In recent
years, the current account deficit of the American economy has been growing
sharply, reaching five per cent of its GDP in 2002. Along with the deficit,
there has also been a marked increase in the number of heterodox economists
who believe that the American foreign debt ("the biggest in the
world") is becoming unsustainable. These include some Marxists (Giovani
Arrighi, Anwar Shaikh, Jayati Ghosh and several others), Post-Keynesians
(Wynne Godley, Robert Blecker, Jane D´Arista, Dean Baker,Tom Pailley,
James Galbraith, among many others) and also some Latin American structuralists
(Arturo O'Connell and Celso Furtado, to cite only the most notable)[1].
If the American external deficit is not substantially reduced, they argue,
this will trigger a "speculative attack against the dollar",
and consequently, a serious crisis in the American (and world) economy.
With this crisis, the dollar would probably lose the central role that
it plays in the world economy today.
In fact, what these heterodox critics do not seem to notice is that the
American current account deficits and external liabilities are very different
from those of a country like Brazil and even from those of the other rich
countries. This is due to the fact that the dollar is nowadays the international
currency of the world economy. The world economy works in practice, at
least since 1980, in what we have been calling the 'floating dollar standard'[2],
where the dollar has a very different role from all other currencies (including
the convertible currencies of the other rich countries). This gives extraordinarily
asymmetric power to the US economy, which simply does not have any kind
of balance of payments constraint.
The position of the American dollar is different from all other currencies
for several reasons. First and most importantly, the dollar is the international
means of payment. This means that, contrary to other countries, almost
all that the US imports are paid for in dollars. This also implies that
virtually the whole of American external liabilities are also denominated
in dollars. Since the dollar is issued by the FED (American Central Bank),
it is impossible (since American imports are paid for in dollars) for
the US not to have enough resources (dollars) to pay their external liabilities.
Moreover, naturally, it is the FED that determines the dollar's
basic interest rate[3].Therefore, since the
American foreign debt is denominated in dollars, the US is in the peculiar
position of unilaterally determining the interest rate paid on their own
foreign debt.
Further, the American public debt - that pays interest rates set by FED
- is the most liquid dollar financial asset and is also the most important
reserve asset and store of value of the international financial system.
Thus, another consequence of the fact that American external liabilities
are denominated in dollars is that when the dollar depreciates relative
to any other currency, it is the owners of the American foreign debt of
that country who will suffer balance sheet losses instead of the US.
Another advantage for the US due to the special position of the dollar
is that exchange rate devaluations cause very little inflation in the
US. This is because in a large part of the international markets, including
almost all commodity markets, prices are set directly in dollars and,
as in the case of the oil price, for instance, do not increase when the
dollar is devalued. Recent econometric estimates show that on average,
less than 50% of the devaluations of the dollar is passed through as increase
in the internal prices of imported products[4].
It is clear that under these special conditions, the US, unlike Brazil
and all other countries of the world, can have a regime of floating exchange
rates and free short-term capital flows without these creating any problems
for its macroeconomic policies.
Let us consider three recent examples of how things are really different
for the dollar. Our first example is from 2001. In that year, when the
September 11 terrorist attack took place, the American recession had already
started with the decrease of private investment, due to the excessive
productive capacity that had been rapidly installed in high technology
sectors of the "new economy" during the NASDAQ bubble.
The American policy answer to the crisis was fast and drastic. The basic
interest rate was reduced, there was an enormous coordinated injection
of liquidity into the international financial system by the FED, together
with the central banks of the rich countries. There were also increases
in public spending, tax cuts, and government financial help for especially
jeopardized sectors such as airlines and insurance companies.
All these measures certainly avoided the deepening of the recession and
the disorganization of the financial system. Just after the terrorist
attack, there was a natural tendency in international financial markets
for "flights to safety", due to the increased perceptions of
risk and uncertainty. This was worsened by the initial fear that the "war
against terrorism" would end up triggering greater supervision and
control of international capital flows, with the aim of combating money
laundering channels and locating the financial sources of the terrorists'
funds.
For our purposes here, what is important to notice is that this "flight
to quality" of the market was a run for the dollar and not from
the dollar, despite interest rate reductions, more than confirming the
role of the dollar as the 'store of value' currency of the
capitalist world economy. It is to the dollar that the market runs at
moments of crisis, even when the crisis, as in this case, occurs in New
York, at the financial centre of the US dollar.
Our second example is from 2002. The damage control and expansionary measures
described above were already beginning to work in 2002. However, the scandals
of Enron and other big companies caught falsifying their balance sheets
exacerbated the bursting of the stock market bubble. Until then, with
the FED's help, the overall stock market bubble had survived not only
the collapse of the NASDAQ bubble, but also the terrorist attack.
Since the dollar was mainly being kept strong by foreign demand for papers
negotiated in the American stock market and the FED was already quickly
reducing the American interest rate (by much more than in the other rich
countries), it is only natural that the dollar started to depreciate.
However, the result of this recent foreign capital outflow from the US
and of the devaluation of the dollar, contrary to what many heterodox
economists mentioned above had foreseen, has been the continuous reduction
(instead of increase) of American interest rates. These interest rate
decreases have lowered the financial losses of heavily dollar-indebted
American firms and workers and has also been helping to keep demand growing,
both in the markets for real estate and for durable consumption goods.
This shows that the US simply does not need those external capital flows
to finance its external current account deficit. The American external
deficit continues to be automatically financed, at the very moment the
transactions that generate this deficit are denominated and paid in the
American national currency. Which other country that has a stock market
crash and an outflow of external capital, answers these by reducing its
interest rate?
Our third example is from 2003. Although the dollar is tending to devalue,
some countries - especially in Asia, as Japan and China among others -
have been doing everything possible to avoid or contain the appreciation
of their currencies relative to the dollar. On the one hand, these countries
do not want the increased costs (in dollars) of their exports to cause
either lower profitability or lower market share for their products in
the international markets. Moreover, the appreciation of the currencies
of these "surplus" countries that hold a great amount of financial
assets in dollars would bring big balance sheet losses for the local companies
and financial systems. Hence, the central banks of these countries are
actively intervening to buy dollars, and are continually accumulating
their external reserves in dollars, in order to avoid appreciation of
their exchange rates. By now, Japan already holds more than US$600 billion
of dollar reserves, while China has already passed the US$350 billion
mark. Similarly, South Korea has more than US$100 billion (built up quickly
in recent years after the crisis), Taiwan has more than US$180 billion,
and even Indonesia has more than US$30 billion[5].
f the heterodox critics cited above were correct, the American government
should be noting the fact that although private agents have "run
away from the dollar" in recent times, the governments of the Asian
countries are helping to minimize the devaluation of the dollar and to
finance the enormous American current account deficit, thus avoiding a
"dollar crisis".
But, what is occurring in reality is exactly the opposite of this. There
has been a growing and not very subtle American diplomatic offensive pressuring
the Asian countries to let their currencies appreciate. The pressure on
China to abandon the fixed exchange rate and to revalue the Yuan, in particular,
has been very strong and there are growing official American accusations
that the Asian countries are "protectionist", follow "mercantilist"
policies and practice "unfair competition". The reason for
this pressure seems to be very simple: at the moment, the American priority
is to revive the domestic economy. The devaluation of the dollar is in
the American interest, in order to increase exports and to reduce American
imports to help domestic economic recovery. The Asians are seen as going
against this plan when they avoid appreciation of their currencies.
This last example shows how the American government is not worried about
the depreciation of the dollar causing any problem, let alone a "crisis".
One reason for this is that (as recent official figures point out) about
a third of the American current account deficit with "foreign residents"
is in fact due to imports from branches of American multinationals abroad.
The main reason, however, is simply that the American government knows
very well that, given its current condition of being the world's
only superpower, it will certainly not have any difficulty in finding
sellers in international markets willing to accept dollars as payment
for its imports.
References
SERRANO, Franklin L. P. (2003). From 'Static'
Gold to the Floating Dollar. Contributions to Political Economy, 22, 87-102
(forthcoming).
BOMFIM, Antulio N. (2003). Monetary Policy and the Yield Curve. Federal
Reserve Board, mimeo, New York
BEDDOES, Zanny M. (2003). Flying on One Engine - a survey of the world
economy. The Economist, September, 20.
SAMUELSON, Robert (2003). A Crackup for World Trade. Newsweek, August,
25.