2009-10-15

U.S. Recovery or Reserve Currency, Choose One

I hadn't written this out into a blogpost, but I notice Martin Wolf and apparently Fred Bergsten agree with my conclusion, which is that the United States cannot recover and maintain its reserve currency status.
The rumours of the dollar's death are much exaggerated
Most analysts assume that the US fiscal position can be determined independently of decisions taken elsewhere. But if the US private sector were to deleverage over a long period (and so spend substantially less than its income), while the rest of the world wanted to accumulate dollar-denominated assets as reserves, the US government would naturally emerge as the borrower of last resort. A corollary of the Triffin dilemma is that the international role of the dollar could make it hard for the US to manage its fiscal affairs successfully, even if it wanted to do so.

I arrive, by a somewhat different route, at the same conclusion as Mr Bergsten: the global role of the dollar is not in the interests of the US. The case for moving to a different system is very strong. This is not because the dollar's role is now endangered. It is rather because it impairs domestic and global stability. The time for alternatives is now.
U.S. reserve currency status led to the imbalances that helped create and exacerbate the financial crisis. The U.S. cannot restructure until it gives up reserve currency status, but the political implications are huge and Washington doesn't want to give up its power.

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