Thread by Michael Pettis
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- Mar 16, 2022
- #PoliticalEconomy
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1/14
Good piece by @TomFStevenson on one of the reasons why, for all the damage it does to the US economy, Washington is unlikely to want to constrain the global use of the US dollar.
www.lrb.co.uk/the-paper/v44/n06/tom-stevenson/first-recourse-for-rebels
Good piece by @TomFStevenson on one of the reasons why, for all the damage it does to the US economy, Washington is unlikely to want to constrain the global use of the US dollar.
www.lrb.co.uk/the-paper/v44/n06/tom-stevenson/first-recourse-for-rebels
2/14
“The fact is," he notes, "that Washington controls access to the international financial system. Much as a naval blockade denies access to the seas, US sanctions are based on monopoly power over a global commons: the world’s reserve currency and medium of exchange.”
“The fact is," he notes, "that Washington controls access to the international financial system. Much as a naval blockade denies access to the seas, US sanctions are based on monopoly power over a global commons: the world’s reserve currency and medium of exchange.”
3/14
But this comes at a cost to the US too. The dollar is widely used not because of US military power but rather in spite of it. Much of the world suffers from growth policies that reward domestic elites at the cost of structurally weak domestic demand and excess savings.
But this comes at a cost to the US too. The dollar is widely used not because of US military power but rather in spite of it. Much of the world suffers from growth policies that reward domestic elites at the cost of structurally weak domestic demand and excess savings.
4/14
If they cannot resolve their domestic imbalances by running persistent trade surpluses and exporting the excess savings, they will be forced into politically difficult domestic adjustments and soaring unemployment.
If they cannot resolve their domestic imbalances by running persistent trade surpluses and exporting the excess savings, they will be forced into politically difficult domestic adjustments and soaring unemployment.
5/14
That is why the dollar is so widely used. The only way for countries to maintain large, persistent surpluses is to recycle them into foreign assets of countries willing and able to support persistent deficits.
That is why the dollar is so widely used. The only way for countries to maintain large, persistent surpluses is to recycle them into foreign assets of countries willing and able to support persistent deficits.
6/14
In practice this means acquiring assets either of developing countries, which are too risky, and in the best of cases too illiquid, or of the Anglophone economies, of the which the US is by far the deepest. There are no meaningful alternatives.
In practice this means acquiring assets either of developing countries, which are too risky, and in the best of cases too illiquid, or of the Anglophone economies, of the which the US is by far the deepest. There are no meaningful alternatives.
7/14
But this means that the large, persistent deficits the US must run, which comprise nearly half of global deficits, force US producers, workers, farmers and businesses to pay a substantial economic cost.
carnegieendowment.org/chinafinancialmarkets/78496
But this means that the large, persistent deficits the US must run, which comprise nearly half of global deficits, force US producers, workers, farmers and businesses to pay a substantial economic cost.
carnegieendowment.org/chinafinancialmarkets/78496
8/14
This cost takes the form mainly of higher unemployment, rising debt, and a relative contraction in the US share of global manufacturing. This is what the US must pay for its global financial monopoly. itif.org/publications/2012/03/19/worse-great-depression-what-experts-are-missing-about-american-manuf...
This cost takes the form mainly of higher unemployment, rising debt, and a relative contraction in the US share of global manufacturing. This is what the US must pay for its global financial monopoly. itif.org/publications/2012/03/19/worse-great-depression-what-experts-are-missing-about-american-manuf...
9/14
So why does the US continue encouraging a global trade and capital regime that imposes such substantial economic costs? Because there are two powerful constituencies that benefit.
So why does the US continue encouraging a global trade and capital regime that imposes such substantial economic costs? Because there are two powerful constituencies that benefit.
10/14
First, and most obviously, is Wall Street and owners of movable capital.
Second, because dollar domination, as Stevenson points out, is such an incredibly effective geopolitical weapon, is the US foreign affairs and defense establishments.
First, and most obviously, is Wall Street and owners of movable capital.
Second, because dollar domination, as Stevenson points out, is such an incredibly effective geopolitical weapon, is the US foreign affairs and defense establishments.
11/14
Stevenson suggests that a widespread perception that the US is abusing its financial power will hasten the day when the financial power of the US will recede, just as it did for the UK, and for some of the same reasons.
Stevenson suggests that a widespread perception that the US is abusing its financial power will hasten the day when the financial power of the US will recede, just as it did for the UK, and for some of the same reasons.
12/14
I, however, am skeptical. The countries most eager to see the end of US financial power are also countries that for the most part are structurally unable to give up their persistent surpluses without substantial reform of their economies.
I, however, am skeptical. The countries most eager to see the end of US financial power are also countries that for the most part are structurally unable to give up their persistent surpluses without substantial reform of their economies.
13/14
This reform inevitably also requires significant redistribution of political power to workers and ordinary households. It is unlikely that the opposition by these countries to US financial power will exceed their opposition to this kind of domestic political reform.
This reform inevitably also requires significant redistribution of political power to workers and ordinary households. It is unlikely that the opposition by these countries to US financial power will exceed their opposition to this kind of domestic political reform.
14/14
In the end I expect that once the costs are too high, the US itself will force adjustment to a new regime, either by redesigning a new global system that allows it to retain some of its power, or by opting out.
Either way, the sooner, the better.
carnegieendowment.org/chinafinancialmarkets/79641
In the end I expect that once the costs are too high, the US itself will force adjustment to a new regime, either by redesigning a new global system that allows it to retain some of its power, or by opting out.
Either way, the sooner, the better.
carnegieendowment.org/chinafinancialmarkets/79641
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Jeff Booth @JeffBooth
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Mar 17, 2022
This is a great thread by @michaelxpettis describing the current monetary system, with its benefits and damages to different power structures. While not explicitly stating it, the post also highlights the emergence of #Bitcoin in allowing the US and world to transition systems.