A Weaker US Dollar?*

A Weaker US Dollar?

The July 19th TLR (“Be Careful What You Wish For”) mused about “Why President Trump wants a weaker US Dollar” and speculated about the potentially adverse consequences if he got his wish. More specifically, it questioned whether the President’s campaign to undermine the value of the US Dollar might undermine its role as the world’s Reserve Currency. (The benefits of being able to print the Reserve Currency were outlined in “What is Money?” in the June 12th TLR.) Surprisingly, a recommendation for a proactive reordering of the global currency regime was raised by Bank of England Governor Mark Carney at last week’s annual Jackson Hole Symposium hosted by America’s Federal Reserve, the place where central bankers and their invitees candidly and publicly address important economic policy matters. Carney proposed that the International Monetary Fund take charge of a process to build a multipolar system by creating a synthetic currency to replace the US Dollar along the lines outlined by Facebook for its proposed Libra cryptocurrency (see “Can Money Be Digitized?” in the June 21st TLR). Commentators have labeled Carney’s recommendation “a shocking, radical proposal.”

Perhaps not so much.

Be careful what you wish for, indeed!

The US Dollar became the world’s Reserve Currency after WWII when the U.S. negotiated an agreement at Bretton Woods, New Hampshire, pegging the value of other currencies to the Dollar and pegging the value of the Dollar to gold. To do so, it enabled other countries to “cash in” their Dollars for gold specie at America’s Treasury. The purpose of the Bretton Woods Agreement was to replace the gold standard with a Dollar standard that, because the price of gold had collapsed during the Great Depression, was thought to be a way to create greater currency stability, enhance global trade, and grease the wheels of post-WWII funding. While the Bretton Woods Agreement succeeded in doing so for more than 25 years (a relatively long period for a new monetary system), the excessive spending by the U.S. to fund the Vietnam War and its Great Society programs meant that other countries began to cash in their Dollars, creating a run on America’s gold holdings. For this reason, President Nixon in 1971 reneged on America’s promise to exchange Dollars for gold, leading to a floating-rate international currency system that continues today … almost 50 years later. Because of the political and economic stability of the U.S., the liquidity of U.S. financial markets, the depth and breadth of the U.S. Treasury securities market, and the ability of the Federal Reserve to keep a firm hand on both the national and international the monetary rudders, inspiring confidence in both its judgment and its independence, the US Dollar has retained its role as Reserve Currency.

That’s been highly beneficial to the U.S., its businesses and industries.

Because the US Dollar is the world’s Reserve Currency, the U.S. for almost 50 years has been able to freely pursue “America First” domestic (and, at least insofar as prior American Administrations were concerned, international) policies and also run sustained balance-of-payment deficits that have enabled Americans to fund their consumption at below-market rates … something that Valery Giscard d’Estaing, France’s finance minister and later its President, labeled an “exorbitant privilege.” Having that exorbitant privilege has been of enormous benefit to America and Americans. It has created a competitive advantage for American firms, empowering allowing them to engage in transactions at a lower cost – they don’t have currency friction when they purchase the commodities used to fabricate their manufacturers and when they sell their goods and don’t have the hedging risks or costs that companies based in other countries incur. It also has reduced exchange rate risks and required other countries to hold US Dollars in reserve, lowering America’s and Americans’ borrowing costs.

Why did Governor Carney last week urge the IMF to replace the US Dollar with an international basket of currencies?

Carney explained that a digital currency “could dampen the domineering [WHY “DOMINEERING” INSTEAD OF “DOMINANT”?] influence of the US dollar on global trade…. If the share of trade invoiced in [a digital currency] were to rise, shocks in the US [WHAT U.S. “SHOCKS” ARE OF CONCERN TO CARNEY?] would have less potent spillovers through exchange rates, and trade would become less synchronized across countries…. The dollar’s influence on global financial conditions [WHY QUESTION THE DOLLAR’S INFLUENCE AT THIS TIME?] could similarly decline if a financial architecture developed around the new [digital currency] and it displaced the dollar’s dominance in credit markets. By reducing the influence of the US on the global financial cycle [WHY SEEK TO “REDUCE THE INFLUENCE OF THE U.S.” SINCE OVER THE PAST 50 YEARS THE U.S. HAS HAD ONLY A BENEFICIALLY STABILIZING EFFECT ON THE GLOBAL FINANCIAL CYCLE?], this would help reduce the volatility of capital flows to emerging market economies.”

The dominance of the U.S. and of the US Dollar, and President Trump’s efforts to weaken the Dollar by manipulating down its value, have been the subject of almost-continuous news coverage and tweeting over the past 10 months. In the latest developments, China on August 23rd responded to Trump’s August 1st ratcheting-up of tariffs by imposing retaliatory tariffs of its own on ~$75 billion of U.S. goods, which led Trump to immediately increase tariffs on Chinese goods and to declare on Twitter that “Our great American companies are hereby ordered to immediately start looking for an alternative to China including bringing … your companies HOME and making your products in the USA.” He later told reporters who were skeptical of his authority to order American companies not to do business with China that “I have the absolute right to do that,” tweeting “For all the Fake News Reporters that don’t have a clue as to what the law is relative to Presidential powers, China, etc., try looking at the Emergency Economic Powers Act of 1977. Case closed!” The issues and risks of an Imperial Presidency were previously addressed in “What If?” in the June 7th TLR and “It’s Congress’s Fault” in the July 15th TLR. (See also “Wagging the Dog” in the May 31st TLR.) Whether in the American democratic system and pursuant to the “American way of capitalism” its government ought to, and whether an allegedly conservative American President can or should presume to, tell American companies how to conduct their business is a question for another time. However, it is self-evident that dictating the actions that permissibly may or may not be taken by domestic businesses is most closely associated with a Soviet-style command and control economy … or of an imperial ruler. Suffice it to say that Trump’s threat to declare apparent declaration of total thermo-economic war on China truly is a declaration of war. There can be no doubt that it is being so interpreted by China … and that the rest of the world is positioning itself accordingly. As a consequence of America being at war with China (albeit one undeclared by Congress), the Emergency Economic Powers Act of 1977, which grants war-like powers to the President, is an appropriate weapon for Trump to use to wage that war.

But is a “cold war” with China (and “cold wars”-that-may-become-hot with Iran, Russia, North Korea, Venezuela, Cuba …) in America’s best interests? And is it best for the future global economic and hegemonic order?

If this is war, the outcomes are that America either wins or America loses. What would it mean for America to “win” … or to “lose”?

Engaging in an escalating cold war with China, a war that is likely to be fought on several fronts only the first of which is economic (and, yes, this could turn into a “hot war” – see, for example, “How the Trade War Could Become a Real War” in the August 13th Barron’s, “Red Storm Rising” in the April 12th TLR, and “Saving Face” in the May 17th TLR) is disruptive of a global economy already gasping for breath (leaving out for the present the often-cited risk of recession addressed in “Is this Time is the Same” in the August 21st TLR). Perhaps of greatest importance for the U.S., an escalating economic war with China risks coordinated challenges to America’s military and diplomatic hegemony (see “Axis of the Sanctioned” in the June 21st TLR and “Updates, Part 2” in the August 21st TLR), and makes it imperative for other countries to choose up sides, perhaps irrevocably handicapping the competitiveness of American business and industry … and could easily lead the world out of necessity to abandon the US Dollar as its Reserve Currency.

However (again), it’s not only the intensifying War with China that led Governor Carney to suggest that the world should abandon the US Dollar as its Reserve Currency. It’s also about whether America and the American economy can be relied on as a stabilizing force in the global economy …, which is the raison d’etre for today’s Reserve Currency. The President’s determined lack of support for the Federal Reserve and its economically prudent and international coordinated policies undercuts America’s economic leadership. The President’s repeated attacks on Chairman Powell create global unease: “My only question is, who is [America’s] bigger enemy, [Federal Reserve Chairman] Jay Powell or [Chinese] Chairman Xi.” Really? With such statements, the President creates moral and economic uncertainty … and uncertainly that has determinable economic consequences. “It’s impossible for businesses to plan for the future in this type of environment,” said David French, chief lobbyist for the National Retail Federation. “The administration’s approach clearly isn’t working.” After Chairman Powell, speaking for the Federal Reserve at the Jackson Hole Symposium, announced that, contrary to the demands of President Trump, the Fed would continue its wait-and-see approach (closely monitoring economic statistics) before announcing further easing steps that could weaken the US Dollar, Trump tweeted, “As usual, the Fed did NOTHING!” Stanley Fischer, a former Fed Vice-Chairman who spoke at the Jackson Hole Symposium, observed that Trump is “trying to destroy the global trading system.”

His statements and the actions of the Trump Administration might do more than that.

After the Chinese actions and Trump Administration reactions on Friday, the US Dollar declined in value. The Euro was +0.6{29ea29b64b10057f61377b2c087cd5b7537a0cd24da4295a308b0bf589469f35} against the US Dollar, and other currencies showed similar gains. What might happen if the value of the US Dollar were to start sliding … and not stop? What would happen if the demand for U.S. government debt should decline? A weakening US Dollar, a weakened global economy, and a weakened global trading system are not in America’s best interest … or the world’s either.

Finally (from a good friend)

Questions with no apparent answers:1.

1. If poison expires, is it more poisonous or is it no longer poisonous?
2. Which letter is silent in the word “Scent,” the S or the C?
3 Do twins ever realize that one of them is unplanned?
4. Why is the letter W in English called double U? Shouldn’t it be called double V?
5. Maybe oxygen is slowly killing you and it just takes 75-100 years to fully work.
6. Every time you clean something, you just make something else dirty.
7. The word “swims” upside-down is still “swims.”
8. 100 years ago everyone owned a horse and only the rich had cars. Today everyone has cars and only the rich own horses.

Four great confusions still unresolved.

1 At a movie theater, which arm rest is yours?
2. If people evolve from monkeys, why are monkeys still around?
3. Why is there a “D” in fridge, but not in refrigerator?
4. Who knew what time it was when the first clock was made?

Vagaries of English Language!

1. Ever wonder why the word funeral starts with FUN?
2. Why isn’t a Fireman called a Water-man?
3. How come Lipstick doesn’t do what it says?
4. If money doesn’t grow on trees, how come Banks have Branches?
5. If a Vegetarian eats vegetables, what does a Humanitarian eat?
6. How do you get off a non-stop Flight?
7. Why are goods sent by ship called CARGO and those sent by truck SHIPMENT?
8. Why do we put cups in the dishwasher and the dishes in the Cupboard?
9. Why do doctors “practice” medicine? Are they having practicing on their patients?
10. Why is it called “Rush Hour” when traffic moves at its slowest then?
11. How come Noses run and Feet smell?
12. Why do they call it a TV “set” when there is only one?
13, What are you vacating when you go on a vacation?


*┬® Copyright 2019 by William Natbony. All rights reserved.

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