The End of Influence by J. Bradford DeLong

Author:J. Bradford DeLong
Language: eng
Format: epub
Publisher: Basic Books

THE ONCE AND FUTURE DOLLAR

And what of the dollar? Could a sudden, sharp decline in the value of the dollar destroy foreign government wealth holdings and make them a curiosity and not a problem? (Back in 1985, remember, the fear was that Japan was going to own America and then Japan’s accumulated and capitalized export surpluses largely vanished between the Plaza Hotel and the Louvre as the dollar fell in value.) Alternatively, can foreign debts owed by America lead to a dollar crash that cripples the U.S. economy in a manner analogous to the Mexican crisis of 1994-1995, the East Asian crisis of 1997-1998, or the Argentine crisis of 2001- 2003—only marvelously bigger? It is likely that the answers to these questions are no and no.

For at least an entire decade, economists have been anticipating a relatively sharp fall in the dollar down to balanced-trade fundamentals. Yet, rich private foreigners value having large chunks of their money in the United States as a form of political risk insurance. They are continuing to increase the size of that chunk they wish to hold in America. Foreign governments continue to increase their holdings of dollar-denominated securities to make sure that they can keep exporting to the United States at a pace that allows for export-led growth and thus produces domestic social peace. And the role of the dollar as the key currency of the international monetary system creates a large demand to hold dollars as reserve stores of wealth—the “exorbitant privilege” of which Charles de Gaulle complained two generations ago. As long as these three factors keep operating, the value of the dollar will remain relatively high. And these three factors have already shown remarkable persistence. Their end is likely to be far off, and unlikely to be sudden.

Moreover, the fact that the United States has borrowed and its debt is denominated in its own currency, dollars, while Mexico, East Asia, and Argentina borrowed in a foreign currency, also dollars, makes a world of difference. Huge debt owed in foreign currency is severely disciplined, and you have to painfully earn the currency. Huge debt in your own currency—in dollars—is different; the United States can always create more dollars, and its value is everyone’s problem.

The maintenance of the dollar at a value stable enough so that its changes do not disrupt the finances of dollar-holding foreign governments is now a common aim of world governments. If they can keep the dollar from losing value rapidly, they will do so. Other countries lose a fortune when the dollar falls: Their holdings of dollar-denominated securities are now worth much less in the coin that has meaning to them. As the value of the dollar falls, it makes room for the dollar prices at which the United States sells its exports to rise, while the dollar debts America owes stay the same. Consequently, the U.S. foreign debt becomes less and not more burdensome as the dollar falls in value. It means, as Nixon’s Treasury Secretary John

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