Comments on: Global imbalances and the Triffin dilemma Thu, 21 Jul 2016 07:57:19 +0000 hourly 1 By: violpoet Tue, 20 Jan 2009 06:05:04 +0000 My Reasoning for Eventual Dollar Decline (with one paragraph about sales taxes):

China is not presently experiencing capital flight. I don’t see it on any significant scale at all. If the Chinese government cracked down on individual Chinese banks or other companies the same way the Western governments are doing to their own companies, you might get some capital flight out of China. But the China-based writer above (Cadassus) is correct about China having more than enough reserve currency to manage the yuan just fine, thank you. Cadassus’s examples of individual cities are pretty convincing. Besides, you don’t hear about anyone making a run on the yuan either way, do you? The quadrillion-dollar question is, does the United States have the “currency” (by that I mean the real capital, and the capital-creating power) to manage the U.S. dollar? In my view, no.

It is critical that we Americans understand that the debt the Treasury (and possibly the Federal Reserve) issues needs to be bought by people outside of the United States in addition to people here. Not enough people here can afford to buy all the debt. Once the foreign incentive to buy American debt lessens (as a consequence of deteriorating fundamentals in the American economy relative to less-leveraged, less-indebted potential places to invest), long term rates will rise. No entity in America, not even the government itself by printing money out of thin air, will be able buy enough long-term Treasury debt to offset the inevitable rise in interest rates. I suppose the Federal Reserve could buy quite a bit of the long-term Treasury debt (print money to buy debt), but at a hit to the value of the dollar–a weird snake trying to eat its own tail. Now those foreigners who already hold a lot of Treasuries might try to bolster the value of their own holdings by defending prior purchases with additional purchases, but all it takes is a persistent marginal seller(s) to drive up interest rates (Japan? The UAE?) who simply believes there is a better risk/reward elsewhere.

I do not understand the euro bashing or the yuan bashing in the above comments. The reasoning makes no sense to me. I would appreciate it if some of you would reply and explain yourselves more thoroughly, particularly in terms of the sovereign debt associated with each currency. Here is my reasoning about why I think the dollar will decline: the amount of debt the United States is issuing and about to issue will be more per capita than the amount of debt issued by any other country or group of countries in any other currency. Granted the United States has more capital-creating power per capita than many other countries, which offsets the debt somewhat (sort of like how you look at debt-to-equity ratios when evaluating corporate debt or equity investability). But let’s be honest and bring onto the U.S. balance sheet all the off-balance-sheet stuff like Social Security, Iraq, Medicare, etc. for the purposes of this paragraph–because the foreign investors surely do so, or will do so, when deciding where to invest their money–and all this excess debt will eventually overwhelm the capital-creating power the U.S. possesses. I understand that the United States has, as Kevin Phillips likes to point out, the luxury of issuing debt denominated in its own currency, and that declines in the dollar will effectively lower the amount America owes, but after some point, sooner rather than later, the tectonic plates must shift, i.e., the dollar’s dominant relationship will scoot about the earth suddenly, differently, not favorably to those of us living here. The foreign investors will not enjoy getting back, when their holdings of U.S. debt mature, less purchasing power as a result of dollar decline. Jim Rogers didn’t just move to Singapore because he likes the food there–I suspect he moved there at least partially because Singapore has a true AAA-rated currency that is less likely to dent him and his family.

Sales taxes instead of income taxes? No. Sales tax is the most regressive tax possible. You take away money from the individuals who spend nearly all, or all, or more than all of their income (the poor and the lower middle class) and who thereby stimulate the essential economy–and you give money to the individuals who hoard it and who, far too often, make lousy discretionary leveraged investments (the upper middle class and the rich). Absolutely not. Sales tax is anti-capitalism, anti-stimulus, and socialism to benefit the rich, period.

I wonder how those of you reading will respond to my assertion about the dollar. I am not the first to be dubious about the dollar. Please, if you disagree, explain yourself clearly to me–please pretend I am very, very young–because I am not an economist, just a fairly skeptical investor who has been prescient enough the last few years to sidestep the crashes in real estate (sold my house in 2004, been renting since) and other equities and who has placed himself higher in the capital structure, buying high-quality bonds so far, buying yen and Swiss francs so far, and very nervous now as to when to 180 the bulk of my deflationary-linked investments into inflationary-linked ones. I have been correct so far, so please grant me that tiny bit of credibility. I don’t doubt there are many holes in my arguments, but I want to learn. Thank you.

By: David Ellsworth Tue, 20 Jan 2009 04:51:55 +0000 The solution should not be focused on what can the US do to maintain both political and economic dominance of the world, but rather how can the US concede what is necessary towards the creation of new global institutions and instruments to ensure a workable and healthy world economy in which to prosper.

By: David Ellsworth Tue, 20 Jan 2009 04:32:55 +0000 In response to James Middleton, I’d like to say that a tax system that places the burden on the consumer while the beneficiaries of capital abscond with the mass of the wealth of the society is unjust.

By: s veit Mon, 19 Jan 2009 15:04:26 +0000 There are a lot of paper dollars throughout the world in bazaara, mattresses, used to pay taxis from Russia to Israel toKenya. These may start to find there way home also.

By: baychev Mon, 19 Jan 2009 14:15:59 +0000 there is no need for global reserve currency. such policy only supports imperialism. there is need for a multi currency regime where the paper of the most competitive appreciates relative to all others and things balance out and are in relative equilibrium. no one wins when there is a glut for the currency of a poorly run country just because it is designated reserve currency: the economy in trouble cannot regain advantage due to the appreciation of its paper, sound countries like germany become even more competitive due to the euro depreciation.

By: Bo Peng Mon, 19 Jan 2009 05:48:39 +0000 I disagree with the fundamental thesis of Triffin’s assertion. There’s no “obligation” for the reserve currency sovereign to provide liquidity. US cuts back on treasury issuance, yield drops and then stabilizes somewhere close to zero. To make the debt issuance sound like a moral obligation and service to the world is intellectually dishonest at best.

Instead, the reserve currency status makes it politically convenient — almost irresistible — to issue ever-more debt. It’s our greed and lack of discipline or political will.

By: purple Sun, 18 Jan 2009 12:27:33 +0000 Massive global imbalances are a product of the fundamental mechanisms within capitalism. The fact that both Britain , and now the U.S. (100 years later), have found themselves in this position should be an indication of that. We need a better understanding and discussion of the nature of capitalism itself, rather than arbitrary cultural attacks, or picayune details. Otherwise we are rushing blindly in a dark alley.

By: Jonnyrox Sat, 17 Jan 2009 03:01:34 +0000 RIGHT ON JOHN, WHERE DO I SIGNUP AT?

By: john Fri, 16 Jan 2009 23:12:46 +0000 It is almost inconceivable that anyone can argue that the US needs a national sales tax to pay our bills. Only the most simplistic analysis could possibly lead one to believe that this so called “solution” would benefit the American citizens.

What it would do is complete the task of shifting all expenses for our nations operation from corporations to individuals as companies export more and more jobs overseas and purchase less and less material goods to be taxed on.

This is exactly the opposite of what we need to have happen, which is to shift all expenses for operating our nation to the corporations that do business here, realizing that this will require a lowering of individuals gross incomes to the current level of net incomes, thus providing to the corporations a one-time adjustment that allows them to continue to afford to operate.

The benefits of this process are too numerous to mention but a few jump right out at anyone who starts to really think about it.

No more individual income tax forms being filed means a massive reduction in the number of IRS agents required to be employed by the government with a corresponding decrease in the massive number of people cheating on their taxes and the concurrent lobbying pressure of assorted groups to avoid paying their fair share of taxes.

Additionally our weak, weak, oh so weak elected officials would now have to choose between which of their lobbyists they would work for instead of taking all their money and punishing the people with ever increasing taxes and debt (you know, the way it was supposed to work to start with).

The list goes on for as long as anyone wants to think about of all the good things that happen when the voters do the voting and the companies do the paying instead of vice-versa, which is how it has been for at least the last 30 years, maybe the last 50.

By: Laurance Marvin Fri, 16 Jan 2009 09:32:41 +0000 The Euro wipped out the D-Mark, French Franc, Lire and many other currency’s that were all excellent investment platforms. Triffin did not live to see the effect of the Euro, which is now unfolding. For the entire period after WW2 the world has seen the USA is the prime buyer for Euro and Asia’s products.

The Euro was an attempt to replace the USD as the currency of reserve for the world. While not having the actual base to create a viable alternative to accomplish the goal that Europe’s banks dream about. The Euro’s creation was an attempt to trade around the US Dollar and not for the benefit of consumers in Europe or the USA

The current greater crisis is who will have the cheapest currency so that it’s products are advantaged for sale world wide. Dropping all, death taxes, capital gains, corp and personal income taxes for a Federal Sales tax. Is a great idea and would stimulate the US economy more than any Federal bailout will ever accomplish.

The credit crisis is wiping out investment funds world wide and shrinking the money supply as we speak.

Money flows in the direction of the best rate of return and the assurance of repayment. The US still holds that role. Can we shoot ourselves in the foot…possible. The credit crisis is putting the vast majority world back on a cash accounting or cash in hand basis.

The IMF has just inked the creation of a new all Arab based currency like the Euro, just last week. To show up on the world stage in 2010-2012. The World has many times had multiple currency situations, but liquidity is so limited outside the US Dollar and Japanese Yen…trading in other currency’s is difficult at best. Lack of stability and liquidity… Try swinging 750 million or a few billion US Tres. Bonds in current conditions inside the US. In the mid 1980’s..that was not a problem…lots of liquidity back then. Liquidity has been drying up for years.

Triffin would most likely have a different view today as conditions are outside his historical perspective.