Uneasy Lies the Head

This must be my Jared Bernstein week. Today he has a really good op-ed at the Washington Post on dollar’s status as the preferred international currency of exchange:

The privileges of the reserve issuer have been twofold. First, they allowed us to run large, persistent trade deficits. This is partly a function of international accounting: When other nations buy dollars, our capital account (capital inflows from abroad) goes up, and our current account (trade deficit) goes down (it gets more negative). In fact, since the mid-1970s, countries have lent us whatever we need to consume more than we produce, meaning we have run trade deficits every year. (For the most recent quarter, the trade deficit was over $600 billion, or 3 percent of GDP.)

Of course, if you’re thinking that four decades of trade deficits are a mixed blessing/privilege, I’m with you, but more on that in a moment.

Second, being the premier reserve issuer means that other countries are happy to buy your debt — corporate, public and private. Moreover, assets in the reserve currency carry an inherent premium in international finance, which means we don’t have to pay creditors as much for their loans as we otherwise would, i.e., the reserve issuer has lower interest rates.

But both privileges carry costs. Inward capital flows strengthen the dollar, which makes our exports more expensive and our imports cheaper. As international trade expert Joe Gagnon wrote a few years ago, other countries “send capital abroad to push down the values of their currencies in order to boost exports and economic growth. Official purchases of foreign exchange reserves and other foreign assets — mainly U.S. dollars — have exploded since 2000 to unprecedented levels as a share of global GDP.”

Notice how this ties in with my earlier post today. People whose livelihoods depended on making things and weren’t protected lost their livelihoods. Those who were protected, mostly those who performed services, have flourished.

Here’s another important passage:

In other words, this is no morality tale of profligate Americans compared to thrifty Chinese or Germans. If trade-surplus countries suppress their own consumption and use their excess savings to accumulate dollars, trade-deficit countries must absorb those excess savings to finance their excess consumption or investment. The dollar’s reserve status is a key factor behind these dynamics.

That applies equally to the trade deficits among the states that make up the United States. New Yorkers complaining about Mississippians receiving more per capita from the federal purse have the wrong end of the stick. It’s the price they pay for their own high incomes and the states being on the same currency. The surpluses and the deficits have to balance out.