Stiglitz argues for the U.S. to get on the global reserve currency bus

In a new op-ed Joseph Stiglitz argues that due to the national debt (projected to be $9.05 trillion over the next 10 years), America should get on the we need a new reserve currency beyond the dollar bus. Kind of a if you can't beat 'em, join 'em message. (see China and the Dollar for details on the Chinese game of chicken while pushing for a new reserve currency).

Our budget deficit, as well as the Federal Reserve's ballooning lending programs and other financial obligations, will accelerate a process already well underway -- a changing role for the U.S. dollar in the global economy.

The domino effect is straightforward: Higher deficits spark market concerns over future inflation; concerns of inflation contribute to a weaker dollar; and both come together to undermine the greenback's role as a reliable store of value around the world. Right now, with so much unused capacity in the American economy and so much unemployment -- likely to persist for at least another year or two -- the more pressing worry is deflation (a general decrease in prices), not inflation. But as the economy eventually recovers, the possibility of inflation will loom, and with forward-looking markets, worries about the future often play out in the present. Anxieties about future inflation can lead to a weaker dollar today.

I would also like to note a Stiglitz validation statement to what we on EP have been talking about with deficit spending and how U.S. taxpayer funds are helping offshore outsource jobs and fueling political cronyism.

What really matters is not the size of the deficit but how we're spending our money. If we expand our debt in order to make high-return, productive investments, the economy can become stronger than if we slash expenditures.

Stiglitz also notes how inflation would reduce in real terms, the value of the debt, which from the above, we know China is very worried about. But here is what he says about it affecting U.S. job growth:

The current system is not only bad for the world, it is bad for the United States, too. In effect, as other countries hold more dollar reserves, we are exporting T-bills rather than automobiles, and exporting T-bills doesn't create jobs. We used to offset this drag on the economy by running a fiscal deficit.

Stiglitz also mentions poor countries putting aside money to prop up the U.S. debt as immoral. Considering China is slated to be the world's largest economy and new global economic superpower, plus if anyone bothered to get out more and just look around (or look down at the homeless person you're stepping over to enter your front door), you can see entire sections of the United States looking identical to 3rd world regions of poverty. So, honestly I just don't feel so guilty on that score!

Being the world's reserve currency has enormous economic advantages. Better purchasing power, lower interest rates, less transaction rates and trading in the currency of choice for commodities (can you say oil?).

I question the implications of this idea, unless one wishes to celebrate the great economic decline of the United States into 3rd world status. Without major policy changes internal to the U.S., namely moving back to a production economy first, I'm not convinced such a move would help the U.S. at all.

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I see only one benefit to this

It would kill wage arbitrage that favors the Chinese. How? Well there are no rules as to how one pegs a currency to this neo-bancor (for the uninitiated, the "bancor" was Keynes idea for a global reserve currency). Everyone has different reasons to support it. The Chinese because they are now the planet's largest hedge fund and are doing what such vehicles do. The Russians, because for some damn reason in their brains the Cold War isn't over for them, and are once more looking to stick it to us/drop us a few pegs. The others (mainly developing nations) either fall into three categories

A) Want to bring "the great Satan/Big Capitalist" down.
B) Are afraid that Dollar-denominated assets like oil will rise as our currency falls.
C) Promote a multi-polar currency/new currency/their own currency as a replacement of the status quo.

But still, this could work in our favor. To be honest, I'm still iffy on this concept of a global reserve. My main hesitation is that many benchmarks like oil is priced in US Dollars. What if they were pegged into bancors/SDRs? There is no real tangible value in these new notes. Indeed, we would be replacing one mismanaged fiat currency with another. At what value do we peg our US Dollar to the New Bancor? Who has the right to make such calculations? Would it be set, or would they operating in a valuation band? Or would they be free floating against this one reserve?

In each case, I spot an opportunity. Of course this will come at a price. Look, the globalization system of China builds and US buys is coming to an end. The Chinese think they can simply sell here take their winnings and plow it into these SDRs and all will be fine for them. But they don't realize, or perhaps they do but underestimate the situation, but there will be a cost for them. What I'm getting at is if we are to be thrusted onto this new global reserve, then we should guage it to our advantage.

No matter what, our costs, should this go through, will begin to escalate. Be it in the price of credit to the price of crude, our costs are going up. We will have to compete for money to purchase our bonds, thus interest rates will have to go up. Oil, if priced in SDRs/Bancors/etc, will go up relative to the value of our currency, because distributors could offload to new customers without the FX risk. So if we're going to pay the piper, let us get something out of this.

Which is why if and when this goes through, we undervalue the hell out of our currency relative to our trading partners. Like I said, we're going to face higher costs anyways in this globalization game, so lets take away one of their balls....wage arbitration. If at present the USD/CNY is 6.82, then we need to push it so that whatever the USD/SDR is at, that USD/CNY is like 2.0 or less. The Chinese can't have their cake and eat it too. If we're to enter this "new world," let us be its factory. Under this new regime, there is absolutely nothing that says we can't do this.


somewhere I wrote up a piece on Chinese currency manipulation

and it appears those talking about it are right...if it was not allowed, wala, our massive trade deficit would evaporate.

But on the other aspects....I'm really not sure this is a good idea at all...

I would prefer the U.S. to just confront directly China on currency manipulation. (as promised and now blown off!)