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The title means the end of the dollar as the dominant reserve currency used in international trade and central bank financial saving used in settlement of balance of payment.Godfree Roberts reflects conventional thinking about this. But from the MMT pov, having the dominant reserve currency is a liability more than an asset, since the country with a dominant reserve currency has to provide enough savings for the rest of the world to settle international accounts. This means that the country with the dominant reserve currency needs to run current account deficits, which the US does spectacularly, supposedly weakening the dollar by cheapening it and undermining its value as a "safe asset."The conventional thinking having the world's dominant reserve currency is a "privilege" aka "exorbitant
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The title means the end of the dollar as the dominant reserve currency used in international trade and central bank financial saving used in settlement of balance of payment.Godfree Roberts reflects conventional thinking about this. But from the MMT pov, having the dominant reserve currency is a liability more than an asset, since the country with a dominant reserve currency has to provide enough savings for the rest of the world to settle international accounts. This means that the country with the dominant reserve currency needs to run current account deficits, which the US does spectacularly, supposedly weakening the dollar by cheapening it and undermining its value as a "safe asset."The conventional thinking having the world's dominant reserve currency is a "privilege" aka "exorbitant
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Mike Norman considers the following as important:
This could be interesting, too:
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The title means the end of the dollar as the dominant reserve currency used in international trade and central bank financial saving used in settlement of balance of payment.
Godfree Roberts reflects conventional thinking about this. But from the MMT pov, having the dominant reserve currency is a liability more than an asset, since the country with a dominant reserve currency has to provide enough savings for the rest of the world to settle international accounts. This means that the country with the dominant reserve currency needs to run current account deficits, which the US does spectacularly, supposedly weakening the dollar by cheapening it and undermining its value as a "safe asset."
The conventional thinking having the world's dominant reserve currency is a "privilege" aka "exorbitant privilege." This is as a good thing. But the conventional thinking also regards a large current account deficit as a bad thing, since it "devalues" the currency. This is also viewed as an aspect of "privilege" by forcing others to "pay" for extravagance since they need to settle in the reserve currency and therefore must hold it.
The reality is that the county with the dominant global currency does hold an advantage if it wishes to use it to deny use of the currency in settlement to countries it wants to pressure or exclude. But this result in damaging the status of the reserve currency as a safe asset for everyone that saves in it. Similarly, currency instability (inflation, devaluation) will under cut willingness to save in the currency.
Let's look at saving (flow) and savings (stock)
In every monetary transaction, the party that settles for a financial instrument rather than a real good chooses to save in that instrument for however long. Think of selling a real good for a monetary token and putting it in one's pocket. This is a flow into the pocket (deposit), The total of those tokens in one's pocket at any point of time is a stock called "savings." Thus, trade is a flow that potentially results in accumulation of a stock to the degree that inflow (receipts) is not balanced by outflow (expenditure, "spending").
Thus the instrument for saving should be a stable store of value that can be relied upon in addition to a medium of exchange if one is accumulating a stock of savings. The USD has been considered to be such an instrument and the Fed, the US central bank, is the guarantor of stability, e.g., through inflation control and financial regulation and oversight of financial institutions. The real factors are the strength of the US economy (goods production) and the military (geopolitical power).
This assumes that the dominant reserve currency cannot be substituted by those subject to pressure. Events are showing that this may not be the case as workarounds appear.
The reality is that the Bretton Woods monetary system established after WWII making the USD the dominant world reserve currency for international settlement is long in the tooth. The original agreement specified that the USD would be convertible at the US central bank for gold at a fixed rate, then $35 per oz. The rate was subsequently changed, devaluing the dollar, and then abolished by President Nixon, thus establishing a floating rate system in 1971 that was formally adopted in 1973 and has held since.
Now the modified Bretton Woods system is being questioned as the USD is being weaponized, which is calling into question its status as a safe asset for nations to save a positive trade balance. (The current situation has actually devolved to the point that privately held financial and real assets are being confiscated for political reasons. That is another matter but it is serious with respect to the world system.)
While adopting a monetary system similar to that proposed by Keynes at Bretton Woods would limit the ability of the nation issuing the dominant reserve currency to weaponize it, this would not materially affect the operation of the global system of world trade, but rather would provide more independent unit of account using a basket of currencies and some real goods as the standard for an international unit of account. Keynes called the unit of account of his proposal "the bancor." The IMF has developed a similar system based on SDRs.
As Godfree Roberts mentions, the IMF has been working in his direction with SDRs and China has been pushing for inclusion of the RMB in the basket of currencies. More countries are also settling in their own currencies, too.
So while a newly emerging monetary system is sort of a big deal in the historical picture of "money," it is not that big a deal financially from the perspective of MMT. It's just an institutional change that will have to be taken into account in describing international finance in terms of new monetary system. Having been developed by Keynes and partially implement by the IMF, it is not a stretch by any means.
While the financial implications with respect to the dollar may be exaggerated it it does have geopolitical implicationI — limiting the ability of the US to weaponize its currency. While this is a loss, so to speak, it is gain from the point of view of the US not have to fund international saving (flow) with its current account to provide for international savings (stock).
One hears the cry, then who will replace foreign buyers for US debt (Treasuries)? From the MMT pov, no problem. For example, it is not necessary for currency sovereigns to provide savings at interest when they are not defending their currencies as would be necessary under a fixed rate system. For instance other countries could be required to hold bank reserves like other savers in the payments system instead of being paid a premium to save, which incentivize saving. This would likely reduce holding surpluses and would promote trade in real goods. There are other options in addition.
And with adoption of a new monetary system institutionally, then countries would adapt their own systems to it and MMT would describe that as a starting point for analysis.
I expect we'll be hearing more about this as it materializes from MMT professionals much more competent to explain the ramifications than I am.
Dollar's End
Godfree Roberts