Re: [OPE-L] Trade Deficit Disorder

From: Rakesh Bhandari (bhandari@BERKELEY.EDU)
Date: Sat Mar 18 2006 - 23:19:16 EST

>----- Original Message -----
>From: "Rakesh Bhandari" <bhandari@BERKELEY.EDU>
>>The CAD may be a bigger problem for US's creditors than it is
>>for the US!  As Susan Strange long ago pointed out in Mad Money
>>(1998): the US can use "its bargaining power as military protector, or as
>>interventionist meddler, or as major trading partner to get its own way
>>and to
>>make others undergo the painful adjustments."
>Is there merit to re-examining the 1970s when the US transferred its
>wreckage of the Bretton Woods currency system to Europe via exported
>inflation, a lower dollar, the gold price explosion (and the $80 bn US
>default on the $35/oz commitment) - before Volcker's 1979 shock? (And that
>shock of course kicked off the Third World debt crisis and serious austerity
>across the world.)

Yes, Patrick,  I agree with you that this history is relevant. I
posted the following
six years ago. Whether the US can count on foreign cooperation in supporting
the international role of the dollar is of course an open question. The ending
of the cold war and the emergence of the euro do make the present
quite different...
I  heard Fred Bergsten joke a decade ago that the collapse of the
Soviet Union would
eventually be the greatest shot in the arm to Lenin's theory of open and brutal
inter imperial rivalry.

The Ricardo Hausman mentioned in the WSJ article cowrote work with
Alain Lipietz, no?

comradely, rb

  there is an interesting discussion of this
problem in Robert Gilpin's  The Challenge of Global Capitalism: The World
Economy in the 21st century (Princeton, 2000). Here is some of it:

"The intl role of the dollar has conferred a nubmer of concrete economic
and political benefits on the US that it would forfeit if the dollar were
to lose its status as the world's key currency. The intl demand for dollars
has meant that the US has been able to finance its huge and continuing
trade/payments deficit since the early 1980s at a minimal cost. IN effect,
the US govt has been able to assume that other countries would
automatically finance the huge American intl payments deficit because
others, needing dollars to conduct their intl business, did not demand high
interest rates. Moreover, the US has been able to borrow in its own
currency and thus avoid exchange rate risks [that also allows for the US to
inflate away its debt, and the devaluation of the dollar did indeed reduce
the debt owed by the US while simultaneously imposing heavy costs on
Japanese and other lenders in the 1990s]. Most of the dollars in
circulation are overseas in the hands of non Americans; this so called
'dollar overhang' of about $265 bn is the equivalent of an interest free
loan to the US extimated to be worth about $13 bn in saved interest

Writing about loss of confidence in the dollars in the late 60s onward,
Gilpin notes:

"America's cold war allies, fearing that a collapse of the dollar would
force the US to withdraw its forces from overseas and to retreat into
political isolation, agreed to hold overvalued dollars. ALso such export
oriented economies as W Germany and, at a later date, Japan wished to keep
access to the lucrative American market.

"Throughout the postwar era the US always had one primary partner helping
it to defend the dollar and hence the US intl position. In the early
postwar period, the American position and support for the dollar were based
on cooperation with the British; this 'special relationship' begun between
the First and Second World Wars, had been solidified by wartime experience.
The Anglo Saxon worked together to frame the Bretton Woods System and
reestablish the liberal intl economy. By the late 1960s, however, the
relative decline of the British economy forced Great Britain to pull away
from its close partnership with the US

"W Germany then replaced G Bri as the formost economic partner of the US
and as the mamor supporter of the dollar. Throughout the Vietnam War and
into the 1970s, the Germans supported American hegemony by holding dollars
and buying American govt securities. Inflationary and other consequences of
this new special relationship weakend it in the mid 1970s and eventually
led to a fracture in the late 1970s when the Germans refused to support
President Carter's economic policies; the Germans then joined the French to
sponsor the European Monetary System. Creation of this 'zone of stability'
in W Europe was the first of many efforts to isolate the European economies
from the wild fluctuations of the dollar.

"In the 1980s the Germans were replaced by the Japanese when, through their
investments in the US, the Japanese provided financial backing for Reagan's
economic and military policies. In the 1990s, sporadic informal cooperation
among American, German, and Japanese central banks supported the intl role
of the dollar. This cooperation continued largely due to fear of what would
happen to the intl economic and political system if the monetary system
were to break down."

see pp. 60-1, 120-21, 222-225

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