Wednesday, April 27, 2011

Mish — Bogus Threats to US Reserve Currency Status

Issuing the world's reserve currency is a mixed blessing. Mish agrees with Michael Pettis that the disadvantages outweigh the advantages and the US should lead the charge away from the dollar as the global reserve currency.

"The reality is the US would be better off (and so would the world), were the US to lose reserve currency status. Nonetheless, don't expect it any time soon. China is not ready and Europe is in the midst of a sovereign debt crisis that will not go away for years."


7 comments:

googleheim said...

in other words Mish is saying that if the US retracted it's position as the reserve, then it would be highly inconvenient the Chinese and the Europeans at the expense of US citizens ...

since we underwrite and subsidize both places to undercut USA businesses

Mike Norman said...

Why is having the dollar as the reserve currency a disadvantage. It means that the world wants to sell us their output in exchange for our currency. It's a huge advantage. Mish doesn't understand very much. That's pretty much what I've seen from him.

Tom Hickey said...

What MIsh and MIchael Pettis are pointing to is the Triffin Dilemma. It leads into the Twin Deficit Hypothesis.

These are issues that MMT runs into when recommending a large deficit to close the output gap in the face of a large trade deficit, i.e., as the deficit grows, so does leakage to net imports, so an even larger deficit is required... This is supposed to blow up the Intertermporal Government Budget Contraint (IGBC) as servicing the the national debt eats up more and more fiscal space.

MMT'ers have written on the IGBC. See Stephanie Kelton, Limitations of the Government Budget Constraint: Users vs. Issuers of the Currency, Bill MItchell, How are the laboratory rats going? and Scott Fullwiler, Interest Rates and Fiscal Sustainability. MMT'ers reject the IGBC as an erroneous concept based on neoliberal assumptions.

Matt Franko said...

To me it's like foreigners (let's face it, OPEC and China, btw #'s 1 & 2 on Donald Trumps radar screen) want to use/own USDs more than they want to establish their own independent legitimate monetary systems. OPEC uses USDs as reserves and China uses a peg.

We either have to acknowledge this and adapt fiscal policy accordingly (to take care of OUR people); or end our trade relations with these 2 non-western entities and tell them to take a hike.

It's got to go one way or the other if we are going to take care of our own folks (ie employment) here at home...

Tom Hickey said...

How do you tell OPEC to take a hike other than the Trump plan. Actually the US position now is Trump plan lite. We buy their oil, they buy our weaponry. We support OPEC and they support the US military-industrial complex. Looks like a pretty incestuous relationship to me. The only way out is to solve the energy issues that perpetuate the oil age.

As far a telling China to take a hike, GM is the largest auto seller in China and the multinationals are basing their long term business plans on growth occurring chiefly in the emerging world, led by China.

I think we have to start looking at the global economy as a closed economy and figuring out how to make it work by distributing demand. Supply is only a problem wrt sustainability, given technological innovation and productivity increases. Capital is not a problem either since the cost of capital to monetary sovereigns is zero and they have no limit on capital creation.

Matt Franko said...

Tom,
We can go over to alcohol at probably $75/bbl and up. If the OPEC scum cannot keep the price down well below this level then they fail and it's time for us to move on.

Here's
a summary from a person who has studied alcohol for a long time (not that kind ;).

Excerpt (I love this one): "Just our lawn clippings could replace a third of the autofuel we get from the Mideast"

We get to keep our infrastructure just about intact. We could continue to use petro for aircraft and diesel. At these prices there are other options.

BTW, did you see all of the oil dictators from the mideast that were invited to the royal wedding this week? What's up with that? BP must be desperate.

Resp,

selise said...

mike, fwiw, i see three potential disadvantages for having the dollar as major global reserve currency first one is for the usa and the second and third are usa and row:

1. our standard of living is dependent on maintaining the reserve status of the dollar. abrupt change in status could be extremely unpleasant.

2. no mechanism (taxes) to withdraw dollars and regulate global demand (obviously not a problem now, but foreign sector desire to net save dollars could decrease as well as increase).

3. we don't provide enough demand to compensate for for foreign sector net saving desires. and that contributes to global unemployment, deflationary pressure, etc.

not making any judgment here on whether the cons outweigh the pros.

.....

of course the above depends on my understanding and/or misunderstanding of both the issues and mmt paradigm.