1/12
I've just read this very interesting blog post on a paper on USD primacy that Michael Kao presented at the West Point Symposium earlier this month. My differences with it illustrate what I believe will become a major debate for the US.
@UrbanKaoboy
urbankaoboy.substack.com
I've just read this very interesting blog post on a paper on USD primacy that Michael Kao presented at the West Point Symposium earlier this month. My differences with it illustrate what I believe will become a major debate for the US.
@UrbanKaoboy
urbankaoboy.substack.com
2/12
Kao correctly notes the reasons for global use of USD, and dismisses many of the popular recent claims that we are seeing a major shift away from USD primacy towards, perhaps, a much greater role for the RMB. I agree with much of what he says.
Kao correctly notes the reasons for global use of USD, and dismisses many of the popular recent claims that we are seeing a major shift away from USD primacy towards, perhaps, a much greater role for the RMB. I agree with much of what he says.
3/12
I've long argued, for example, that many of these claims are based on a misunderstanding of the balance-of-payments arithmetic and a failure to recognize the various roles demanded by the global economy from its dominant currency.
elgaronline.com
I've long argued, for example, that many of these claims are based on a misunderstanding of the balance-of-payments arithmetic and a failure to recognize the various roles demanded by the global economy from its dominant currency.
elgaronline.com
4/12
Where we disagree is on whether the global role of the USD is good for the US or bad. Kao says the primacy of USD as global reserve currency is "a pillar that must be defended at all costs to ensure national security and stability of an evolving rules-based order."
Where we disagree is on whether the global role of the USD is good for the US or bad. Kao says the primacy of USD as global reserve currency is "a pillar that must be defended at all costs to ensure national security and stability of an evolving rules-based order."
5/12
But while USD primacy does indeed create an "exorbitant privilege" for certain sectors of the US economy and polity, what is less well understood is that it also creates an exorbitant burden for other sectors, and Americans will have to decide which matters more.
But while USD primacy does indeed create an "exorbitant privilege" for certain sectors of the US economy and polity, what is less well understood is that it also creates an exorbitant burden for other sectors, and Americans will have to decide which matters more.
6/12
US control of the global payments system, as Kao notes, creates major security and geo-political benefits for the US. It also benefits Wall Street and the global banking system, along with the US and global elites who benefit from highly mobile capital.
US control of the global payments system, as Kao notes, creates major security and geo-political benefits for the US. It also benefits Wall Street and the global banking system, along with the US and global elites who benefit from highly mobile capital.
7/12
But there's a reason why, for all the criticism of the US exorbitant privilege, other countries have never been able to replicate this "privilege". None has been willing to bear the economic costs associated with currency domination.
foreignpolicy.com
But there's a reason why, for all the criticism of the US exorbitant privilege, other countries have never been able to replicate this "privilege". None has been willing to bear the economic costs associated with currency domination.
foreignpolicy.com
8/12
And these costs are significant. Global use of the dollar rests on the willingness and ability of the US to run the huge trade deficits needed to accommodate the excess savings (the result of mercantilist industrial and trade policies) of the rest of the world, and these...
And these costs are significant. Global use of the dollar rests on the willingness and ability of the US to run the huge trade deficits needed to accommodate the excess savings (the result of mercantilist industrial and trade policies) of the rest of the world, and these...
9/12
deficits in turn force the US to choose between higher unemployment as a way of absorbing foreign excess savings or (more likely) higher household and fiscal debt.
carnegieendowment.org
deficits in turn force the US to choose between higher unemployment as a way of absorbing foreign excess savings or (more likely) higher household and fiscal debt.
carnegieendowment.org
10/12
These deficits are also associated with the declining US share of global manufacturing, as manufacturing share has shifted from persistent deficit economies (the US, the UK, Canada) to persistent surplus economies (China, Germany, Japan, Taiwan).
itif.org
These deficits are also associated with the declining US share of global manufacturing, as manufacturing share has shifted from persistent deficit economies (the US, the UK, Canada) to persistent surplus economies (China, Germany, Japan, Taiwan).
itif.org
11/12
While USD primacy clearly benefits the defense and foreign affairs establishments, Wall Street, and the global financial elite, in other words, it comes at the expense of American workers, producers, farmers, middle-class households and the US manufacturing sector.
While USD primacy clearly benefits the defense and foreign affairs establishments, Wall Street, and the global financial elite, in other words, it comes at the expense of American workers, producers, farmers, middle-class households and the US manufacturing sector.
12/12
That is why the debate about USD primacy should be held not in China, Saudi Arabia or Russia (countries unwilling anyway to pay the cost of abandoning USD) but rather in the US, where the benefits of USD primacy come with enormous economic costs.
carnegieendowment.org
That is why the debate about USD primacy should be held not in China, Saudi Arabia or Russia (countries unwilling anyway to pay the cost of abandoning USD) but rather in the US, where the benefits of USD primacy come with enormous economic costs.
carnegieendowment.org
This may be a little technical, but several people have asked me about this:
carnegieendowment.org
carnegieendowment.org
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