Thursday, September 8, 2011

Pettis — "An Exorbitant Burden"

Why keeping the dollar as the world's reserve currency is a massive drag on the struggling U.S. economy.
Michael Pettis has a new piece in Foreign Policy, An Exorbitant Burden


mike norman said...

This guy's very mixed up. There is no "imbalance." There is a trade deficit and a capital account surplus and they balance.

The reserve status of the dollar is determined endogenously, by the desire of foreigners to "net save" in that unit of account. (Dollars.)

It's neither a good thing nor a bad thing. It is what it is.

Having the dollar as the reserve currency does not allow Americans to "consume beyond their means." Everything consumed is "paid for." Every dollar of consumption is matched with a dollar of capital inflow.

One can also restate this by saying, the dollar's reserve status allows foreigners to save beyond their means. And it allows foreigners to invest beyond their means.

NeilW said...

Only as long as the US keep raising the debt ceiling.

Arguably that foreign hoarding is causing people to question Medicare and Social Security because the US politicians have their view of the world backwards.

So politically its a big problem because the politicians (or their advisers) are a bit thick.

Ralph Musgrave said...

Acting as the World’s central bank is like any other form of economic activity. Get it right, and you can make a nice living. Make a hash of it or get too greedy, and customers will look for other “central bankers”. The recent shinanigans in Congress over the debt limit come into the “hash” category: it has frightened customers away and in the direction of Switzerland, etc.

mike norman said...



beowulf said...

This is a confusing situation that only gets better by making it more confusing.

Amend the Budget Act to leave capital spending on-budget only to the extent it exceeds capital surplus. Last year (per OMB def of public investments), $560B in capital spending while there was a $500B capital account surplus(as Mike notes, inverse of the trade deficit), so only $60B would be left on budget. Tsy could fund the off-budget amount with coin seigniorage and everything squares up. :o)

beowulf said...

I don't think those calling for the replacement of the US dollar with a global currency are taking into the account the political ramifications.

"Who lost China?" drove US politics to the right 60 years ago and fostered McCarthyism ("Tailgunner Joe" was only stopped when he began stepping on the Army's toes).

Imagine the fallout from "who lost the dollar?". Rick Perry would look like a moderate.