsustainable persistent external debt.

Persistent external debt is largely (and please note the caveat) something that has arisen from (and especially the latter stages of) the Bretton Woods system, as can be seen HERE, where the 1939 US accumulated debt was $40 billion that had leapt to $269 billion by 1946. And ever since upwards and upwards, lately at a dizzying rate until it was $9 trillion in 2007 doubling in just 8 years to $18 trillion (and now $19 trillion and growing rapidly).

Is it me or does the THIS paper on the sustainability of external debt fail to mention the name of those many western nations that have the biggest, if not horrendous, external debts ever - but instead waxes righteous about those awful backward African nations that have far smaller indebtedness? Hypocrisy anyone?

Meanwhile, the below argument in the Telegraph on the "exorbitant privilege" of reserve currency status remains by far the accepted understanding.

The advantages this system bestows on the US are enormous. "Reserve currency status" generates huge demand for dollars from governments and companies around the world, as they're needed for reserves and trade. This has allowed successive American administrations to spend far more, year-in year-out, than is raised in tax and export revenue.

I eagerly await the day that US reserve currency status ends, to see just how the US is able to respond to a world where dollars do not automatically flow to the US treasury to help keep it's massive plate-spinning indebtedness... well, spinning. It should be great fun to watch the plates start toppling and crashing on the floor of reality, and I've placed a large futures option on popcorn to watch the spectacle unfold.

Having said that, I am aware that it has become common practice for the markets to be roulette-wheel fixed by the community of bankers - something that dates dates back to Reagan's and/or Bill Clinton's time in office thanks to the so called Plunge Protection Team.

Even so, even the most optimistic must look with a jaundiced eye at that future day when the unimaginably massive US debt can no longer ad infinitum be rolled-over by the Treasury's spin trick of buying back it's own obligations in order to issue new debt that it then buys back again - and so on and so forth. As my old bank Chairman (a former deputy governor of the Bank of England) once poignantly observed "banking is a confidence trick".

Anyway, when that time arrives, as it surely must, two things will likely happen imo.

1) the deposits by the world's wealthy elite that flow into 3 or 4 US tax exempt states will witness a capital flight programme as the greedy seek another crooked offshore skull and bones flagged ship to park their ill-gotten gains (as will the the leading central banks flee dollar assets). This is likely to happen suddenly and will, presumably, impact the Treasury market quite considerably. I say this is "likely" not certain, but I'm being coy. The glaring greed of the buccaneers and pirates who make up this class of oligarch care only about themselves and they are the last shipmates one would choose to have your back on a bloody day. But hey, you choose your friends - you pay the price.

2) The reduction of reserve currency funded money flows to the Pentagon system will severely impact on the US projection of force. Whoopee! What a happy day that will be.

Personally, I'm very content to wait and see how the US performs when it no longer has reserve currency status and dollar hegemony ends. I think the world would benefit greatly from both and having multiple trading currencies to choose from can only be a good thing.

And I commend it to the House.