In recent
years, the current account deficits of the American economy have been
growing tremendously, reaching 5% of GDP in 2002. Along with the deficit,
there has also been a marked increase in the number of heterodox economists
who believe that the American foreign debt (“the biggest of the
world”) is getting unsustainable. These include some of followers
of the Marxist tradition (Giovani Arrighi, Anwar Shaikh, Jayati Ghosh
and several others), Post-Keynesians (Wynne Godley, Robert Blecker, Tom
Pailley, James Galbraith, among others) and also some Latin American structuralists
(Arturo O’Connell and Celso Furtado, to cite only the most notable)If
the American external deficit is not substantially reduced, they argue,
this will trigger a “speculative attack against the dollar”
and consequently a serious crisis in the American (and the world) economy.
With this crisis, the dollar would probably loose the central role that
it plays in the world economy today.
In fact, what these heterodox critics do not seem to notice is that the
American current account deficits and external liabilities are very different
from those of a country like Brazil, and even from those of the other
rich countries. This is due to the fact that the dollar is nowadays the
international currency of the world economy. The world economy works in
practice, at least since 1980, in what we have been calling the 'floating
dollar standard'[2], where the dollar has
a very different role from all other currencies (including the convertible
currencies of the other rich countries). This gives an extraordinary asymmetric
power to the US economy, which simply does not have any kind of balance
of payments constraint.
The position of the American dollar is different from all other currencies,
for several reasons. First and most importantly, is that the dollar is
the international means of payment. This means that, differently from
the other countries, almost all the US imports are paid in dollars. This
also implies that virtually the whole of the American external liabilities
are also denominated in dollars. Since the dollar is issued by the FED
(American Central Bank), it is impossible (since American imports are
paid in dollar) for the US not to have enough resources (dollars) to pay
their external accounts. Moreover, naturally, it is the FED that determines
the dollar basic interest rate.[3]Therefore,
since the American foreign debt is denominated in dollars, the US is in
the peculiar position of unilaterally determining the interest rate paid
on their own foreign debt. Further, American public debt that pays interest
rates set by the FED is the most liquid dollar financial asset and is
also the most important reserve asset and store of value of the international
financial system.
Another consequence of the fact that American external liabilities are
denominated in dollars is that when the dollar depreciates relative to
any other currency, it is the owners of the American foreign debt of that
country who will suffer balance sheet losses instead of the US. Another
advantage for the US due to the special position of the dollar is that
exchange rate devaluations cause very little inflation in the US. This
occurs because, in a large part of the international markets, including
almost all commodity markets, prices are set directly in dollars and,
as in the case of the oil price for instance, do not increase when the
dollar is devalued. Recent econometric estimates show that on average
less than 50% of the devaluations of the dollar are passed through as
an increase in the internal prices of the imported products[4].
It is clear that, under these special conditions, the US, unlike Brazil
and all the other countries of the world, can have a regime of floating
exchange rates and free short term capital flows without this creating
any obstacle to its macroeconomic policies.
Let us see three recent examples of how things are really different for
the dollar. Our first example is from 2001. In this year, the American
recession had already started with the decrease of private investment,
due to the excess of productive capacity that was rapidly installed in
the high technology sectors of the "new economy" during the
NASDAQ bubble, when the September 11 terrorist attack took place.
The American policy answer to the crisis was fast and drastic. The basic
interest rate was reduced, there was an enormous coordinated injection
of liquidity in the international financial system by the FED, together
with the central banks of the rich countries. There was also a rise in
public spending, tax cuts, government financial help for the especially
jeopardized sectors as airlines and insurance companies, etc.
All these measures certainly avoided the deepening of the recession and
the disorganization of the financial system. Just after the terrorist
attack, there was naturally a tendency in the international financial
markets for "flight to quality", due to the increased perception
of risk and uncertainty. This was worsened by the initial fear that the
"war against terrorism" would end up triggering greater supervision
and control of international capital flows, with the aim of combating
money laundering channels and locating the financial sources of the terrorists’
funds.
For our purposes here, what is important to notice is that this “flight
to quality” of the market was a run for the dollar and not from
the dollar, despite of the interest rate reduction, more than confirming
the role of the dollar as a store of value currency of the capitalist
world economy. It is to the dollar that the market runs to at moments
of crisis, even when the crisis, as in this case, occurs in New York,
at the financial centre of the US dollar.
Our second example is from 2002. The damage control and expansionary measures
described above were already beginning to work in 2002. However, the scandal
of ENRON and of the other big companies that were caught falsifying their
balance sheets ended up bursting the stock market bubble. Until then,
with the FED's help, the overall stock market bubble had survived not
only the collapse of the NASDAQ bubble, but also the terrorist attack.
Since the dollar was being kept appreciated mainly by the foreign demand
for papers negotiated in the American stock market and the FED was already
quickly reducing the American interest rate (by much more than the other
rich countries), it is only natural that the dollar started to depreciate.
However, the result of this recent foreign capital outflow from the US
and of the devaluation of the dollar, contrary to what many of the heterodox
economists mentioned above had foreseen, has been the continuous reduction
(instead of an increase) of American interest rates. These interest rate
decreases have lowered the financial losses of the heavily dollar-indebted
American firms and workers, and have also been helping to keep demand
growing both in the markets for real estate and for durable consumption
goods.
This shows that the US simply does not need those external capital flows
to finance its external current account deficit. The American external
deficit continues to be automatically financed at the moment in which
transactions that generate this deficit are denominated and paid in the
American national currency. Which other country that has a stock market
crash and an outflow of external capital, answers these by reducing its
interest rate?
Our third example is from 2003. Although the dollar is tending to devalue,
some countries - especially in Asia, such as Japan and China among others
- have been doing everything possible to avoid or contain the appreciation
of their currencies relatively to the dollar. On the one hand, these countries
do not want the increase in the dollar costs of their exports to generate
either lower profitability or lower market share for their products in
the international markets. Moreover, the appreciation of the currencies
of these “surplus” countries that hold a great amount of financial
assets in dollars would bring big balance sheet losses for the local companies
and financial systems. Because of that, the central banks of these countries
are letting their external reserves in dollars increase continually in
the attempt to avoid the appreciation of their exchange rate rates. By
now, Japan already holds more than US$ 500 billion dollars of reserves,
while China already passed the US$ 300 billion mark, South Korea has more
than US$ 100 billion, Taiwan province of China more than US$ 180 billion
and even Indonesia has more than US$ 30 billion[5].
Given this, if the heterodox critics cited above were correct, the American
government should be commemorating the fact that although the private
agents have “run away from the dollar” in recent times, the
governments of the Asian countries are helping to minimize the devaluation
of the dollar and finance the enormous American current account deficit,
avoiding thus the “dollar crisis”.
But, what is occurring in reality is exactly the opposite of this. There
has been an increasing and not very subtle American diplomatic offensive
pressuring the Asian countries to let their currencies appreciate. The
pressure on China to abandon the fixed exchange rate and to revalue the
Yuan, in particular, has been very strong, and there is growing American
official accusations that the Asian countries are “protectionist”,
follow “mercantilist” policies and practice “unfair
competition”. The reason for this pressure seems to be very simple:
at the moment, the American priority is reviving its domestic economy.
The devaluation of the dollar is in the American interest in order to
increase exports and to reduce the American imports to help the domestic
economic recovery. The Asians are seen as going against this plan when
they avoid the appreciation of their currencies.
This last example shows how the American government is not even slightly
worried about the depreciation of the dollar causing any problem, let
alone a “crisis”. One reason for this is because (as recent
official figures points out), about a third of the American current account
deficit with “foreign residents” is in fact due to imports
from branches of American multinationals abroad. The main reason, however,
is simply that the American government knows very well that, given its
current condition of being the world’s only superpower, so soon
it will not have any difficulty in finding sellers in the international
markets willing to accept dollars as payment for its imports.
References
SERRANO, Franklin L. P. (2003). From 'Static' Gold
to the Floating Dollar. Contributions to Political Economy, 22, 87-102
(forthcoming).
BOMFIM, Antulio N. (2003). Monetary Policy and the Yield Curve. Federal
Reserve Board, mimeo, New York
BEDDOES, Zanny M. (2003). Flying on One Engine - a survey of the world
economy. The Economist, September, 20.
SAMUELSON, Robert (2003). A Crackup for World Trade. Newsweek, August,
25.