Can US dollar remain world's currency?

Can US dollar remain world's currency?

Source: The Real News Network

Transcript

Jane D'Arista Interview (Part 1 of 6)

PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I'm Paul Jay in Washington. Between 1983 and 1990, the Reagan era, the total US debt—and by total US debt we mean households and businesses big and small, governments state, local, and federal. Under Reagan the debt grew from $5 trillion to $10 trillion. This has all been pointed out by Jane D'Arista in some of her recent writing. And she also points out it took 200 years to get to $5 trillion, so that move from 5 to 10 is rather significant. Jane also writes: now there's a possibility that a monetary collapse could engulf the entire global economy, that a loss in the value of the key currency, which means the US dollar, could precipitate a worldwide shrinkage in credit that would deepen the financial and economic crisis already underway. Now joining us is Jane D'Arista. She's an economist at the Political Economy Research Institute, known as PERI, at the University of Massachusetts Amherst, where she's also a cofounder of the Committee of Economists for Financial Reform, called SAFER, for Stable, Accountable, Fair and Efficient Reform. Thanks for joining us, Jane.

JANE D'ARISTA, ECONOMISTS FOR FINANCIAL REFORM: Thank you for having me.

JAY: So if I understand your basic point is that the global economic system, based on the US dollar as the reserve currency of all international transactions, is actually exacerbating the crisis. Why and how?

D'ARISTA: Well, very much so, because it has played out its ability to perform the function that was in place before, namely, the US was the banker to the world and was in effect doing the transactions that allowed the global trade and investment regime to work. Now that we are so much in debt, and that it began, as you point out, with the Reagan administration and has run up precipitously over time, we are now at historic levels in terms of debt. And the household sector in this country, which we shifted to when in the Clinton administration we took down the federal deficit, the household sector has played out. As you know, unemployment is high. People are losing their houses. They cannot borrow money to continue to buy. And the whole global system came to be based on the idea that the American consumer was the engine for the global economy, and it is no longer.

JAY: So if I understand it correctly, your argument is that in '71, when Nixon decouples the dollar from gold, more or less institutionalized something that had already been happening anyway, 'cause there essentially wasn't enough gold to fuel the amount of international global trade, so people had kind of already began relying on the dollar as the main means of exchange. They institutionalized it in '71. But by everyone needing the US dollar to participate in global trade, it means everybody has to do something to get dollars. So what do they do, and what's the effect of that?

D'ARISTA: Well, the effect of it is, as you say, that they have to export, they have to sell into the United States in order to earn those dollars. The alternative is to borrow them, and if they borrow them, they go into debt, and then they have to service the debt. Where do they get the dollars to service the debt? Exports to the US. And that has been the regime as it grew up. In 1971 you had a situation where the US was running out of gold. It had agreed among the central banks that if they needed to exchange their dollars for gold, the US would give them gold at $35 for an ounce of gold. The US reserves got much too low. And when some of the countries asked for gold at that time, 'cause they were in trouble, Nixon closed the gold window. And what he did was to take the monetary system, the payment system, out of the hands of central banks and put in the hands of the private sector, the private international banks, the big ones, the ones whose names we know—Citibank, etc. And they began to be able to speculate on changes in the value of currencies over that period of time. Now, we got into a situation in 1970s where there was a good deal of inflation, and by the end of the 1970s the dollar did collapse. Paul Volcker came in and rushed up interest rates to 20 percent and absolutely flattened the country. That was the worst recession we had had since the 1930s.

JAY: And flattened a lot of other countries, because a lot of countries, like Brazil and others, have been pushed into getting these loans from the IMF and World Bank and other places at what was supposedly practically zero interest rates, except they were floating interest rates.

D'ARISTA: Exactly.

JAY: So when they go from 1 or 2 percent up to 20 percent, it could completely transform many of these economies.

D'ARISTA: It was a disaster. There were 15 middle-income countries that were so highly indebted at that point that they did collapse, and we had what is called the lost generation in the '80s for those countries. Meanwhile, the US get back on its feet. Why? The value of the dollar went up with those high interest rates. The privatized system now saw the virtue of investing in the dollar—you got all that currency appreciation with high interest rates.

JAY: Because most of this money that Brazil and others are doing is they're using it to pay back debt back into the United States.

D'ARISTA: That is correct.

JAY: So this becomes this vacuum cleaner sucking back up all the dollars.

D'ARISTA: Right. So how could we get so much debt, $5 trillion national debt in the 1970s? Foreign savings—not our own savings, not our own wealth that we had created in our own economy. But the fact that the dollar was at the center of the monetary system, and if you put that interest rate up high enough, everybody wants more dollars. So they come into the US; they flood the markets; there's a lot more credit.

JAY: Flood the markets with cheap products.

D'ARISTA: Well, no. Flood the markets with cheap money, and everybody then can buy. Remember, we had a housing crisis at the end of the '80s because, again, housing prices had gone up as a result. I mean, we had a sort of a preview of what we have just now experienced at that time. And indeed, beginning in 2000, we had a similar episode of enormous increase in credit in every sector over a decade of time. Household sector debt went from 66 percent to 114 percent, and the most dramatic of all was the rise in the debt of the financial sector. So the financial sector has been running a casino, and it has put everybody into a very difficult situation. Meanwhile, of course, our problem is—and Nicolas Caldor pointed this out in 1971—that we necessarily are a country that will lose its ability to compete in the world if we continue to be the key currency country. People must sell us goods in order to earn the dollars that they need to conduct their international transactions—buy oil, buy food, whatever it is they need to buy in the world—and therefore, in selling to us, putting us into a situation where the cheap goods undermine the wages of our own workers.

JAY: But doesn't it depend on how you define "us"? Because it hasn't been so bad if you happen to own a bank.

D'ARISTA: It's been great if you own a bank. What we have to say is: why was the decision to keep the US dollar the key currency? It doesn't do a thing for Main Street.

JAY: Okay. So in the next segment of our interview, let's go back and answer the question.

D'ARISTA: Okay.

JAY: Please join us for the next segment of our interview with Jane D'Arista on The Real News Network.

END OF TRANSCRIPT

Panic Time at the Fed

The pathos of a losing war and a deep recession provide a wonderful back drop for comedy. We see a drunken passenger who mixes martinis as his ship sinks.

Panic Time at the Fed

Steve H Hanke, Forbes

U.S. Treasury Secretary Henry Paulson's blundering is becoming more breathtaking with each passing week. At the end of March he rolled out a grand plan to crown the Federal Reserve as the nation's new financial stabilizer. The Fed a stabilizer? That's who created the financial mess we're in.

If this wasn't bad enough, Secretary Paulson then donned his cheerleader's uniform and encouraged Beijing to let the Chinese yuan appreciate against the greenback. All the while favoring in this fashion a debasement of the U.S. currency, Paulson proclaimed that we should remain calm and confident because the economic fundamentals are sound. He reminds me of the stockbroker who performed a valuable service to his partners by always being wrong.

The current U.S. financial crisis follows the classic Fed pattern. In 2002 then governor Bernanke set off a warning siren that deflation was threatening the U.S. economy. He convinced his Fed colleagues of the danger. As former chairman Greenspan put it, "We face new challenges in maintaining price stability, specifically to prevent inflation from falling too low." (Given the U.S. economy's productivity boom, the Austrians viewed the prospects of some deflation as just what the doctor ordered.)

In the face of possible deflation, the Fed panicked. By July 2003 the Fed funds rate was at a record low of 1%, where it stayed for a year. This set off the mother of all modern liquidity cycles, and, as members of the Austrian school anticipated, the credit boom ended badly.

True to form, the Fed has panicked again, pushing interest rates down and flooding the economy with liquidity. A broad measure of the money supply (MZM) reported by the Federal Reserve Bank of St. Louis increased at an astounding annual rate of 37.7% from the end of January until Mar. 24. With this money supply surge and February's price gains (from February 2007) of 4% for consumer goods, 6.4% for producer goods and 13.6% for imported goods, it's no surprise that inflation expectations have risen.

It's also no surprise that the dollar remains debilitated, which makes Secretary Paulson's Beijing weak-dollar message so bizarre, particularly since it is based on an incorrect premise propagated by many prominent economists. Harvard professor Martin Feldstein, for example, argues that the bilateral trade balance between the U.S. and China is determined by the yuan-dollar exchange rate. Accordingly, to reduce China's trade surplus with the U.S., he advocates an appreciating yuan.

This advice is nonsense. Trade balances are determined by national savings propensities, not exchange rates. China's savings surplus and America's savings deficiency largely determine our trade imbalance with China. The U.S. Treasury should have learned this lesson after years of forcing the Japanese to adopt an ever appreciating yen, which destabilized Japan's economy without doing a lick of good for trade balances.

Until the Fed dumps inflation targeting and the U.S. abandons its weak-dollar policy, inflation will rule the day. Retain (and add to) your gold hedges.