"This succinct and powerful analysis adds a key element of political economy that is often missing from arguments over the dollar system, all too often phrased in national terms. We talk as though the rest of the world as a collectivity suffers the unequal terms of trade implied by America’s exorbitant privilege. It is often said that the “safe asset” status of US Treasuries is ultimately grounded in America’s national military power. Both claims have an element of truth to them. But as Atkeson et al remind us, global investors flock to the United States not simply because the United States supplies protection, or serves as a unique issuer of “safe assets”, but because investing in America offers outsized returns thanks to the country’s lop-sided domestic political economy. America is a great place for corporates to make profit and that is ultimately what attracts investors and accounts for a large part of America’s net foreign liabilities. Managers of foreign capital enthusiastically buy into the American profits bonanza."
Super curious speculations about the global political economy of the dollar system, of which I probably understand about half. So for the sake of trying to organize my own partial understanding and for the curiosity of the equally economic literacy challenged I summarize:
There is an old economic saw that goes, more or less: If you owe the bank $100 that's your problem but if you owe the bank $100 million that's the bank's problem; it's usually attributed to mid-20th c oil magnate J. Paul Getty but its actual origins are older and murkier.*
The US owes the world, our bankers in this respect, so much that defaulting on that debt or devaluing the dollar is viewed as a threat to foreign economies heavily invested in the dollar system. Some people call this the "Dollar Trap." Countries become dependent on dollars and their stable growth value.
One large factor reinforcing foreign investment in the dollar system-- and so making it more invitational than just a trap-- is that returns, profit returns, interest rates, are better in the US, and in the dollar system than anywhere else. This is attributable (significantly, if to an uncertain degree) to reduced labor claims on corporate profits (which US economists refer to euphemistically as "higher productivity") in the US. Likewise, the priority placed on "share value" in the stock market reinforces this anti-union, anti-labor, anti-government bias in the US, which makes foreign investment more lucrative than places where labor (and/or the state) take a bigger piece of the pie. This is particularly so in other developed capitalist states like Germany or Singapore or Norway or Japan, etc.
So in a terribly dreary twist domestic inequality, living wages, public infrastructure, are casualties to a booming dollar system; and so foreign investment in the dollar is hedged by domestic austerity measures for workers and the public good, health care, environment, whatever, in the US. You know, all that "waste, fraud, and abuse" stuff. In the ultimate boomerang that which makes the dollar invitational to foreign investors makes it an austerity trap, the "dollar trap" at home, for labor and the caring economy in the US.
It's also possible global use of the dollar is viewed more as a debt "trap" or lucrative "invitation" based on global asset positions. In modern times until maybe two decades ago the amount of foreign assets owned by the US and foreign ownership of US assets was more or less equal. Since then the imbalance has shifted dramatically towards foreign ownership of US assets exceeding US investment in foreign assets by nearly $29 trillion. This is not like Trump's crude Tariff obsession with balance of trade numbers that leave out lots of relevant economic exchange. The claim here is that the imbalance in foreign assets works against the value of the "invitation" and increases the sense that investment in the dollar system is a "trap" that foreign states will look for ways to escape.
My general understanding, woefully limited, is that the dollar system has proven remarkably resilient because ultimately it makes global trade easier and more profitable than the Euro or China's RMB or any other currency and has been doing so since WW2. There is some stabilizing hegemonic power in a single currency system that is conducive to global growth and prosperity, or let's say the belief that it does possess this power has survived some pretty big disruptions, which includes on and off non-stop Cold Wars and getting off gold in 1972.
But will the dollar system survive Trump? Can labor and the caring economy ever escape the dollar trap? Can the dollar stay relevant in the global energy transition of the 21st c if the US opposes and cuts investment in that transition? Stay tuned to Professor Tooze to find out, he of a comically pompous accent is in no way to blame for my crude misinterpretations of his super interesting work.
*- Reportedly, Grump likes this economics proverb as well and relates it in his speeches this way: "If you owe the bank a million dollars, you got a debt problem. But if you owe the bank a billion you actually own the bank." In business terms Trump has always wanted to be a chip off the old block. Using size and scale of business projects to extort concessions and profits from other smaller stakeholders is a business model specialized in by his father the real estate developer, Fred Trump
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