Is the US dollar still an international public good?

(Has it really been a week since my last post? Try to improve on that . . . )

The international currency we see today, with the US dollar acting as the primary reserve currency for the world and the most important currency for internationally traded commodities, is not an unprecedented one. Lawrence Broz, an economist and historian, has written about another international monetary regime, one that existed in the 18th, 19th and early 20th centuries during the era of the gold standard. Broz argues:

From the perspective of international political economy, such a regime is something of an international public good. When a sufficient number of governments commit credibly to a set of international monetary rules, the result is that goods, services, and capital can flow across borders relatively unimpeded by currency concerns, creating joint-welfare gains and promoting technical efficiency.

The international monetary regime that Broz analyzes had three key players: England, France and Germany. England had a strong commitment to the gold standard, ensuring that the sterling always had a fixed value. This worked wonders for European trade, since European countries could trade with a newly industrialized England with the assurance that the sterling that they received for their raw materials would hold its value and would buy them a healthy basket of English industrial goods.

In order for England to maintain their gold standard without wildly fluctuating interest rates, which would've been a burden for the European economy, and would've resulted in similarly fluctuating rates in France, the Bank of England needed a lender of last resort. Essentially, the Bank of England needed the Bank of France to lend them gold when their reserves were drained in order to prevent crazy interest rate increases. And France built up huge gold reserves in order to act as a lender of last resort. According to Broz, by 1908, the Bank of France had "well over three times the reserves held by the Bank of England."

Does this sound familiar to anyone else? After reading a ton about the Chinese-American currency situation, I definitely noticed some paralels. In the current international currency regime, which is really a dollar hegemony, Chinese lending preserves the system. Without China buying American treasuries—lending to the United States—the dollar would be unable to preserve its current value.

Understanding the current situation as an international currency regime also gives shape to what might come after the end of the dollar's reign. What we might be experiencing now is the end of the dollar regime and the rise of another. Perhaps the Euro will take the place of the dollar, or perhaps we will operate without a clear regime until there is an obvious replacement. If the latter happens, we can expect huge economic costs for the world, due to the increase in transaction costs. Until a new system forms, the international economy will be fundamentally unstable. But, as Broz says:

From a perspective of comparative politics, however, a smoothly functioning monetary regime is far from a natural state of affairs. Adherence to a common set of monetary rules and conventions requires a certain degree of macroeconomic-policy cooperation among member governments, despite potentially vast differences in the domestic constraints confronting policy makers. The overriding political obstacle in the way of establishing and maintaining a multilateral commitment to a common set of exchange-rate rules is that national politicians face heterogeneous domestic electorates and organized constitutencies, not homogeneous global ones. According to this view, the paradox is not the difficulty of designing a stable international monetary regime in a world of opportunistic but like-minded national governments, but that such systems, composed of an extremely diverse group of nation-states, have ever existed, let alone operated relatively smoothly for extended periods of time.

So the rise of a new regime is certainly not a foregone conclusion.

Here are some pertinent questions that I don't feel up to answering right now:

1. As there are now three huge economic powers—the United States, China, and the European Union—is a stable currency regime possible? Can China afford to be the lender of last resort to the EU as it was to the US, and for how long? Will it decide to establish a free-floating currency that could make a claim for the leader in the regime in its own right?
2. What are the domestic political barriers in China, the US and the EU that are killing the current regime and might lead to the rise of the next one?
3. What are the interim costs of a regime-less world economy? What does it look like? Will we go back to gold in the interim? Will we go back to gold for the long-run?

I think I've talked myself out for now, but I'm really interested in answering some of those questions, especially the second one, so I'll try to post again in the next couple of days.

Sports writer + jingo + Super Bowl = joygasm

I'm sure some jingoistic sports writer somewhere is having an orgasm over the Patriots v. Eagles Super Bowl. Ohhhh, how sweeeet.

How irresponsible tax cuts are treasonous

In Bruce Sterling's science fiction novel Distraction, the Chinese government crippled the American economy by offering every American software product free for download from their satellite network. While an intriguing idea, it would actually take a much less illegal step by the Chinese government to cripple the American economy.

In 2003, 83% of the American current account deficit was funded by central banks. While this does have some benefits—institutional investors are less susceptible to a panic than individual investors—there are also some unique risks. Not all central banks are as independent from government interference as the Federal Reserve is. I don't actually know the status of the independence of the Chinese central bank, but I'd be willing to bet my lifetime earnings it isn't entirely independent. Given that the Chinese still have a command economy, the central bank is just another tool of communist economic planners.

And the Chinese central bank is the leading institutional funder of the American current account deficit. In 2004, China funded a third of the current account deficit, increasing their dollar reserves by $207 billion. Now their primary motivation for this dollar-buying is the maintenance of the peg of their currency, ensuring that the renminbi remains cheap compared to the dollar. This also ensures that the dollar maintains its value—if China stopped buying dollars to, say, shift it's currency peg to a mixed peg or to a Euro peg, then the value of the dollar would drop precipitously since demand for the dollar would drop staggeringly. That would crush the buying power of the average American, impoverishing the country. Thus the Chinese have an incredibly powerful economic weapon.

Of course, the question of whether or not they would ever use it is important. I believe it to be a credible threat—one becoming ever more credible as the Chinese deepen trade relationships with Latin America, Europe and South Asia. In 2003, 22.5% of Chinese exports went to the United States. A huge oversimplification of the situation would be to say, "Well if the United States set up an embargo against China in retaliation, it would only kill about 23% of Chinese export revenue, and that's less than 33% of the American current account deficit that China funds." A detailed would analysis would have to be made about the cost-benefit balance for the Chinese in ending their support of the American dollar. But if tensions mounted between the Chinese and American governments, I believe the threat to be credible because the Chinese have other trading partners, because the Chinese are not a democracy and could weather the internal dissent such a move might spark, because the Chinese could do it subtly and slowly and insulate themselves from some of the negative consequences.

* * *

So how do tax cuts fit into this equation? The current account deficit can be written as:

CA = Sp — I — (G — T)

where Sp is private savings, I is investment, G is government spending, and T is government tax revenue. If the government deficit increases (as G — T increases, or as the gap between government spending and tax revenue widens), a nearly identical increase in the current account deficit occurs. Of course, if the government deficit increases but it's offset by increases in private savings and domestic investment, the current account deficit doesn't move.

American private savings have been piteously low for years, and many American consumers suffer dissavings—debt. This has not changed since President Bush instituted his huge tax cuts for the wealthy. What has changed is the government deficit. Our current account deficit is growing at record pace, requiring more and more funding by foreign investors—foreign central banks—and requiring the Chinese to buy more and more dollars to maintain their currency peg.

Hiding in plain sight is treason. Bush's rabid desire to put more money in the pockets of the wealthy has increased this country's vulnerability to a currency shock orchestrated by our chief rival.

* * *

I believe progressives must make "betrayal" the central theme of their fight against the conservative establishment. These are wealthy men who have betrayed our country by their fiscal irresponsibility. They have betrayed our people by threatening Social Security, whose preservation is mandated by Congress and the Constitution, in order to enrich the wealthy. They have betrayed our fundamental values by tarnishing the American flag with torture, imperialism, and brutality.

Some of this language will be too hyperbolic for Democratic Congressmen. But it ought to be made a central part of our argument because it's powerful and true.

There is no crisis

As you can see, I put a nice "There Is No Crisis" add on my sidebar. Pretty snazzy, eh? I have to get to class, otherwise I'd give you a whole mountain of links to stories about why there isn't any crisis. Most importantly for now, though, go to www.thereisnocrisis.com, read about it, add an advert to your sidebar, help get the word out. Time to rally around something new, after the election defeat. Also, Matt Yglesias has been writing about the phony Social Security crisis for ages, so check out his most recent post about this newest effort to stop Bush's power grab, and pick through his archives. More to come from me, I think.

The accountability moment

Regardless of your party-affiliation, one universal value of Americans must be accountability. It is one of the fundamental aspects of democracy that makes it more desirable than other systems of power. Unlike under a dictatorship, democratic leaders are accountable to their fellow citizens. Indeed, Freedome House, a pro-democracy NGO that publishes a democracy index for the world's governments, added a question about accountability to its 2003 survey.

So everyone ought to be peeved by President Bush's recent comments that the American populace support his Iraq policy, since the election was an "accountability moment," and he's still in office. In fact, he says that his reelection represents an endorsement of his policies.

This ridiculous assertion of some "accountability moment" by the President is anathema to American democracy. Accountability must go far beyond elections held once every four years, even beyond Congressional elections held once every two. If it does not, then we put in place a fresh set of dictators at every election cycle, or confirm the rightfulness of the last set. This is why our Constitution sets forth the separation of powers—so that accountability is embodied by the branches of the government itself, with each answerable to the next. The President's understanding of accountability further points to the "Putinization" of American politics, as Matt Yglesias has coined it, and hardens the impression that, after four years of failed Congressional oversite, manipulation of the media by the administration, media agglomeration around conservative ideologues, and the implementation of an unreliable electronic voting system, our democracy is, frankly, travelling down that oft-foretold slippery slope.

And, besides, the President's claim is bullshit. The Republicans are trying to argue an inherently contradictory set of positions. "We won the election because of 'values,' so it's a vindication of conservative Christians." Or, "We won the election because the people liked our Iraq policies." You cannot have it both ways when you win with just over 50% of the electorate. The truth is, there were a hundred cross-cutting political issues, and polls conducted by the New York Times and other organizations that showed majorities of Americans believing the war has cost us too many lives and too much money make it clear that, as spurrious as the "values" argument might be, it holds more water than an endorsement of Iraq policies.

I fear that now that we're on this slope, there's no way off of it. How do you combat political forces that are willing to sacrifice democracy in so many ways in order to remain in power? Once the fundamental beliefs in democracy have been sacrificed to realist strategems, there's no obvious righteous path back to democracy. Many would argue that many of those values in democracy, and our government's commitment to maintain them, were illusions to begin with. In that case, at least now the beast is out from under the bed. Good luck getting it back down.

UPDATE: 58 per-cent of people think that the situation in Iraq was not worth going to war for. 44 per-cent said the war has destabilized the middle east. There's no vindication there.

More about religion; the intersection of spirituality and science

For Christmas, I received a book about the Kabbalah and its applications to modern life (an odd Christmas present, I know, but such is the life of a Unitarian). I haven't yet gotten into it, reading some lighter fare. So before anything deeper sticks, I thought I'd do a bit of dot connecting.

First, there's the story at the Agonist about a study conducted at the University of Wisconsin with Tibetan monks that shows a measurable change in brain activity as a result of meditation. This comes at the same time as Atrios, in his Bobo's World feature, links to the story of a famous study conducted a few years ago that showed a correlation between prayer and fertility—praying for women increased their fertility, and has now come under serious investigation and attack as a fraud.

Now, obviously, the University of Wisconsin scientists' findings about brain activity are not quite as dramatic as a supposed increase in fertility, but they're profound nonetheless. The fact that science can now describe a measurable effect of meditation helps link the scientific with the spiritual in a powerful way. If the results of the study stand up, it will perhaps begin to carve a real place for spiritualism in the lives of, let's say, "aggressively" rational people. That, I think, will be a great thing. Maybe we'll one day look at meditation and spiritual exercise as we now look at running, weight-lifting, and aerobics. I'm looking forward to the emergence of a Jane Fonda of meditation.

Meanwhile, a cornerstone in the same process of linking science and spirituality, this infamous fertility study, is collapsing. This is not to say that deep, concentrated prayer might not have similar benefits to meditation. But it remains a matter of faith that prayer can have any measurable effect on another person.

Anyway, it's too easy to read a political and ideological story line into these two stories: "Eastern religion has always been the baby of crazy liberal academics, so it's no wonder that meditation gets raised up on scientific evidence while prayer gets torn down." And I'm sure there's some conservative commentator somewhere who would happily howl that to her grave. I'm not sure that's really the most realistic or interesting connection between the two stories. I'll think more about this and maybe more will come out of it. But for now, I'll stop at connecting the dots.

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