Global imbalances and the Triffin dilemma
– John Kemp is a Reuters columnist. The opinions expressed are his own –
For the world monetary system, the financial crisis which erupted in the summer of 2007 is a cataclysmic shift that will prove every bit as significant as the outbreak of the First World War (which heralded sterling’s demise as a reserve currency) and the suspension of gold convertibility in 1971 (which marked the end of bullion’s monetary role).
The crisis marks the passing of an era in which the U.S. dollar has been the world’s undisputed reserve currency for making international payments and storing wealth.
The dollar is not about to lose its reserve status completely. But it is set to become less “special”. In future, it will increasingly have to share its reserve status with the euro, the yen and perhaps the currencies of the other advanced economies. In time, it may even have to share its status with China’s yuan.
In fact, the whole concept of a single reserve currency (the dollar) and a principal reserve asset (U.S. Treasury bonds) is set to undergo a profound shift. Policymakers, businesses and households will in future think about and hold a whole portfolio of competing reserve currencies and assets. Multipolarity in the world of security and economic relations is set to be matched by a world with multiple reserve currencies.
One positive consequence may be greater stability in a more diversified financial system, once the current crisis is passed. But the price for the United States may be a loss of policy autonomy for Treasury and Federal Reserve officials used to being able to ignore the international dimension when deciding interest rates and budget deficits.
EXTERNAL IMBALANCES
Although the article does highlight many key issues concerning the global economic market it follows a continual theme that fails to recognize the lack of a Federal Sales tax. The US economy originally was built on manufacturing, domestic expansion, and foreign export providing an extensive robust base to stabalize the dollar. As the economy shifted to a global footprint the US has failed to recognize the weight of the income tax on US corporations. This has resulted in lower cost imports, a shift of manufacturing off-shore, and then inevitable devaluation of the US dollar. To compete globally the US must overhaul the antiquated tax code and convert to a sales tax.