An unhealthy privilege

By J Saft
September 29, 2009

jamessaft1–James Saft is a Reuters columnist. The opinions expressed are his own.–

When the U.S. dollar ultimately loses its status as the world’s premier reserve currency it will be painful for all involved, almost certainly disorganized, and very possibly a very good thing.

World Bank President Robert Zoellick outlined the risks to the dollar’s status in a speech in Washington on Monday.

“The United States would be mistaken to take for granted the dollar’s place as the world’s predominant reserve currency. Looking forward, there will increasingly be other options to the dollar,” he said.

Zoellick went on to emphasize how choices in the United States on inflation, fiscal policy and financial system reform would help to influence the dollar’s fate.

Quite true. The U.S. cannot simply devalue its way to competitiveness, nor can it appear to be inflating away its debts without risking a run on the currency. The Chinese and others would sell dollars or fail to buy up new debt if they felt the U.S. was behaving both cynically and irresponsibly.

China has good reasons not to force a crisis and devalue its holdings of dollars, but not immutable ones. The two nations are like two men trying to swim to shore while dragging a heavy box of gold, the difference being that the U.S. is tethered to the box while China is only holding on. If China decides the water is too rough it can let go, sacrifice its dollar holdings and swim for it. The United States is not so lucky.

“Exorbitant privilege” is a term coined by an understandably embittered French Finance Minister Valery Giscard d’Estaing to describe the fact that under the old Bretton Woods currency system the United States, unlike everyone else, could simply print dollars to cover current account deficits.

Bretton Woods is gone, but the arrangements which replaced it also tended to underwrite U.S. overconsumption, as purchases of U.S. dollars as reserves by other nations kept funding rates lower despite household or government profligacy.

“The United States is incredibly fortunate that the dollar enjoys this special status,” Zoellick said. “When I work with countries struggling to pay for budgets or finance trade deficits, I reflect on how Americans do not spend a moment considering the unique advantages of being able to issue bonds and print money freely.”

My best guess is that Americans will spend quite a few moments in coming years considering that unique advantage, and that while they will miss it, they should also be sorry they ever enjoyed the right to borrow freely and seemingly without consequence.


Of course the U.S. current account deficit has contracted massively, standing at about 3 percent of gross domestic product in the first quarter as compared to 6.5 percent of GDP in 2006. That’s the result of plunging global trade and steep falls in investment in the United States. And while the personal savings rate has jumped in the United States, which after all it had to since credit was no longer easy, the government has stepped up massively as a borrower, overwhelming households’ efforts to save.

Barclays Capital calculates that the United States now needs to attract 46 percent of the world’s net savings, i.e. the sum of all current account surpluses, as opposed to 54 percent before the crisis broke.

That 46 percent figure is an improvement, but it too is ultimately unsustainable. It’s also arguably starving lots of other places of investment that could ultimately produce higher returns.

The newly empowered G20 group of nations has meanwhile resolved to rebalance the global economy, using peer pressure to force the irresponsible to shape up and the overly tight to start spending at home.

The world’s central bankers and politicians just received an object lesson in what a good idea it is to have a bunch of reserves piled up against a bad day. Even putting China aside, responsible leaders in places like India will have a very tough time trusting in an international body to protect their own best interests. And because that body doesn’t have any real power to compel, it will be ignored. That means that there is a good risk, G20 or not, that everyone is trying to simultaneously keep their currencies low and exports high.

The only body seemingly exempt from market discipline, the United States, is not going to be in a position to resume eating up everybody’s exports. This is a recipe for very slow growth and for rising international economic tension. That doesn’t make the changes proposed at the G20 a bad idea, but they are not sufficient and threaten to be a resolve-softening time waster.

So not so much as rebalancing but a re-basing of growth expectations. Look for continuing dollar weakness alongside that, with the real drama being not the decline but the rate of decline.

–At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund.–


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This article is based on the assumption that the dollar *will* lose privilege as reserve currancy.

As the financial crisis hits the recovery phase I wonder, has this assumption been made out?

For what reason will the dollar cease to be the reserve of choice? America remains higher in GDP then the major players of Europe put together. And stronger then China and several other nations combined.

So what possible competitor currancy can uproot the dollar in terms of national demand or stability? That has yet to be seen.

So until the assumptions have been proven beyond doubt, I find I cannot comment on the accuracy of articles such as this.

Posted by Anon | Report as abusive

To be honest the way the Obama administration is spending, and the spending they hope to do in the near future with health care and other great must have programs, I do not see anyway out for the US but to inflate away the debt.

Ultimately, because of this inflation, the individual middle class Americans who have saved hundreds of thousands and even millions of dollars will have nothing to show for their frugal efforts. The result will be a leveling of the economic status of most Americans. In this country we will have a few ultra rich, their holdings will not evaporate, and then about 95% of the people will have no capital reserves and will be dependent on the government for job, health care, retirement, mortgage, etc.

This will be the new America that Obama creates. An America where citiznes have equal dependence on the state. A country that is reduced to being militarially on a level with the UK as China ascends to being the most powerful nation, economically and militarially on earth. This is the change for which we voted.

Posted by Bill | Report as abusive

I cannot wait for the Dollar to be replaced, either by a new gold standard or SDRs, so long as it is not just another single currrency. This currency exercise has been a disaster and the US has exploited it. It was like giving the kid the key to the candy store, now that kid has rotten teeth and does not want any more candy.

It is quite likely that the US will have to default at soem time as there is no way that the forecast growth figures of Obama are achievable. Also, this percentage figure for the demand of world savings does not make sense. A while ago they were saying that the US needed 70% and now it has fallen. How can that be when they are selling bonds at a huge rate and other countries are also selling more bonds for the QE exercise? Also, why are countries printing and buying their own debt if there are so many world savings? How can there be so much savings with this level of unemployment etc? This does not make sense to me at the moment. An explanation would be useful.

The world is heading for some very hard choices. At the moment it is all green shoots this and green shoots that. Just wait until all this free money is pulled and interest rates, taxes etc rise and government spending is cut.

Posted by D Rumsfeld | Report as abusive

Hi- can someone tell me what system replaced Bretton Woods that makes it desireable in other countries to buy US debt?



Posted by Bob | Report as abusive

I hope the “Free Trade” hacks are happy with what they have wrought.

Posted by RFL | Report as abusive

This is just another stone into the bucket raising the water level of the US crisis. Eventually all that water is going to spill out.

I’m looking at stuff like this and the spending of the US Gov and it seems to me that the best thing that I can do is get out of personal debt asap put some money into wealth securing assets. For me that’s gold and silver, something China is very interested in too.

Looking at the widget this morn I see that both are still up but seem range bound at the moment. I don’t think that will last long as we draw closer to November. What with China telling its citizens to buy the metals and their increasing of their gold reserves, the spot price of gold won’t remain below 1k for long I think.

Posted by Hal | Report as abusive

Nothing lasts forever.

GDP sounds cooked to me when one starts to compare prices of things e.g. The CCCT building in China was built for .75 billion dollars. The aenemic and very standard plans for the WTC are estimated at almost 6 billion and climbing steadily (the last time I looked). That figure doesn’t seem to include the land cost. The Port Authority already owns the site. And the buildings are merely the same old, same old for Lower Manhattan. The principal developer and the Port Authority are not stretching the state of the art, by any means, on any of the buildings to replace the twin towers.

The CCCT building, on the other hand is an amazing tour do force and just loaded with all sorts of special basic structural and finish conditions that prevent it from being an off the shelf project – or as its architect, Rem Koolhass called buildings like the Empire State Building – “automatic buildings”. It is very like the Bird Cage stadium: that required a computer to keep track of all the unique condtions that are needed to construct it. These buildings can no longer be designed without the graphic capabilities of the computer. No two floors on the CCCT building have the same floor plan. Most of the new buildings at the WTC aren’t that complex.

Being head of the table for Breton Woods may have made very biased book keepers of our own economists. Is an economy truly “rich” if commodities or services tend to have higher prices than an economy elsewhere would price them?

There is no standard for determining the actual “universal” cost of an adequate standard of living, yet so many things we use in daily life are becoming standardized across boundaries. Yet the prices can vary considerably – except McDonald’s hamburgers which cost the same in the US as anywhere else – I had one in the US and paid the same the next day in Rome for the very same menu items.

Investors also seem to look for growth potential. The US doesn’t really have than any more. Our problem is keeping the rattle trap together at all.

Posted by Paul Rosa | Report as abusive

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This is just another indication that we are headed toward a one-world government. The U.S. is losing its edge in world affairs; we are losing the wars in Iraq and Afghanistan, we were rejected for the 2016 Olympics, and now world confidence in the dollar is at an all-time low. Unless we get rid of the one-worlders and all the Democrats and Republicans (who are responsible for this country’s ills), there is no hope for America.

Posted by Mufaso | Report as abusive

The way out of this mess is to remove profit and interest from the economic equation.

Money is only supposed to be a tool to facilitate the exchange of resources and nothing more. Lending money at interest is called usury. And for thousands of years it has been said that usury is a big mistake. Look at what interest is doing to the economy. Look at how profit interferes with the creation of technologies and services that actually address and solve real world problems.

Look at how the issues of health care, education, immigration, etc… are obscured by issues of debt and profit.

We solve nothing while we value money for its own sake. Solving our problems means letting go of profit and interest as motivators. Instead we must adopt the real and grown up motivation of solving actual problems and making human life richer and fuller. There is no “fixing” this economy. What must be “fixed” is what we as human beings value and hold dear.

Posted by Benny Acosta | Report as abusive

All this talk about replacing the dollar is baseless and namely inclausable because there are no other means of basis or country that has the gold reserve to back it up not to mention the market for the new currency.

And in order to replace a saturated currency the results would be a total devastation of the world’s assets, even then people would still use the dollar to buy into the new currency. We would be in the same situation again with a disaster and worst due to the fiscal unease and speculation.

It would be a desabilizing world wide effect

Posted by Ian | Report as abusive

Woe to me, speak the raven. If I can confuse, lie, cheat the greatest nation to believe it. I should have won without the fight.
Some countries hate the U.S. They would see us fail. Some enjoy to see us taken down a few notches, and even friendly nations would like to make a buck off of us.
We live in a dangerous, competitive world which needs our attention at all times.
Obama and friends are writing hot checks to cover hot checks and we know where that ends. Do not allow a sick country to be thrown into jail. Demand results! local, state, and federal and I don’t mean a free ride or communism.
If someone is cruel, dishonest, or hurtful do not dismiss it as “normal” or the way of the world.
ostracize them, avoid them, do not trade with them, tell others of their works and values….and vote them out

Posted by robert m. | Report as abusive