From: John H
This really should be titled 'Goodbye to Imperialism', my apologies for the extended introduction, but I think that it is necessary.
Attached is a particularly interesting piece by Chris Hedges concerning the possibility that U.S. Dollar hegemony as the world's reserve currency may be threatened by the ongoing actions of Donald Trump. It contains important ideas about which most Americans are clueless; and some others of which most are also clueless that are not accurate. The idea is that Trump's actions in the world are effectively destroying other nations, particularly our allies, are losing faith in the ability of the United States to be a trusted partner in regards to treaty obligations and within the lines of obligation of international institutions – most of which the U.S. was instrumental in creating and managing such as the World Bank and the International Monetary Fund.
Hedges cites the work of noted historian Alfred McCoy and world renowned economist and historian Michael Hudson in support of his argument. (Hedges article is actually a follow-up on a piece by Hudson which I sent out this past Saturday. It is also attached for reference.) The central idea here is that, as a result of U.S. actions under Trump, but also under George W. Bush, many nations are becoming skittish about dealing exclusively in Dollars for international trade – particularly trade in petroleum which has been sold almost exclusively in Dollars since Kissinger negotiated a deal with Saudi Arabia, and thus OPEC, to insure that during the Nixon administration.
Hedges then concludes that, because other nations are worried about the constancy and dependability of the United States as a global hegemon, they are beginning to transfer their gold holdings out of the U.S. (Germany and Netherlands) and bringing it back to their own countries for safe keeping. Other nations, such as Russia, China and Iran, are unloading their Dollar reserves and working on transferring their reserves into each other's currencies. Even the Bank of England is talking about reducing its Dollar reserves. And, to be sure, this does represent a very real threat to the Dollar as the world's reserve currency and a threat to U.S. imperialism around the world as U.S. imperialism depends upon reliable allies to support our actions both financially and militarily.
But it is here that Hedges falls off the money cliff as he says that this will result in foreign countries losing their willingness to purchase U.S. Treasury bonds, therefore strangling our ability to issue Dollars through borrowing. Chris Hedges should know better. As I have reported on many occasions the United States Treasury does not have to borrow to spend for any reason other than an obscure act by Congress, the Banking Act of 1935, which requires that the Treasury issue bonds through Wall Street bond brokers, at interest, for all spending. And, while this is a law, it is also true that the Federal Reserve is required to purchase all Treasury bonds not purchased in the public market and deliver the necessary Dollars to the Treasury for its needs. Foreign governments refusal to purchase U.S. bonds in no way constrains the ability of this government to spend any amount it chooses.
Furthermore, there is no limit on the amount that the federal government can spend or the amount of debt which can be paid so long as the debt is denominated in Dollars – no matter who or what holds this debt. Neither China nor any other nation can bankrupt the U.S. by demanding payment of bonds it has purchased – the Fed simply credits the accounts of the holders with Dollars and the debt is paid – period end of story. This has always been true whether we were on a gold standard or not and the U.S. has not been on a gold standard since 1971 – and even then it was a faux gold standard.
However, this is not to say that the failure of the U.S. Dollar to remain the reserve currency of the world would have no impact on the United States. As it now stands, most international trade is conducted in Dollars and this is very important to our current economy since we now import most of the items necessary for the nation to function. The Dollar as the reserve currency means that other nations must accumulate Dollars in order to purchase items on the world market, particularly petroleum products. This dependency on Dollars means that other countries are willing to sell us their goods and resources without being too concerned about the health of our economy. In other words, it permits the United States to amass an extremely large foreign account deficit – that is debt.
If the Dollar loses its status as the reserve currency, the U.S. would have to acquire the currency of the nations we want to trade with or the alternative reserve currency if we want to purchase goods abroad. So in this sense Hedges is quite correct. The loss of the Dollars as the reserve currency would likely result in economic chaos here in the States, at least for a while. To the extent that other nations also lost faith in the ability of the United States to actually pay for its transactions (i.e., the Dollar devalues relative to other currencies) it could be calamitous for our standard of living.
However, the greater likelihood is that in such an event the immediate result would be an increase in the cost of imported goods and a slow reduction in living standards; which, given the current state of inequality, could be rather dramatic. But it is still true that the U.S. would still be a very important market for much of the rest of the world, thus reducing the overall impact of the loss of reserve status. We would not become Zimbabwe or Weimar Germany. These situations only occur when the nation's debt is denominated in a currency other than that of the nation. What it would do is substantially limit our ability to interfere militarily in the affairs of other nations because other nations (our allies for instance) would no longer be dependent upon our good will in order to survive in the community of nations (see crippling financial sanctions imposed by the U.S. on nations we don't like).
It would also have a major destabilizing impact on global financial stability likely resulting in a massive worldwide depression which may or may not be survivable for the global economic community. And, as bad as it could be, this would not necessarily be a bad thing to happen. But, like all cataclysmic events, outcomes are highly unpredictable.
At the same time within the United States, to the extent that we could still gain access to resources necessary for the maintenance of economic operations, the government would not be constrained in how much it could spend to maintain operations. While it would certainly take time, the nation could once again begin producing the goods and services necessary for survival as local production would be less costly than imports. Work would be plentiful once the productive base was reestablished and operational and pay should be reasonably attractive for all workers. If it were done properly every effort would be made to make all production environmentally sustainable – pie in the sky perhaps, but absolutely necessary for survival.
Do read the attached articles. They are important, particularly the Hudson piece. But be assured that the ability of the U.S. to sell Treasury bonds is absolutely irrelevant to the ability of this government to spend Dollars into the economy.
John
Link 1, Goodbye to the Dollar, pdf file, 149k
Link 2, Trump's Brilliant Strategy to Dismember US Dollar, 203k.
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