© Martin Poole / Global Look Press
Kudlow's remarks came a day after Donald Trump declared that China is trying to displace the U.S. Dollar [sic] as the NUMBER ONE CURRENCY" and that if this occurs, it would be the biggest defeat for our Country [sic] in its history."
Neither Trump nor Kudlow actually explain why maintaining reserve currency status is so important. After all, it's clear that it is not necessary for a country's currency to be a reserve currency in order for that country to have a high standard of living and a high degree of economic freedom. We could simply look to Norway and Switzerland to see that.
What's Good for the Government Isn't Necessarily What's Good for the People
Trump and Kudlow seemingly can't tell the difference between what is good for the US government, and what is good for the people. The idea that global reserve currency status for the dollar is essential to "America" relies on the false notion that the interests of the US regime and the interests of ordinary taxpaying Americans are one and the same. These interests rarely coincide, however, and they certainly don't when it comes to reserve currency status. This is especially the case when the dollar is unbacked by any commodity like gold, and is simply a floating fiat currency that can be inflated at the will of the regime at any time.
That global reserve currency status benefits the regime itself is obvious. This status for the dollar does indeed allow the regime to more recklessly inflate the dollar and increase deficits. This enhances the US regime's ability to bribe voters with enormous welfare programs and involve the US regime in a dazzling array of wars that have nothing to do with defending US territory. None of this, however, improves the standard of living of Americans who pay the bills. Even worse, when the dollar ceases to be the dominant reserve currency — an event that is inevitable — holders of dollars will see their purchasing power plummet. Yet, it not the end of reserve currency status that is to blame for the inflationist pain. Rather, the fault will lie with the decades of monetary and fiscal mismanagement made possible by the dollar's status as global reserve currency.
To demand the regime continue to cling to global reserve currency status is to demand a continuation of the policies that have hollowed out the financial well-being of Americans for decades.
Trump and Kudlow, however, are not troubled by this. For them, it appears that the supposed importance of reserve currency status is not about economic concerns, but is really a political project. This shouldn't surprise us given many of the narratives surrounding the dollar's status — which focus on China and Chinese geopolitical power as the main reason to fear a decline of the dollar. This isn't about protecting your wealth or reining in government power. It's about increasing US government power in the name of fighting the latest foreign "axis of evil."
In fact, China's currency, the yuan, doesn't even pose a threat to the dollar. The yuan is a fifth-place also-ran in the currency race. So, for now, the dollar still reigns supreme, and being the regime whose currency enjoys global reserve status comes with many advantages.
Why Reserve Currency Status Enhances State Power at the Expense of the Taxpayers
The first advantage is reserve currency status brings a greater global demand for dollars. This means more of a global willingness to absorb dollars into foreign central banks and foreign bank accounts even as the dollar inflates and loses purchasing power. Ultimately, this means the US regime can hoodwink the voters into accepting more monetary inflation, more financial repression, and more debt for many years before domestic price inflation becomes a political problem for the regime. After all, even if the US central bank (the Federal Reserve) creates $8 trillion in new dollars in order to prop up US asset prices, much of the world will take those dollars out of US domestic markets, and this will reduce price inflation in the US — at least in the short term.
A second advantage: the fact the dollar dominates in global trade transactions means more global demand for US debt. Or, as Reuters put it in 2019, the dollar is used "for at least half of international trade invoices — five times more than the United States' share of world goods imports — fuelling demand for U.S. assets." Those assets include US government debt. In fact, as Robert Murphy notes, this inflation-fueled demand for US assets will be "heavily tilted toward debt (rather than equity in growing companies)." This rush for US debt pushes down the interest rate at which the US government must pay on its enormous $30 trillion debt.
All in all, reserve status for the dollar means a lot more US government spending. This produces no net benefit since government spending in itself distorts the economy, drives up prices, and otherwise redistributes wealth according to political considerations, rather than according to the needs of consumers and entrepreneurs.
None of this is good for the productive people in the US. For one, deficit spending — whether for elective wars or welfare programs — must always be paid for, either in the form of price inflation (i.e., the inflation tax), or in terms of future ordinary taxation. Moreover, reserve currency status creates political cover for the regime's easy-money policies in the short term. That is, global demand for the dollar helps create the temporary impression that monetary inflation comes with few downsides. This, however, can only continue until the dollar's reserve status ends or even significantly weakens. In the meantime, the world will have been flooded with dollars.
Reserve currency status, by politically fostering more deficit spending, also harms those parts of the private economy that depend on private investment. As deficit spending increases, the economy is flooded with ever larger amounts of government debt backed up by tax dollars. This attracts huge amounts of wealth to government Treasurys that otherwise would have gone into private-sector investments.
All this dollar profligacy has been neither necessary nor advisable, yet maintaining global reserve currency status can help regimes get away with this sort of thing for decades.
The Effects of Losing International Currency Power
Often, discussion about the dollar's reserve status creates a false dichotomy between total domination of the global monetary system on one hand and complete abandonment of the dollar on the other. A more likely scenario is that the dollar will weaken considerably but will remain among the most often used currencies. After all, even after the pound sterling lost its status as reserve currency in the 1930s, it did not disappear.
For example, let's say the US dollar sinks to 40 percent of all foreign reserves and is only used in one-third of all international trade invoices — instead of one-half, as is now the case. This would not necessarily destroy the dollar or the US economy, but it would certainly constrain the US regime's ability to pile on another trillion dollars worth of debt without the true costs of mounting debt becoming abundantly clear. Perhaps more importantly, a world less awash in dollars will mean a world with less demand for US assets such as US government debt. That means higher interest rates for the US government and less of an ability to finance the welfare-warfare state by inflating the currency.
Naturally, politicians and pundits such as Trump and Kudlow view any threat to this kind of state power as a bad thing. At this point, however, how we feel about it is irrelevant. It's going to happen regardless of our feelings on the matter. The only way it doesn't happen is if the US regime suddenly starts slashing deficits and government spending, embraces a strong dollar policy, and perhaps even anchors the dollar to a commodity like gold. None of those things is going to happen without first experiencing a wakeup call on the level of losing currency reserve status. The good news is such a wakeup call will weaken the US regime, potentially forcing policymakers to embrace a more sane fiscal and monetary policy.
Reader Comments
You could believe it if the author was really willing to show the whole truth.
However, the author did not tell everything.
The author noted that the fall in the value of the dollar will not affect ordinary Americans much, but it will limit the greed of politicians.
He forgot to add, however, that half the dollar equals half the debt to pay!!!
The author noted that it is 30 trillion, but he did not notice in his calculations that this debt would fall on the shoulders of .... ordinary Americans.
You will hear many more fairy tales about it. Some optimistic, some pessimistic.
What's the truth???
AMERICA IS IN AN ECONOMIC AND POLITICAL STALEMATE STATUS... AND NO ONE KNOWS WHAT TO DO WITH IT!!!!!!
Yeah Civil war comes to mind...as a potential distraction/solution event...
How China is breaking the colonial effects of Western lending
In their latest Geo Economical Report economists Radhika Desai and Michael Hudson discuss Russia's move away from the 'West'. The points on Russia are certainly interesting. But they also remark...I am wondering if the the "currency reserve status" is irrelevant as a concept except for propaganda purposes due to these "currency swaps" and other coordinated activities between central banks across the globe. The BIS [Link] and its "rules"(Basel Accords [Link] ) for money supply, and national debt(of all countries), are hardly ever mentioned, but it is the elephant in the room in regards to the economy, wars etc. and is always on both sides of every conflict(cause 'All Wars Are Bankers' Wars': [Link] ). What are your thoughts on that?
Later, there were various ideas, like tying the value of the currency to the gross national product and such "acrobatics".
However, it was in 1972 that the entire world of finance became ABSTRACT!
Abstract because the currency has since lost any value other than its CONTRACT value.
As a result of this event, everything you see today, stock charts, exchange rates of various currencies, debts, income, losses and profits, the cost of human labor, the value of goods traded ..... ARE ABSTRACT, UMONE, and therefore subject to NEGOTIATION only, and negotiations stronger wins.
They know it all, but something is wrong with introducing a new system. Their plans were thwarted by Russia, which did not go to this monetary armageddon. Then China and India joined in, and that's actually the majority of the world's population
ANOTHER STALEMAT! :-))
What did it lead to?
Do an experiment.
Go to the bank and ask for a loan.Ask for the interest rate.
Let's say 20% (I don't know what your current interest rate is, random number)
Let's say you take out a $1,000 loan, so you have to pay $1,200.
At this point, the bank gives you the money.
And now the very point, ASK HOW MUCH IS 1 DOLAN OF A BORROWED AMOUNT???:-))))
You'll see the banker get mixed up. He'll say it depends on what you buy with it. For example, 1 dollar is 1 hamburger.
Then say that you know it, but you don't ask what you can buy for 1 dollar, because it depends on many factors, for example inflation.
Ask him again... HOW MUCH IS THE $1 YOU GIVE ME WORTH???:-))
Do you understand the absurdity of the modern world???
NO ONE KNOWS!!!
The only way to stop this is to end the Federal Reserve System or at least diminish its power significantly. The credit unions, for instance, could extract themselves from that system, but people would have to support them through a period of being attacked. It really comes down to us. Either we find ways of making ourselves uncontrollable, or we will be slaves. That's the long and the short of it.
How will you sell them this idea??
Ask the Chinese or Indian who sold you America for $1...remember???:-)))))
But these less advanced players want to keep playing... just to keep playing, for nothing more.
Not in a metaphorical sense, but in a literal sense.
And not only America. Before that, it was Hitler's Germany.
And in fact, there is some evidence in history that the greatest powers throughout history have had to use the "help" and "advice" of beings with much more advanced capabilities than the era allowed.
For example.
My friend wants to see what the first tanks in the world looked like??
This one is from 2000 years ago!":-))
[Link]
There is also no single logic. Logic is ALWAYS SUBJECTIVE!!!
For you, it is logical to walk on two legs in an upright posture, and it is illogical to walk on your hands, upside down.
For a fish, it would be more sophistry than logic :-)))
But the same fish would tell you that it is logical that the world has no straight lines, everything is round. It is logical and certain.... because that's how a fish sees :-))))
I posted " is a fight against pure logic " , fight being the operative word.
I'll not dispute your suggestion regarding logic, debate is a wonderful freedom, long may it last.