Yves here. Some financial markets commentators seem to be eagerly awaiting the dollar to collapse under the weight of the Fed’s monetary expansion. The wee problem with that view is that everyone knows that the party that trashes its currency gets a nice boost to its export sector, but it’s easy for this sort of behavior to devolve into “beggar thy neighbor” competitive devaluations (witness our recent finger-shaking at Japan). And since policy-makers in the major economies are deeply devoted to our current “free trade” system, the tacit assumption has been that we might see some jockeying within the current system, but no real breaks.
And the second major reason for the mainstream view that the dollar’s dominance is not at risk is that no other large economy wants the burden of serving as the reserve currency, which entails running trade deficits much of the time.
Nevertheless, a lot of countries resent the dollar hegemony. This post describes one effort to supplant it.
By Valentin Mândrăşescu, Editor of Reality Check @ The Voice of Russia. The article was edited by Wolf Richter and first published by Testosterone Pit.
The status of the US dollar as the world reserve currency gives the US a number of advantages over other countries. The world’s most important commodities are priced and traded in dollars, even if most of these commodities are not produced in the US. The fact that the world’s financial system is based on the dollar allows the Federal Reserve to export inflation to other countries, while the Federal Government runs a huge deficit with impunity.
So far, only China has been active in challenging the dollar supremacy. The internationalization of the yuan is an official priority of Chinese leaders. Currency swap agreements with major trade partners like Brazil, France, or Australia are small but important steps in the Chinese strategy. Changing the world financial system is not an easy task and certainly a very challenging undertaking for China. Now, it seems that Beijing has found an ally in the Kremlin. And there appears to be a consensus between the BRICS countries: the urgent necessity to dismantle the dollar system.
A week before the recent BRICS summit in Durban, the Kremlin administration has silently produced a document which describes the Russian strategy in the context of BRICS cooperation. The document makes for a fascinating read for anyone brave enough to plow through the dense Russian legalese. The strategy has been designed in the “inner circle” of Vladimir Putin’s team, so it is safe to assume that it represents the official view on the BRICS future.
In Russia, politics are Byzantine; the fact that the Kremlin decided not to hide the document or leak it to a chosen few journalists, but publish it outright is a very strong signal, a very vocal angry signal directed at the US. A signal that the Western media chose to ignore.
In the recitals section of the document, the authors point out that “there is a common desire of the BRICS partners to reform the outdated global financial and economic framework that doesn’t take into account the growing economic weight of the emerging markets.” Moreover, the Russian strategists view the BRICS as a tool to reform the way the world is being governed. Then the document hammers home its message:
Russia assumes that, given enough political will of the leadership of the BRICS countries to advance their cooperation, this alliance can become one of the key elements of a new system for global governance, primarily in the economic and financial domains.
Move aside New World Order! The BRICS are coming to change the world.
The goals are clear. In the section titled “Strategic goals,” the first point on the BRICS’ agenda is the reform of the world financial system in order to make it “fairer, more stable, and more efficient.” In the later chapters, it is spelled clearly that this “reform” is actually a dismantling of the dollar system.
It is worth noting that the place of this issue in the list of the BRICS’ priorities speaks volumes about its importance. Judging by the order of priorities, depriving the dollar of its status as the world reserve currency is more important than “preventing breaches of sovereignty” (a.k.a. the “Syrian problem”) or “expanding economic cooperation.”
The language used in this document indicates that it has been written or strongly influenced by Sergei Glaziev, the president’s economy advisor, who is known for masterminding the economic aspects of the Eurasian Union between Russia, Belarus, and Kazakhstan. Glaziev has repeatedly accused Fed Chairman Ben Bernanke of starting “a currency war” against the emerging markets. He also believes that Bernanke’s policy will ultimately lead to a military confrontation: “the conservation logic of the current financial and political system leads to a further escalation of military and political tensions, including the start of a major war” (read more).
A whole chapter of the strategy document is dedicated to step-by-step instructions on dismantling the existing global financial system. The list of measures includes:
- Reformation of the world currency system in order to create a representative, stable and predictable system of world reserve currencies;
- Reduction of the risks of destabilization of currency and equity markets linked to massive cross-border flows of capital;
- Increasing the use of national currencies in the trade between BRICS countries;
- Increasing the level of cooperation between BRICS countries in order to promote their interest in the domain of world trade;
- Strengthening the BRICS Exchange Alliance;
- Creating independent rating agencies.
Since the Durban Summit, at least one of those measures has been implemented: RT reported that “China’s Dagong Global Credit Rating agency is to set up the joint venture with US-based Egan-Jones Ratings Co (EJR) and Russia’s RusRating JSC to challenge the three major US ratings agencies.” As BRICS countries try to achieve the rest of their stated goals, it remains to be seen if the dollar system survives the joint onslaught of the biggest emerging economies. By Valentin Mândrăşescu, author of the pungent article on the inner machinations of Russia…. Cyprus: A Triumph For Russian Isolationists
Interesting. Perhaps this is how we get the much needed global rebalancing. I’m still not convinced that having a the reserve currency is really much value to most of the population living in the country “blessed” with the reserve. Seems the critical thing is to be an autonomous currency issuer with debt denominated in your own currency, but reserve isn’t needed. Seems all that gets you is large currency account deficits that lead to over-leverage in the public or domestic private sectors. Good for capital and consumers and the FIRE sector but bad for labor, which is most of the population. Don’t see the value, but willing to be convinced.
Only “bad for labor” because c don’t understand how the economy and US monetary system work. Obama and Lew should be spending a helluva lot more to provision the government’s infrastructure, broadband info highway, education, 21st C transportation systems, real healthcare (Lambert’s piece should be required reading in every US home), etcetera. These are good for labor. But no, these cretins (Obama and Lew) think credit not real money rules and have given government functions to the banks, who can then charge the public interest on these previously non-interest bearing government activities. They haven’t even spent the stimulus.
Should read “Only “bad for labor” because Obama and Lew don’t understand how the economy and US monetary system work.” [The c was the copy symbol.]
I think Lew and Obama understand it only too well. The truth is, they do not care because all they care about is putting more money into the pockets of the Wall Street Banksters and the rest of their crony capitalists. They all learned at Robert Rubin’s classes of ‘Crony Capitalism 101’ in the early 90s. One thinks that he still teaches it to aspiring Banksters and Politicians. Obama was an early, willing and star student.
Great points. The reserve currency status and military hegemony guarantee that the entity called the USA could even drastically increase borrowing to fund infrastructure, research and education projects if it wanted to. But the ruling elites don’t want to for a variety of reasons.
The point here is that the BRICS are announcing that they won’t sit idly by while the U.S. focuses on ONLY short-term profits for oligarchs–the Russians understand this and believe that their patient work will be eventually rewarded because they and the Chinese see things in a longer time span and are less focused just on short-term goals.
Perhaps you do see the value, MRW. Why should Putin and his buddies be concerned about “most of the population”? If Russia can sell her oil for rubles on the world market, then her bankers (think Putin’s buddies in the FIRE sector) can print-and-pocket rubles. On this view, the “Ben Bernanke exports inflation” meme is just a Red herring, thrown out to bait the gullible. Glaziev wants to be Ben Bernankski.
This is true, and so is Bangars point above. The Chinese and Russians are thinking in longer terms than the US, decades rather than the next electoral cycle or two. But at the end of the day, what have the Russians got, except hydro-carbons and some robust military technology? And how can anyone sensibly accept the Chinese economy isn’t facing a massive property and debt crash at some point before the dollar hegemony finishes?
The Russian and Chinese elites want to change things, not to make the world a fairer or better place, but because they want THEIR oligarchs to globally socialise their losses while keeping the profits for themselves.
The US public is fed short time frames but the ruling plutocrats think long term. Some of them are even oligarchs in other countries.
Some plutocrats would tell you that the US brand is long in the tooth and her resources utilized or under their control for exploitation so reducing the riff raff to 3rd world wage levels and social safety net it their goal as part of this Shock Doctrine event.
Globalized plutocracy is where we are headed and almost there. We will know we are there when a serious US insurrection is put down and suppression continues.
The global plutocratic elites helped propel Obama to POTUS because they knew his misguided philosophy and background made him the best “useful idiot” puppet to complete the collapse of the USA, which has always been thought to be the major obstacle to their long-planned new order. This is to be a neofeudalistic system ruling a world with a much-lower population of 500 million to one billion people, most of whom will be serfs kept alive to serve the plutocrats and their favored friends. It seems that either O has displeased his masters or has completed his task, because the Left has turned against him en masse. O has lost Jon Stewart and Chris Matthews. Methinks the bigs have signalled the MSM to turn on O like a pack of jackls
I could not possibly agree with this more.
“[T]he fact that the Kremlin decided not to hide the document or leak it to a chosen few journalists, but publish it outright is a very strong signal” that the Russians actually intend to do something quite different.
Kind of like Obama running on a platform of “change.”
But we can dream.
For having only 5% of the world’s population (and yet burning 25% of the world’s energy) Americans sure do have an inflated sense of entitlement to all the goodies that the rest of the world serves up. It should be amusing when foreigners start demanding (because they have alternatives) hard assets and hard money in exchange for their irreplacable natural resources, especially oil.
Check with the DoE. We have the largest number of oil reserves. Why do you think we bomb every other country that has them and kill their citizens? We want to deplete theirs before we use up ours.
World’s largest oil reserves? Nope, even if you include Canada’s unconventional the US is way down the list. If you want to understand the geopolitics of oil, you must look at conventional oil first, then new production vs declining production rates, then consumption. The US is experiencing a brief reprieve with unconventional petroleum but balance this with projected decline rates of conventional, and its massive consumption rate and it’s easy to see why protecting the oil supply chain is no. 1 priority for the US military.
The A #1 priority of the US Military is energy self reliance, not supply chains that break during war.
Welcome to US NAVY GREEN FLEET:
” The U.S. Navy is globally postured to secure our homeland and citizens from direct attack and to advance our interests around the world. Our core capabilities of forward presence, deterrence, sea control, power projection, maritime security, and humanitarian assistance and disaster relief create a fast, flexible, and responsive global force for good.
The Navy is committed to improving energy security and environmental stewardship by reducing reliance on fossil fuels. The Navy is actively developing and participating in energy, environmental and climate change initiatives that will increase use of alternative energy and help conserve the world’s resources for future generations.”
Welcome the US Army’s Solar City:
“Solar photovoltaic and solar thermal technologies make up the majority of the DoD renewable energy installations and are a focal point of investment.
In September of 2011, Energy Secretary Steven Chu announced the largest domestic residential rooftop solar project in history: a $334M loan to solar power provider SolarCity that will provide “up to 160,000 rooftop solar installations on top of privately run military housing complexes at 124 military bases across 34 states.” Large scale solar projects are also in development across the U.S.—including a 500MW solar concentrator project at Fort Irwin in California.”
The industrial policy of America is whatever the Pentagon says it is.
Indeed, the Pentagon is the only part of the ruling elite that can, politically, plan ahead because it has political clout The rest of the political landscape is filled with rentiers and criminals who are riding bubbles or thinking up new ways to commit fraud and a population that is asleep and utterly uninterested in participating in Democracy as we drift into neo-feudal decline.
Protecting the environment and advancing clean energy is the single best cause our military has. It does look like they and the administration, and even with the collusion of congress members, are doing this on the qt. That becomes a question. Why are they downplaying something so honorable and important?
This is in reply to Susan the other:
Why does the military stay silent on its energy independence green initiatives? It might upset the oil and gas industry if a powerful and prominent user were to embrace an initiative that was contrary to its own interests.
The powerful respect each other.
The Navy has been very aggressive about renewable energy.
The Army…. has been extremely resistant. If that’s changing, good.
Rowdy, oil (and gas) has always been the number one US national security issue because of the military. Since the end of WWII.
I thought Russia was the #1 producer and holder of reserves in the past decade until I encountered this site that breaks it down. I just looked again, for the first time in over a year. Saudi Arabia is back on top with 11,545.7 (in 000s) bpd. The US is second with 11,095.5 (in 000s) bpd. If you add in Canada, then we’re highest.
http://www.eia.gov is an interesting source with lots of info.
while the Federal Government runs a huge deficit with impunity.
It has to or the domestic non-government sector will be deficit. If we want our domestic private sector to be in surplus while we carry the world’s trade deficit, then the federal government MUST be in deficit.
Hahaha, wow. Sure, let’s use the RenMinBi as the global reserve currency. It’s not as if China has ever complained vociferously about “meddling foreigners” any and every time a light is shone from the outside on Chinese domestic policies.
I’m sorry, but this is humor as economics. The CCP doesn’t have a thick enough skin to be in the domestic spotlight, let alone an international one. Not to mention the policy banks shoveling imaginary money at NPLs. How will the bursting of giant real estate, investment, commodity and export bubbles going to impact this supposed stability?
And what is this supposed advantage of the entire world pegging their currency at artificially low ratios to the USD? The hollowing-out of manufacturing and stagnant wages? Oh no, please don’t take our exorbitant privilege away!
i think you miss the point… “And what is this supposed advantage of the entire world pegging their currency at artificially low ratios to the USD? The hollowing-out of manufacturing and stagnant wages? Oh no, please don’t take our exorbitant privilege away” Those are symptoms of our country losing its exhorbitant privlege. Most americans do not understand that the “golden age” was a rare confluence of factors that prob will never occur ever again. The only reason labor had so much power was because the rest of the world that could produce something had been bombed to hell, and our “allies” weren’t going to buy products from the soviet union. We could have protected american labor more, but if you actually read history you would see that the power elite would never have done that. Wait until the dollar does lose its reserve status and americans have to pay a fair price for oil, you wanna see an economic crash you’ll never forget……
The devastation and subsequent loss of productive output for Europe and Asia after WWII doesn’t have much of a causal relationship with the USD as reserve currency. Certainly after the Asian crisis in the late nineties, the USD was firmly fixed in the eyes of exporters as the thing to hoard. The decline of American manufacturing was accelerating during this period.
Any country looking to “tuk r gerbs!” would favor the USD as the global reserve currency to avoid any complaints about devaluing their own currency to keep it artificially low (which supports their exports).
The elite in export countries can hold dollars or land or businesses or other non-native currency assets to avoid the devaluation of their currency, and pawn the problem off to poor savers.
Most americans do not understand that the “golden age” was a rare confluence of factors that prob will never occur ever again. The only reason labor had so much power was because the rest of the world that could produce something had been bombed to hell, and our “allies” weren’t going to buy products from the soviet union.
This old chestnut gets repeated again and again, normally coming from the TINA crowd. It’s simply not true. US exports plummeted after WW2. By 1950 they had already fallen to pre-war levels. Labour’s power certainly didn’t come about because the factories were working around the clock supplying all those “bombed to hell” countries. Rather than a rare confluence of factors, there was just one – genuine left-wing parties threatening to win power.
I don’t know what you’re trying to say. Your chart starts from 1960 and doesn’t show the pre- and post-war years at all. What has it got to do with the idea that the destruction of industrial capacity during the war was part of a rare confluence of factors that gave American workers special post-war bargaining power?
Know what else was going on at the same time?
Is it just coincidence that containerization coincides with your export deficit chart?
Besides, what are you trying to say about USD global reserve status and that chart anyway?
While it may be true that the Ruskies cannot suffer the spotlight – after all, they cannot even face their own baggage – still, they and the Chinese absolutely can destroy. And they have long, very emotional memories. We’ll see the end of USD world reserve. That alone is enough to occupy most of us for perhaps a few decades.
It’s pretty easy. Stop selling stuff to the US, and stop buying our treasury securities. We have a trade deficit because of foreign governments/banks/citizens desire to net save in US dollars. The day they don’t want to do that anymore is the day we won’t have a trade deficit and we wont be the reserve currency anymore. . . just like the 1950s.
The Chinese yuan is not a floating currency, therefore not sovereign. The ruble could be sovereign but it doesn’t understand that.
The way the world works, a country NEEDS to have large $ reserves to protect against international economic crises, and against raids by currency speculators. Countries don’t buy treasuries because they like them, they are forced to.
Capital controls work fine too – see Malaysia circa 1998.
The federal reserve is now the biggest buyer of US treasury securities (the QEs) which removes their value and the interest paid from the private sector (the economy) driving up the value of the dollar. I don’t the author understand this. The BRICS can’t dismantle the dollar system.
I think the point to be addressed is, how are you going to replace the demand side of the equation? If the BRICS make most of their trade surplus selling to the USA then its pretty silly to be talking about taking the dollar down etc. Well, sure thing, please do because the enemy you are going to confront are the Wall Street Banksters because they are the ones who want the strong dollar and they have wanted it since the 1990s when Robert Rubin and his cronies came up with the blue print to impoverish the world and put the money into their own pockets. So, yes, go ahead please take these crooks to the wood shed, it will be good for real America but first replace the demand that the USA generates year after year. That is a little hard to achieve. Despite 20% unofficial unemployment, hollowing out of manufacturing jobs, institutionalized looting in the defense and medical sectors, America somehow still generates massive demand for the trinkets the BRICS produce.
It would be of some interest to project the fallout from the proposed currency landscape – an exchange environment where dollar hegemony is limited by the euro complex and a new and substantial third cooperative.
Is anyone writing detailed analysis? Most of what I read to date seems to assume the implications are obvious. I’m not convinced that’s the case.
Ran off the rails after the first paragraph:
The fact that the world’s financial system is based on the dollar allows the Federal Reserve to export inflation to other countries, while the Federal Government runs a huge deficit with impunity.
More austrian nonsense. So after years of no inflation despite doomsday goldbug predictions, now we have the latest excuse as to why they weren’t really wrong: somehow the Fed can export inflation.
Quite a trick, that is.
It all depends on where you sit.
In 2008, and until the recent softening in the Chinese economy, which has cooled investor enthusiasm, there’s been a big runup in commodity prices. It’s been across all the complexes. The Bank of India did study showing that non-exchange-traded commodities, didn’t participate in the boom.
Commodities inflation, particularly in food, hits less affluent countries really hard. QE has been a VERY sore point with the BRICs, they’ve complained about it vociferously for sending hot money in and out of their markets (emerging economies were favorite destinations for the “risk on” trade when that was hot) and commodities.
But Yves, you know as well as I do bank reserves can only be used for buying government securities, obtaining cash for bank customers and clearing payments between banks which is just a method of satisfying the requirements of double-entry book-keeping.
Thiose reserves only exist as credits on hard drives at the Fed. It seems to me the anger from developing nations over QE stems from failure to understand what the Fed actually does.
Aren’t the extended low interest rates part of the package of QE – not the most exotic, certainly; and don’t those low rates enable a carry trade, and keep the cost of speculative loans very low…with commodity speculation being one of the preferred avenues…haven’t you heard one of Jim Rogers interviews on Bloomberg over the past few years about his general inclination into the land/food/ag avenues?
QE was seperate from ZIRP. See, the Fed always must target price because it’s required to set an interest rate. This means that normally it has no control whatsoever over quantity of reserves. The only time it can exercise control is if interest rates are already at zero; since the rate can’t go any lower the Fed is now free to add any additional quantities of reserves it desires.
Now if it’s the case emerging markets are angry over the interest rate, WTF do they expect the Fed to do in an environment where everyone is screaming for Bernanke to do something? As ineffective a tool as it is, interest rates are the only thing the Fed can directly control.
Lol @ no inflation. Someone believes government numbers, and for a decade or more hasn’t taken one look in the direction of housing, education, wall street, insurance, health care, etc ad infinitum. I mean, go to the grocery store. Turn off the Fed News Network bro.
The key word is “exports.”
Loose money policy in the USA exported inflation to many other countries. e.g. During the decade of the 2000’s, the cost of living soared in most of the Middle East and North Africa. Some of the Gulf countries suffered double-digit inflation during that time.
The loose money policy was highly irresponsible on the part of the managers of the world’s reserve currency, but the temptation to exploit reserve status for US national interest (and for elite class interests within the USA) proved irresistable.
Now a PRC or Russian world currency system is not inherently better in itself. However, the world could definitely benefit from currency regime competition. The competition would help lead to better behaviour from our central bankers.
Is this effort on the part of the BRICS to dismantle the hegemony of the US$ reflected in the efforts of especially China and Russia to accumulate huge amounts of gold ?
I doubt it will ever happen. None of these countries want to run big trade deficits. Nor do they want to trigger WW3.
And while the Gulf dictatorships will sell oil for dollars the game continues.
Note this as well:
Glaziev has repeatedly accused Fed Chairman Ben Bernanke of starting “a currency war” against the emerging markets. He also believes that Bernanke’s policy will ultimately lead to a military confrontation . . .
So the “mastermind” is engineering a rebellion against the dollar because he doesn’t know what bank reserves are. Makes one wonder how many conflicts in human history were the result of outright stupidity.
Would it be possible to provide a link to a document quoted?
I have to laugh a little – laughing is a good psychological defense – it’s sort of a micro-denial. Anyway, chess being the game here….. there is no reason to believe that other countries do not know what they are doing or are stupid when it comes to economic warfare – or even economics – take a look at our own prowess in the economic field.
Let us not forget that we throw away technology and leadership in the advancement of science like one would throw away a good steak because it did not meet our elitist tastes.
We are also shocked..shocked I tell ya, every time some new crime, new financial wrong, new ghastly degree of idiocy is perpetrated in our USA name. What about that Solindra thing — we act, as if, diving forward into the USA manufacturing of solar cells is some how a stupid investment and, a political blunder, when, in fact, we need more manufacturing of advanced non-hydrocarbon based infrastructure development. – The real issue that brought down Solindra was Chinese currency manipulation and financed based – global labor arbitrage. What does the USA do…abandon it and treat it as some laughable matter. Meanwhile, the global community laughs at us while they deposit the gain in their bank, laugh at us while we go about the world like some distempered monkey with a club trying to get everyone to play by its rules.
Sometimes ya just have to laugh to prevent the tears.
To claim that the rest of the world is too stupid to know what they are doing is just a denial.
The competitive advantage of the BRIC strategy is that they are playing for the long-term because they know that U.S. policy, because of our political situation, is focused on the extreme short-term. Eventually, if they hold together and aren’t brought down by black ops they succeed in what they set out to do with no opposition from the U.S. authorities who cannot plan ahead at all.
Absolutely. I’m not sure Putin *has* a long-term plan; the Russian policies have no coherence to them, looking more like imperial posturing and thoughtless hostility to the US.
Brazil, India, and China most certainly do have long-term plans.
The USD could use some healthy competition. Not that the BRICs aren’t acting in their own interest but what’s wrong with that? The US needs to get off the financialization track and China needs a stronger yuan to support a more robust domestic economy. The USD isn’t going to disappear but it could use a reality check. We are flooding foreign economies with hot USDs rather than using them productively at home. Having regional trade denominated in other currencies would be healthy. Not without problems but overall I think a good balancing mechanism.
I’d still like to hear a coherent explanation of 2008. For 70 years the US has given money away to promote trade and environmental destruction. And financialization. With all that money in the global system, suddenly in 2008, it all came crashing down. Not so suddenly I’m sure – but we were all told it was brought down when the housing bubble burst. The entire world? And the sollution? Flood the world with more dollars to get trade going again. Which it isn’t, but nevermind. It is a better solution that all-out war. Which wouldn’t work either. The dollar even as reserve currency really can’t do it alone, hence every other central bank is flooding the system with money too. The only thing I object to is the establishment of world trade syndicates that are above sovereign law. They will commoditize labor in no time flat.
There are those that wold argue that we have been in a financial war since 2008 and the US continues to win as it keeps the printing presses running.
Inflating the dollar reduces the value of all holding such and other countries currencies then need to be inflated to maintain par with US value. That is why countries are making financial deals w/o the US dollar in the middle.
Yes and the fact that this money is being used in various carry trades rather than to actually benefit US citizens it is the oligarchy and FIRE sector that are winning.
Trying to work out the psychology of the Russian leadership is worthwhile. I think Putin’s geopolitics is poorly thought out, but Russia is still enough of a Great Power that one has to understand it in order to understand what’s going on.
This gives some interesting insights. It seems consistent with the analysis I read elsewhere that said that Russia’s leadership was frustrated with high-handed, obnoxious behavior by American governments and had simply decided to obstruct the US whenever possible. Hello Cold War — I knew it couldn’t be over that easily.
Both the Russians and the Chinese share in a long-term competitive advantage that they have, perhaps, decided to take advantage of. They plan ahead while the U.S., for political reasons cannot plan ahead.
The U.S. ruling-elites are focused on short-term profits, riding bubbles and so on not cultivating long-term economic growth.
Geopolitically, I don’t see Russia gaining long-term advantages. It’s repeatedly picked the unpopular side in regional wars and ticked off natural allies. Economically… well…. seriously, still using broad gauge rail?
China is much more competently run and has been operating a rather intelligent program of economic imperialism and industrialization. India is operating a different one.
Brazil is far more interesting. Brazil is part of the bloc of South American countries which have broken free from the US-European economic masterminds, despite incredible efforts on the part of the US to suppress South America and return it to colonial status. Brazil is positioning itself very, *very* well for the future.
The BRIC countries can, in the long term, achieve their goals and, at the same time, not seriously disrupt the current system. There is no requirement to do anything dramatic other than have a long-term strategy and try to hold together and consolidate power within their own spheres.
Right now there is no danger to the dollar hegemony, in my view. But if the BRICS and their allies can hold to their course the fruit will drop in their laps without much of a fight as the U.S. eventually drops out of having political hegemony (the U.S. will probably maintain military hegemony but will become gradually and independent force for hire).
The reason why the dollar will remain strong is, of course, that this country represent security and is the world Empire’s military force. This force keeps order, insures trade routes are kept open and so on. The U.S. is required by the world and most countries want it that way. However, the U.S. has a leadership class that is increasingly focused on the short-term profits, fraud, general criminality, bubble-riding speculation, and uninterested in the long-term welfare of the American people other than as chumps to milk. This situation has forced this country into political paralysis. Few people believe in America today and, in fact, there is a political party dominated by people who want to take a wrecking ball to the whole edifice and devolve power into feudal fiefdoms in general alliance with the global, not national, elites.
Pontifications on US hegemonic reserve-currency ways are very silly. US didn’t seek this, and it is a VERY arguable point that it derives any benefit from having it, if not being outright costly. The simple truth of “reserve currency” is that it is a mechanism to transact inter-country transactions, and has to be based in a politically stable country with deep markets such as treasuries, and have legal protections. Russia or China posses almost none of these attributes, and economically dubious statements such as these will not change the fact that no-one in their right mind would want to store or transact in rubles or yuan anytime soon.
P.S. Float your currency as a first step at least, jokers.
That is absolutely untrue. The US nixed Keynes’ Bancor proposal at Bretton Woods. The dollar as reserve currency was something we put in place.
Thanks very much for this important posting. There is no doubt that there is a lot of chaffing under the current system dominated by the US, but putting together a basket of currencies as the alternative is a tough long haul. But the threat of currency wars, QE and the role of the US Fed all remind me, once again, how rich and timely Karl Polanyi’s 1944 book “The Great Transformation” is. That’s because it spends so much time talking about international “free trade,” the gold standard and the interaction between central banks and that standard. Mind you, it is not to be read in the “biblical” sense as a left source, but now in my third reading I’m still impressed with how Polanyi manages to keep himself out of all the labels we like to pin on dissenting economists. In addition, precisely because Hayek is now a saint on the right and to libertarians, one would think that as a matter of sheer intellectual balance there ought to be more interest in what another “Vienna” economist had to say in 1944 – and since Polanyi had already been skirmishing with Von Mises in Vienna during the 1920’s. Global trading and financial regimes, even long lasting ones, do end, do unravel, and I think that’s what we’re witnessing. That’s why Polanyi extends the “long 19th century” through the 1920’s and into the early 1930’s when it all came apart – not to be put back together until, as you rejoinder reminded us, Bretton Woods – and not in the wiser way Keynes wanted.
The part of this alleged BRIC plan I really love is “create independent rating agencies!” This is going to be good.
Yep, that’s great; it’s part of the package deal, though, isn’t it, if you think about how important the existing agencies are (were?) in keeping the existing system going? Do you recall the mocking tones Michael Lewis found – Wall Streeters and independent hedge funders thought the ratings places were very low on the financial world’s pecking order (This was in “The Big Short.”)and never got the top talent. By then, everyone had been briefed on how they didn’t have truly independent funding…and we never did come to any reforms in 2010 to change it, if I recall.
USD hegemony is colonisation in disguise exploit raw materials and resources, in exchange for USD printed. It is estimated the USA has got a 10 thrillion USD free lunch this way. So Americans should not feign ignorance(even though you are an expert in this)
“The status of the US dollar as the world reserve currency gives the US a number of advantages over other countries…allows the Federal Reserve to export inflation to other countries, while the Federal Government runs a huge deficit with impunity”
No, no, and no.
1. The dollar as reserve is beneficial to some actors in the US, harmful to others. If anything, I think a multi-polar world would be better on balance.
2. The Fed can export inflation to other countries because those countries are holding dollar denominated financial assets. If (when) they decide to buy something in the US with those dollar assets, that would send the inflation back to the US. The reserve status of the dollar has some influence on maintaining a basic level of dollar reserves for trading, but it has no impact on the extra dollar assets held as savings. If China went out tomorrow and converted half their USD treasury holdings to yen assets or euro assets or precious metals, that would make US imports more expensive in dollar terms (ie, cause dollar price inflation).
Also, this language implies there is no inflation in the US currently, even as the things people need to maintain a basic standard of living have gone up tremendously in dollar prices over the past couple of decades.
3. USFG can run a budget deficit in dollar terms in an arbitrarily finite time period because dollars are created by the USFG. Any monetarily sovereign nation can do this; that has nothing to do with dollar reserve status.
You sound knowledgeable about these matters, so let me ask you this about trade deficits and their relationships to budget deficits. James Galbraith maintained, in his book “the Predator State,” that given our great trade imbalance, the US had to run a deficit of some sort, or the books don’t balance: either the public deficit (governmental) or the private sector (households and private businesses,esp. the finan. sector) must run a deficit to balance the trade one. He said when we paid down public debt/deficits in the late 1990’s, we should have expected a huge binge and rise in private sector debt – which is exactly what happened.
If he’s right, then isn’t much of officialdom’s hysteria over debt and deficits misplaced? (Galbraith said it was fara better that the public run these “ordained deficits” than the private sector). Or at minimum, telling only part of the full story?
agreed – I think sometimes people over think these things (often times, because their interests are compromised)
Over the Very Long Term, I think US current and capital account imbalances will correct some from the past decade and a half of massive capital account surplus/current account deficit. Maybe it happens through current major exports, like tourism or education or agriculture; maybe it’s through expansion of IT or ‘traditional’ manufacturing; maybe it’s a new development on the scale of the computing revolution; maybe it’s the continued trend of transnational ownership of companies (for example, what nation produced the Ford Escort – Japan, US, Mexico?).
And maybe it’s through decreased imports – maybe we use more trains and wind turbines and flex schedules, less imported oil and commuting. Maybe we drink more California wine, less French wine. I’m not worried about these things because that’s how trade balances – as dollars become less valuable, more of our production will naturally find its way overseas and less overseas production will find its way here. There’s no catastrophe here – that’s why it’s called the Balance of Payments, because it balances.
Personally, I think the big tragedy of the past decade and a half is not that we have gone into a lot of debt – that is largely a distraction at best, and outright fear mongering and racism at worst.
The problem, IMO, is that we’ve squandered those resources on entrenching inequality rather than investing it in the public commons. What matters is how money is spent.
Of course, at a more fundamental level, I don’t think there is much officialdom hysteria over debt and deficits. I think it is all kabuki theater, part of the show for the leftists to get them to go along with wage stagnation and the two-tiered justice system and the assault on the Constitution at the heart of wealth concentration.
P.S. I forgot one other critically important component that is all too often left out: one other big way the balance of payments can revert to the mean is for the US to change drug policy. Since all the official stats use the officially sanctioned categories of legal and illegal (ie, torture is legal, marijuana is illegal) – a huge change would impact our trade if we:
1. stopped spending money prosecuting the drug war, and
2. started counting recreational drugs beyond alcohol, tobacco, and caffeine in US economic data
Not to oversimplify too much, but drugs are basically how the Brits in another time solved their trade challenge with China whereby the British imported Chinese stuff but all they had to export was the British pound – they sent opium to China to get the silver back.
For the US, it wouldn’t be that we would need to send massive amounts of drugs to China, so much as if we could just grow/manufacture it domestically and stop fighting the war on drugs, it would significantly reduce the leakage of dollars outside of the dollar economy and create companies in which foreigners could invest (like AB-Inbev and MillerCoors).
And let me make my question a little tighter with the flow above, and esp. Yves’ comment about Keynes at Bretton Woods: Keynes was denied his mechanism to deal with great trade imbalances – he saw how de-stabilizing they are – at Bretton Woods because the US wanted to be in the driver’s seat, not engage in genuine economic power sharing.
Today, Martin Wolfe has written about the great “re-balancing” needed in the world economy – and that refers to the trade barons – China and Germany – distorting the world economic flows. Krugman recently pooh-poohed this in the “great debate” (sic) with Stockman by hemming and hawing to the effect that US multinationals’ accounting systems distort the real balances – which Mike Whitney over at Counter Punch (rightly,I think) called so much academic mumbo-jumbo. I tend to think the great trade imbalances are very destabilizing – and can wreck havoc inside nation’s economies…the blue-collar-older cities devastation in the US, being just one example.
That’s a fascinating discussion that gets a little bit beyond where I’m familiar. I agree there are trade imbalances that cause problems, but a bit like global warming, the problems are concentrated largely in the rest of the world, not North America. It is a humanitarian issue, not primarily an economic problem, confronting the US.
From an American perspective, I would shift the focus, and say Germany and China are virtually irrelevant to the living standards of American households. Our main challenge is not the size of the pie, but rather, the distribution of the pieces – and that comes down to domestic US policy that has encouraged wage stagnation and price inflation: the skimming off of productive labor for the purpose of enriching connected elites.
I think it is both arrogant and dangerous for us to tell the Europeans or the Asians how to conduct their trade policy. If Greeks like sharing a currency block with Germans, I have no problem with that (in fact, personally, to the extent I have an opinion, I favor tighter European integration). If Greeks are sick of bailing out criminal German banks, I also have no problem with them leaving the EMU and repudiating all Euro-denominated debt. If Chinese policy makers like holding a trillion dollars of USD treasury debt, I have no problem with that. If they want to sell those dollar-denominated assets and convert them to importing baseball players or beanie babies or gold or corn or something else, I have no problem with that, either.
One other thought I had that helps me put international trade in perspective is the following observation:
The five largest exporting nations on the planet are the same nations that are the five largest importing nations on the planet (US, China, Japan, Germany, and France).
Of the big three traders (US, China, Germany), the US stands out for international trade representing a SMALL portion of overall economic activity, and our net activity (the ‘trade deficit’) is not a whole lot more than a rounding error in comparison to the overall size of the economy (basically, 5% – the leftover of a 95% confidence interval).
Even in comparison to just the federal budget, our entire trade deficit is less than military spending or healthcare spending.
Why then is free trade such an emotionally and intellectually charged issue with professional economists and yes, capitalist ideologues, beginning with the classical economists in the 1770-1830’s period, esp. in England, who eventually went so far as to jeopardize their own nation’s viability by risking dependence on imported ag. products? And let me include perhaps the most emotionally charged aspect of trade – the free flow of capital – the regulation of which, when I mentioned it – was the only time I’ve ever seen a full fledged member of the Washington think tank/policy world “lose it” – unleash just a torrent of anger in my direction (I think I had called for a financial transaction tax – a proposal which is still a pretty good way of measuring what the establishment perceives to be the stakes in free trade and free financial trading)…
This was the first regime of globalization which unraveled in 1920-1930’s crisis – and what was the first thing the economic world tried to put back together at the end of WWII? You may be right or wrong to put it in the perspective you have – but then please explain why so many perceive the stakes to be so much higher?
One stab at my own question: those most engaged in global trade are trying to sell abroad what they cannot sell at home: autos, electronics, airplanes…under current domestic arrangements, the repositioning of which, broadly defined, can have dramatic domestic political implications…profits rates, it is alleged do fall in older economies over time…and that China market, such a long-standing dream in the West and esp. the US beckoned, even on terms which have proved, may yet to prove, to be disastrous for the US national interest.
I can tell you this though: you’re not going to sell many US cars to folks who don’t currently have any at the current income allocation and US stance towards its own minimum wage…and speaking of wages, where does any domestic discussion lead on that topic if not to the China-Asian trade and billions of new, cheap workers crushing higher US wage hopes…you may be right, it’s all a diversion from high tension US domestic politics…but it always circles back to “what Asia is willing to work for” in tom friedman’s “flat” world…
I love the why question; it is what piques my curiosity also. And yet, is way beyond what I feel meaningful value to add. I don’t know why the simple observation that humanity has always liked to trade with people near and distant is so controversial.
I think there are passions from prior eras because they were less wealthy times with smaller nations (less margin for error) and because the ‘professional economists’ were a much smaller group. They were men (perhaps another problem) of some relatively rare intellect philosophizing about political economy.
Three major changes over the period of the 20th century I would identify, in no particular order.
1. The rise of the US as the central power on the globe. The US simply doesn’t face the kinds of threats and opportunities of, say, 18th century Great Britain. While far from perfect in execution, the ideal at least of the New World is intimately transnational, and the poets perhaps capture this best:
Not like the brazen giant of Greek fame,
With conquering limbs astride from land to land;
Here at our sea-washed, sunset gates shall stand
A mighty woman with a torch, whose flame
Is the imprisoned lightning, and her name
Mother of Exiles. From her beacon-hand
Glows world-wide welcome; her mild eyes command
The air-bridged harbor that twin cities frame.
“Keep, ancient lands, your storied pomp!” cries she
With silent lips. “Give me your tired, your poor,
Your huddled masses yearning to breathe free,
The wretched refuse of your teeming shore.
Send these, the homeless, tempest-tost to me,
I lift my lamp beside the golden door!”
2. The rise of the corporation, of bureaucracy, of mass centralization, and the attendant mass implementation of technology/organization/processes so allowed. While I would argue that globalization actually goes much further back in history than I think your comment suggests, I also think the rise of regional, then national, then transnational units of organization is a trend under appreciated outside of the business world (and some anti-globalization activists) in how fundamentally it has altered the game more recently. We simply have so much more productivity (wealth) that we just don’t need as many farmers as were necessary pre-20th century for a basic standard of living; the employment shift from agriculture to manufacturing to services happened essentially within a couple generations. Most Americans alive today have always known an economy where most of the work to be done was in neither agriculture nor manufacturing.
National borders make increasingly less sense when discussing trade – perhaps best captured by the Chrysler ads, ‘imported from Detroit’. The companies themselves buy stakes in each other, put workers in each others’ ‘home’ countries, and at a deeper level, the owners of the companies are themselves scattered about the world in increasing ways. We now trade tourism and intellectual property and drugs as much as coal and corn and salt.
3. The rise of systematic higher education. I want to be careful here, because I think political economy is important and many individuals have contributed greatly to it. Galbraith and Sitglitz and Reich and Baker and many more are all important post-war thinkers. Krugman is perhaps one of the few who has been successful at trying to reach a broad lay audience. But…there is a kind of caretaker/civil servant role filled by more pedestrian teachers simply to fill the sheer volume of business created by the higher ed system that exists today. Gatekeepers have arisen and hoops to jump through and physics envy and obsessing over minor mathematical models rather than the important issues and the small corruption that comes from knowing who butters your bread and what advances a career.
Yet having said that, there is little time for deeper thought as people are pulled in other directions with other responsibilities. Most students not interested in business or economics don’t even have organized exposure to personal finance, never mind larger issues about trade and regulation and so forth. And by the time you are working and raising kids, you have way more important things to consider, and if you care enough, say, to hear some guy you think named Mike Daisey say something about how Apple is treating workers poorly in China, you likely won’t have the energy to read up a bit more and find out that he’s making things up rather than conveying specific factual information. Just try reading the following post when you need to change a diaper:
At the end of the day, I actually don’t think international trade is a hot-button issue anymore, except when it is specifically framed as a hot button issue or purposefully distorted to be something it’s not (like when corporate trade pacts are described as free trade pacts). Most of the time, people engage in the free flow of information, ideas, wealth, and people because trade is inherently beneficial; we as a species are fundamentally communal and social. We recognize this value instinctively. It requires determined propaganda to get people to view a particular restraint of trade as positive when the case is something other than the underlying merits (for example, human rights or labor conditions or environmental concerns).
Or to say it differently, how many economists have traveled outside of their home countries? That’s international trade in action.
P.S. On Tom Friedman, I reserve a special place of ridicule for that spokesman of the elite. He is the poster child of trying to shift blame away from US domestic policy of wage stagnation to anything else he can find in the world. The salary test for FLSA overtime exemption is $455 per week because the world is flat? Sure.
Russia Captures CIA Agent Plotting To Kill Obama
The Federal Security Service (FSB) is reporting today it has captured and arrested an as yet unidentified agent of the United States Central Intelligence Agency (CIA) [photos 1-4 left] (since identified as Ryan Fogle, a third secretary at the US Embassy in Moscow) for his clandestine efforts to secure Russian intelligence assets in a plot that could very well be a plan to assassinate President Barack Obama.
Though not confirmed in this report, the Jerusalem Post News Service is reporting that this CIA agent was, also, an employee at the US Embassy in Moscow, which, however, the Americans refused to either confirm or deny.
According to this FSB report, Russian counter intelligence agents began tracking this CIA agent when he first appeared in Moscow in mid April 2011, and even more extensively after he traveled to Benghazi Libya the day following the 11 September 2012 attack on the American consulate which killed the American Ambassador J. Christopher Stevens and 3 members of his security detail.
From Libya, this report continues, this CIA agent next appeared in Jordon in late September, 2012, where he was a part of the American intelligence team tasked with supplying Syrian rebels with weapons under a “Secret Order” signed by Obama earlier in the year.
We live in a world where the dominant economic model is kleptocracy. So I see this as grumbling among some of the second tier (or with the exception of China, third tier) kleptocracies against kleptocratic hegemon.
The author rails against the US running trade deficits, but as Yves points out, a country whose currency is the world’s reserve currency has to run trade deficits in order to get enough of its currency into general ciculation to serve that role.
The only other way is to establish a world currency. However, such a currency would need a coordinated world economic policy (or at least a policy consensus of the world’s biggest economic actors) behind it. This would be difficult even in a non-kleptocratic environment. In a kleptocratic one, it would be like scaling up the euro from continental to planetary size.
I doubt that the BRIC could pull this off with China, but the important point is they don’t have China. I can see China hedging its bets and rattling some cages, but its Chimerica relationship dwarfs anything the BRIC could offer it.
Ratings agencies, as the 2008 meltdown illustrated, are just some kleptocratic razzle-dazzle to fool the rubes. If that’s all Mandrasescu has for the BRIC’s “grand plan”, then he has nothing.
being reserve currency is not a God given right, nor is it an absolute necessity for world trade. Maybe an accounting hassle, bu I am sure a computer will be able to track few exchange values.
There is no reason the world cannot exist in multiple currencies moving dynamically. The world exist just fine before Dollar become default post war reserve currency. (It was nixon’s trick anyway.)
Actually the point to a reserve currency is that it gives parties to international contracts and trade a referent that is likely to hold its value and so provide a measure of security and predictability to these business activities. Currencies moving dynamically sounds all nice and good, but it would introduce an element of chaos that would severely damage productive, as in not hot money, international business.
Hugh – Youn are quite right about regulating hot money flows in and out of national economies – this is what ‘done for’ the Bretton Woods system by the 1970s. Infact, it can be argued that various major unilateral moves toward full currency convertibility from the late 1950s secured by financial lobbyists led to the creation of the Euro Dollar market which is widely seen as one of the catalysts that brought the system down.
I think the only way such multlateral policy can succeed is by banning convertibility for private speculative purposes. It’s no surprise that Britain, France,Germany, South Korea and Japan (where this crisis is continuing through the carry trade)experienced their first post war recessions after changing these rules for the benefit of the currency speculators.
Yeah, China is really anxious to see a collapse in the purchasing power of a nation with which it has a $25b monthly trade surplus.
Empires, Technology and Currency, & You
For the last 50 years the majority has been dismantling the private family, transferring its wealth to the public coffer in exchange for pension promises in a ponzi scheme, to artificially juice income and control development, NPV, which is naturally collapsing with demographic deceleration. And in the latest artificial feast and famine business cycle, intelligent labor was cut out again, with the expectation of young replacements, which never materialized.
The story of the empire is the story of scale economics, gravity, accelerating demographic replication as the means to borrow income from the future and thereby control out years. Deficits and debt, employing currency to enable misdirection, to resist adaptation, enslaving future generations to the past in prisoners dilemma, is no accident.
The majority’s financial leverage and emotional extortion, driving digital technology, is a double-edged sword, which defines wealth as the control of other people’s debt formation to the majority’s own purpose. Its top-down, family law banking mechanism maximizes return on zero risk, hiding the losses off sheet, ignoring them until it can’t, and what better place than pension promises. Net, the majority borrows to spend, to preserve non-performing assets, its own perspective.
The majority pays itself in convoluted make-work credit, to be ignorant. Debt is an empire asset the majority calls money, and Bernanke is paid to be its scapegoat. To extend and pretend, to delay and deny, he has simply been bringing the entire global middle class up to the cliff, with monetary shock and awe, austerity and expansion. They deserve each other.
Empires are prisons within prisons, of false assumptions, enforced by privilege and punishment, layered upon layer with leverage, with drugs piped in as necessary. The vast majority is normalized shortly after birth, either by parental example or peer pressure in school. And the majority of the remaining minority rebels, assuming the exit is physical or mental, becoming self-destructive.
You design, build, implement and enforce technology, whether you know it or not. Technology itself is neither good nor evil. It may just as easily be employed to free the prisoners.
If you balance the observer’s prism, which is relative, all the doors open, the inmates ignore the operation, and the scapegoat takes credit for the successful reorganization. Basically, you create space to interrupt the empire’s interrupts, catalyzing resistance reversion, rebooting the linear field and incrementing the quantum field, in a chain reaction, developed in advance for the occasion.
If you rebel against the prison, instead of creating space, you make the inmates of denial acutely aware of their prison, resulting in depression for all. Resistance is futile. Grow your capacity.
The empire is fully contained and imploding. The bang will happen when it happens, and there is no point in watching other people watch other people die off. At equilibrium, you are replacing Family Civil Law enforcers with your children, to alter course.
Space travel is the same problem, perspective. You are trapped on earth; how do you get out? The answer is not to plead for funding from the zoo keepers. You are the bank, unless you choose to avoid responsibility, and then you get what you get, a gossip sh-show, a crappy McMeal, and Starbucks p-water, and you’ll like it.
As demand for oil has fallen, the price for oil has risen; why? When may you expect reversion? The leading outliers adjust gravity implicitly. The old-timers are not going anywhere, the technicians below them cannot fix anything, the economy remains in stall, and the corporations are starting to advertize for travelers.
Why on earth would you fund the majority’s pensions with real wealth? The majority pays itself to be selfish, to hide the truth until it can’t. It’s not rocket science.
Most of this theory and history goes over my little head, but still I think it generally misses the elephant in the room. From a non-economist point of view, I question the notion that economic growth is based on money, and that issues of fiscal/monetary policy or reserve currency are the significant driving or mitigating forces over the long term. Seems to me growth is based on and limited by energy cost, which BTW includes the negligently-unaccounted-for devastating effects of climate change that are going to hit us like a ton of you know what. I worry that we’re heading into a new paradigm where none of the old accounting tricks can hide the very real deficits that will accrue from extreme over-exploitation of resources and unabated pollution and over-taxation of the planet’s ability to sustain our life. The suffering already has begun in a number of underdeveloped countries. The hyper development plans of the BRICS are going to be hit hard when food/water/energy shortages threaten their populations. Sooner or later, the developed world’s commodities, technology, manufacturing, and funny money trading will also be thrown into chaos, unless all of you econ wizards figure a way to turn the system away from the capitalist consumption-growth model and toward a sustainable life and human-needs centered one. Until that happens, I’ll just try to stay off the grid as much as I can, while I take all this financial stuff with a pinch of salt.