China is claiming that it’s not devaluing the renminbi to gain a competitive advantage, it’s adding flexibility to prepare for the yuan’s new role as an international reserve currency, becoming part of the International Monetary Fund’s special drawing rights basket and all that. That’s a highly implausible story about what’s happening right now, but it may be true that China’s urge to loosen capital controls is driven in part by its global-currency ambitions. But why, exactly, should China be eager to manage an international reserve currency?
I mentioned one of Charlie Kindleberger’s aphorisms in a recent blog post, about taking the first bite of the cherry. Here’s another one of the economist’s aphorisms: “Anyone who spends too much time thinking about international money goes a bit mad.” What he means by that is that there’s something about the subject of reserve currencies that makes people want to believe that it’s a really important issue – that the dollar’s special role is a vital part of American power. So you have spectacles like Secretary of State John Kerry and President Obama declaring that one big risk in rejecting the recent deal with Iran (which I very much support) is that the dollar’s reserve-currency status would be threatened. No it wouldn’t, and anyway, who cares?
What does America gain from the dollar’s special role? You often find people declaring that it’s only thanks to the dollar’s power that the United States has been able to run persistent trade deficits – people have to take our money, you see. But even a quick glance at international balance of payments statistics reveals that countries whose currencies play no exceptional role whatsoever are perfectly capable of running deficits over long periods of time; all that matters is that they are perceived as reliable debtors who offer good investment opportunities.
So what are the advantages of owning a reserve currency? You get to borrow in your own currency – but then, so do other countries (again, this comes down to your reliability, not your currency’s special status). And there’s nothing in the data suggesting that you can borrow more cheaply than other safe borrowers.
What you’re left with, basically, is seigniorage – the fact that some people outside your country hold your currency, which means that, in effect, America gets a zero-interest loan corresponding to the stash of dollar bills (or $100 bills mainly) held in the hoards of tax evaders and drug dealers around the world. In normal times, this privilege is worth something like $20 billion to $30 billion a year; that’s not a tiny number, but it’s only a small fraction of 1 percent of America’s gross domestic product.
The point is that while reserve-currency status may be politically symbolic, it’s essentially irrelevant as an economic goal – and it’s definitely not worth distorting policy to achieve.
Help us Prepare for Trump’s Day One
Trump is busy getting ready for Day One of his presidency – but so is Truthout.
Trump has made it no secret that he is planning a demolition-style attack on both specific communities and democracy as a whole, beginning on his first day in office. With over 25 executive orders and directives queued up for January 20, he’s promised to “launch the largest deportation program in American history,” roll back anti-discrimination protections for transgender students, and implement a “drill, drill, drill” approach to ramp up oil and gas extraction.
Organizations like Truthout are also being threatened by legislation like HR 9495, the “nonprofit killer bill” that would allow the Treasury Secretary to declare any nonprofit a “terrorist-supporting organization” and strip its tax-exempt status without due process. Progressive media like Truthout that has courageously focused on reporting on Israel’s genocide in Gaza are in the bill’s crosshairs.
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We’re preparing right now for Trump’s Day One: building a brave coalition of movement media; reaching out to the activists, academics, and thinkers we trust to shine a light on the inner workings of authoritarianism; and planning to use journalism as a tool to equip movements to protect the people, lands, and principles most vulnerable to Trump’s destruction.
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