Dollar as world reserve currency

The president of the World Bank Robert B. Zoellick said in a September 28, 2009 speech at Johns Hopkins that the euro and the Chinese renminbi will begin to replace the dollar as the capitalist world’s reserve currency.

Since 1999, the dollar has been decreasing and the euro has been increasing in world foreign exchange reserves. (China has kept its currency out of international circulation so far, but is in discussions with other states regarding replacing the dollar in oil trade.)

Replacing the dollar as the world reserve currency would likely mean the following:

1) Despite its natural and human wealth, the US is not an economic producer. The US’s aging economy is based principally on speculating with capital, as well as oil and oil-based infrastructure and military expenditures. Because imports have exceeded exports, the US has a large trade deficit. The large trade deficit means that the US has borrowed a lot of money from foreign creditors.

When it does not hold the world reserve currency, the US will be unable to negotiate for more favorable terms of debt repayment. This means the cost of debt repayment will increase for US taxpayers. Currently the US public debt is 61% of its annual GDP, and 28% of the public debt is foreign-owned.

The above “Foreign Owners of US Treasury Securities” chart was made by a “US Public Debt” Wikipedia editor using US Treasury data.

2) US taxes will pay foreign creditors. There will be class wars over who is to pay these taxes; but in general working class Americans will experience austerity.

3) If the US dollar is no longer the reserve currency, the US would raise interest rates to attract and maintain foreign capital. This would make it more expensive for Americans to borrow money, reducing US economic growth for the long term.

4) The US may try to let its currency depreciate in order to reduce its debt burden. Creditors may retaliate. Currency depreciation can result in inflation. Imports will be more expensive, and the US produces very little of what it consumes.

5) When the US loses its “exorbitant privilege” (Giscard d’Estaing), the country will be more susceptible to a currency/balance of payments financial crisis, and accompanying speculative attacks on the currency.

Obviously, the US has put its all behind maintaining the dollar’s world reserve currency status. From bucking Keynes to Nixon taking the US off the gold standard to sacrificing balance of payments and domestic production capacity to substituting working class debt for working class income to the imperial military-financial explosion. US dollar, we did it all for you, it was all for you, all along.

Current efforts to maintain the dollar as the world reserve currency are, however, becoming very burdensome, not just on other peoples, but on Americans as well. They include:

1) The bailouts of irresponsible FIRE (finance, insurance, real estate) corporations, such as AIG. These bailouts impose a great tax burden on Americans, which further reduces their discretionary income, diminishing Americans’ role as global consumers. Because human capital is not a competitive advantage of the US, the loss of Americans’ ability to consume will eventually result in lowered socially-necessary wages in the US.

As well, because American taxpayers pay the costs of FIRE capital’s bad business in order to keep the world economy afloat, the bailouts establish emphatic disincentives for FIRE capital to act rationally or in the long-term interest of the US economy. Poor business practices + impoverished taxpayers = reduced incentives to foreign capital to supply capital liquidity to the US.

2) With some encouragement from Israel, which always feels the need for lebensraum, the US fights wars in South Asia when countries such as Iraq and Iran indicate they will switch to doing oil business in euros rather than US dollars. (This results in China switching to more euros.)

This means that a large proportion of US wealth and lives, and the US state, are devoted to and entrenched in military expansion. This economic-dominance-by-military-aggression comes at a terrible cost to US democratic institutions, and narrows the range of policy to address domestic problems. It is unclear whether exorbitant military expenses are balanced out by the extent to which military production stimulates the US economy–metastasizing militarization is famous for pushing stressed societies such as the US to their collapse.

However, what is clear is that as the US economy has become partially dependent upon exporting weaponry and other forms of militarization, the US multiplies the conditions for future conflicts, even as it creates enemies and long-range problems out of whole societies (South Asia, the Islamic world, etc.) That produces more deaths for more impoverished American sons and daughters. The only way to rationalize that domestically is with bigger fascism.

Perhaps you will forgive my cynicism when I say that I sincerely doubt that the US is going to make its fascism conquer all where Germany could not. Will the Russians, inter alia, end up crushing the US machine, if it comes to that? Poor, tortured Russians.

Live by the sword, die by the sword. Recall that on the eve of the 1960s, Daniel Bell proclaimed the end of ideology, and 16 years before the US was about to lose its superpower status, Francis Fukuyama declared the end of history. We should recognize this pattern: Just a bit after conservatives are lullingly smug about having secured their utopia, we will all find ourselves rudely awakened to the fact of capitalism. All that is solid melts into air.

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