Must A Reserve Currency Explode The Trade Balance? No! Just Look! Also: Avoiding Slavery Is No Socialism!

Established economists say that Trump doesn’t understand the nature of the dollar: its status as world reserve currency causes a trade deficit for the USA. Really? It takes one look at one graph, while knowing the USA conspired to make the dollar official world currency in 1944. (And when the French Dominique Strauss Kahn tried otherwise, as head of IMF, he soon fell to a huge sex prosecution, out of which nothing came, except the destruction of his career. That would teach all those who, like DSK, pretend to follow the exact same idea Lord Keynes had in 1944… when Keynes chaired the Bretton Woods conference!) WTF? 

I have a Facebook friend who is a fanatical anti-Trump, she retweets anti-Trump material frequently. 2 days ago she put out 2 posts (retweeting from overseas oversea junk) which were deeply offensive. One extolled a woman cop killer; the young mom he had killed was unarmed; the other compared Trump to Hitler, and emanated from Germany, supporting whom I call Merkler (for her economic war against the Greeks and others… which has killed many).

My friend didn’t know her (French) jailbreaker hero was an unarmed-woman-officer killer (because my friend doesn’t know much about Europe). Neither did my friend, who has socialist pretentions, know Merkel was a fascist exploiter hiding under a “left” immigration policy (importing slaves to better exploit the working class). My friend took down both posts (and my smart comments, unfortunately!). We are still friends. Some of the political hysteria is just misunderstanding. For example, do conventional economists misunderstand what causes the deficit? If we can’t learn to live with (some) intolerance, we aren’t tolerant.

Another friend, an economist objected to my playing dumb in economic matters. I had asserted there was no connection between reserve status and deficit (contrarily to what self-declared “liberal” economists say). To the price of starting a squirmish with dropping a thermonuclear warhead on the opposition, here is the proof:

Those Who Brought You Reagan, Brought You the Trade Deficit. Economists of the Clinton-Obama persuasion say the dollar as reserve caused the deficit. This is obviously false: the dollar has been a reserve currency for about a century, and officially since 1944. However, there was no sizable deficit before Reagan. Reagan was a tool of global plutocrats, so the deficit exploded under him, right away. He was succeeded by G. Bush, who knew all too well where real power was an re-established the balance. But then came the stooges of plutocracy, and they let the deficit fly, as their masters told them to. The idea was to weaken American US unions, workers, and citizenry.

Eugen Roden wrote:

“Even if it is hard to believe, that you Patrice don’t understand how reserve currency will necessarily create deficit, I will do my best to explain to you and to your followers in a very easy way, why [the status of the dollar as] reserve currency necessarily creates deficit in US.

Reserve currency means,  that the currency is saved in other countries, than [the] country of its origin. It can be done by private corporations or public entities,  or even private individuals, who prefer to hold the reserve currency, as media of savings, because of the trust [they have] in it, compared to the local currency.  By doing so, they create demand for the money itself, as if it would be commodity or item of value by itself. And the truth is the reserve currency is an item of value, because of the trust people all over the world put in it. This trust is result of long history of reserve currency origin country’s military dominance,  democratic political system, free competitive market economy and unchallenged right for private property and wealth. China, even with its size of economy, (a bigger economy than that of US, not in nominal but real terms) doesn’t have a reserve currency, because it couldn’t create the trust in its sincerity in most of the above mentioned issues.  Europe succeeded only partly in making the Euro a reserve currency, because of its history of because of the world wars it initiated, and their economic consequences on Europe. Even 70 years of peace was not enough to create enough trust in Europe, to make from its currency a reserve currency comparable to US dollar, which has a history of continuous respect for the values mentioned above, since its declaration of independence.

The need for reserve currency exists,  to create trust in local currencies, based on these reserves. Just as in the past precious metal reserves, like gold or silver, made the currencies trustworthy, today holding of US dollars makes local currencies trustworthy.

But then if there is demand for reserve currency,  not as media of exchange, but as value holding item, its price, or exchange value will be influenced by this demand, without the question if exists enough additional production capacity to satisfy the value of potential demand that reserve currency promises. But then the relative prices in the country of origin of reserve currency,  have to be higher than in countries who accumulate the reserve currency, that has to create surplus in trade with reserve currency origin country, to be capable to accumulate these reserves. Such a surplus can be created only if the local currency value is undervalued compared to the reserve currency. Then the other side of this surplus has to be the deficit of the reserve currency origin country.”

***

Too Much Reserve Makes You Deficient?

The argument seems partially to be that, to create a store of dollars overseas, one needs to send said dollars there, to start with: a deficit. The graph of the deficit from the Federal Reserve which I put on top shows this is not correct: a continual flow of dollars is not needed to entertain a stash. A stash is a stash, it’s not a current.

OK, so we need X amount of dollars to create an overseas dollars stash. Say that stash is $10 trillion (a large overestimate). That’s 25 years at the present rate of deficit with China alone. And the stash existed before, it started before 1945. And also 4 trillion dollars of the stash is unpaid taxes by US corporations…

Moreover, consider, say, Argentina. It has a dollar stash. However the US has long exported cars to Argentina, so how did the stash develop? Through plutocratic mechanisms involving either tax cheating (laundered Argentine currency) or US plutocrats buying vast tracts of the country (also done in Chili).

In any case, the fact that the US dollar is considered reserve doesn’t mean one needs to have a deficit! And the fact is the US has been reserve since 1944 (after cheating Lord Keynes who didn’t want the $ as reserve, and headed Bretton Woods, but documents were switched!) There was no deficit for decades! And the fact is the massive deficit with China and Germany, or Ireland are recent. And the fact is, Germany has used its bankrupt small banks to self-finance its massive export machine, even within Europe…

And the fact is, the industrial core of the USA in the Middle West, got gutted, although it had a large educated population, and lots of fossil fuel energy. I say it got gutted precisely because it was educated (and thus a risk). Unions used to be hyper powerful in the USA, now they are near nothing…

Trade is good, exporting work, exporting ALL work, is bad… Yes, Merkler, 44% unemployment in Greece thanks to YOUR policies, was a terrible thing. Yes, the Greek government was an accomplice, an accomplice of you and your ilk. But We The People of Greece was innocent.

There are legal incentives to exporting job overseas, because corporate plutocrats told politicians to pass such friendly laws: watch how wealthy the Clintons are. And now the Bamas. Bahamas Bamas: a jungle rhythm. Main offenders in trade should be punished, until they cease and desist:

  • China/Hong Kong exported to the US 3 times as much as it imported from the US.
  • Japan exported to the US 2.2 times as much as it imported.
  • Germany exported to the US 2.2 times as much as it imported.
  • Ireland “exported” to the US 32 times as much as France, per capita, all of it being tax evasion by US corporations.

Notice that the French Republic should not save Merkler’s skin: whereas Europe didn’t have the muster to correct the exporting and exploiting ways of Merkler’s Germany, Trump does, and Southern Europe (that includes France, which is both northern and southern…) should enjoy the shooting down of the Merkler vulture by Trump, hopefully ending the austerity which has, and is destroying Europe (see Brexit).

***

Krugman, Smelling Blood In Global Plutocratic Waters, Turning “Socialist”?

Krugman blocked and banned my comments for years, presumably because they were “socialist” (what else? I supported Sanders, Krugman dined with the devils, including Obama and Clinton, and took systematically anti-“socialist” position). But now he is changing. Suddenly, “Radical Democrats Are Pretty Reasonable“, opines Paul.

A “Socialist” newcomer young woman defeated the fourth ranking democrat in Congress in New York.

Alexandria Ocasio-Cortez’s upset primary victory has produced a huge amount of punditry about the supposed radicalization of the Democratic party, how it’s going to hurt the party because her positions won’t sell in the Midwest… But I haven’t seen much about the substance of the policies she advocates, which on economics are mainly Medicare for All and a federal job guarantee.

So here’s what you should know: the policy ideas are definitely bold, and you can make some substantive arguments against them. But they aren’t crazy. By contrast, the ideas of Tea Party Republicans are crazy…

Ocasio-Cortez’s positions: Medicare for all is a deliberately ambiguous phrase, but in practice probably wouldn’t mean pushing everyone into a single-payer system. Instead, it would mean allowing individuals and employers to buy into Medicare – basically a big public option. That’s really not radical at all.”

***

A hefty minimum wage is not a question of having it more social, it’s a question of avoiding a slave society:

Medicare for all was proposed by yours truly, more than a decade ago: the idea is to open Medicare to all… As long as they pay the cost of insuring themselves. As Medicare is not for profit and is huge (economies of scale), it would be cheaper than ANY private health plan. So Medicare for All would quickly devour for profit healthcare gouging. My friend Obama meekly proposed it to his cabinet, which unanimously rejected it in favor of giving subsidies to healthcare billionaires, their sponsors (“Romneycare aka, Obamacare”).

Employment for all, as presently done in the USA is a good thing… Except if people work for free, in which case that’s called slavery. Thus, to avoid slavery, a hefty minimum wage insuring minimum living standards, in particular the capability of affording a home. In places like Oakland, California, or cities around, with all those jobs, a minimum one bedroom is $3,000 a month. That’s 36K a year. Cities around Oakland are instituting a minimum wage of $15. That boils down to 30K a year, working full-time, 2,000 hours a year: not enough to afford a roof! Thus college professors in San Jose have been observed, sleeping in cars….

$15 an hour is not socialism, it’s not even, a realistic minimum wage in the most booming part of the US. It is just an effort to avoid a slave society.

We are all socialist, just as we are all progressive. Just as we have to be somewhat conservative (to save the planet). The only question is how much. Not whether. 
Patrice Ayme

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16 Responses to “Must A Reserve Currency Explode The Trade Balance? No! Just Look! Also: Avoiding Slavery Is No Socialism!”

  1. Gloucon X Says:

    I agree with everything you said as I do most of the time. Here’s a better % of GDP chart gives a better look at pre-WW2 trade surpluses.

    • Patrice Ayme Says:

      Thanks Gloucon X, especially the appreciation part! 😉 And thanks for the link! I struggle to find good charts, I downloaded the one I used directly from the Fed myself…

  2. SDM Says:

    What about the petrodollar in all of this? Is it not the petrodollar that helps support the US dollar as a reserve currency? Curiously those who seek to abandon the petrodollar meet cruel fates.

    • pshakkottai Says:

      India is trying to trade with Iran using Rupees (basically barter) and USA objects vehemently. We shall see how it works out.
      Partha

      • Patrice Ayme Says:

        India better stays out of that. Modi should find better things to do, than to help an Islam Shia Fundamentalist regime. Differently from Saudi Arabia, where the dictatorship has excuses and heads in the right direction, Iran is just the opposite: no excuses and regression. Trump smells blood in the Iranian waters, just as he does with Merkler, and he is right…

        • pshakkottai Says:

          Hi Patrice: I agree with you on not helping Islam, a blight on civilization, but trade is in self interest (like any international friendships) and I can’t categorically deny trade with Islam! Oil is mostly found in Islamic countries to the bane of all nations including Islamic ones which keeps them backward.

          • Patrice Ayme Says:

            Yes, oil. However, the EU will have to follow the US in the crackdown on Iran. Whereas the west tacitly understands and approves of Indian nuclear weapons, Iranian nuclear weapons is a completely different thing (because of Islam, and Iran aggressive past, I mean from way back: around 600 CE Iran extended to the Med and all over Arabia… Didn’t last, but gave a fright to the Romans before a lightning counterattack… The whole mess precisely bringing the Islam monstrosity… Anyway, it’s the last day of oil… except if a breakthrough is made in recycling CO2 economically…

    • Patrice Ayme Says:

      Yes, when Saddam decided to trade in euros, he sealed his fate. I wrote about that plenty, and even before it happened… Nowadays, it’s more relaxed, and the leaders of Montenegro are doing fine…
      The dollar needs NO “HELP”. See what Partha said: the dollar is an oversea convenience. Also Wikipedia explains well what is going on: the $ acts as a supplementary currency. Also Eugen had a nice long comment involving “trust”, the one I quoted… Trust in the OVERWHELMING POWER of the US Armed Forces, that is… “Petrodollars” are mostly a fiction: profits get recycled in the USA and its dependencies (EU, etc…) ASAP… Thus the finances of Saudi Arabia are in a terrible state, and hence the muscular ways of effective ruler Muhammad bin Salman Al Saud in recovering said corruption…

      The deal between FDR and Abdulaziz Al Saud was: your oil against our dollars, recycled on Wall Street, the whole thing cemented by Wahhabism…
      https://patriceayme.wordpress.com/2015/01/29/great-bitter-lake/

  3. pshakkottai Says:

    “Bottom line: A reserve currency is just a convenience. It needn’t be an “official” reserve. The market naturally seeks a reserve just to make trading easier. In our ever-more computerized world, there very well may emerge a non-political currency – a currency of no specific nation.
    But whatever emerges, let’s not give it more significance that it deserves. It’s just a convenience.
    Rodger Malcolm Mitchell
    Monetary Sovereignty

    From https://mythfighter.com/?s=reserve+currency

    And deficit is basically what is required for growing an economy. It is not debt but created zero-cost money, a concept created for convenience, a book-keeping tool.

    Debt and money are the same. It is a transfer from one side to the other.

    A deficit is directly proportional to GDP for a nation that creates money.
    In fact you can show that

    GDP = govt spending + non-govt spending + net exports
    = (deficit – 0*tax) + K* (deficit – tax) + net export
    =5*deficit – 4* tax + net export, for K = 4, an empirical value for USA, probably the same for all money-creating nations (with shared deficits and shared political union, not Europe.)

    Increasing tax reduces GDP.

    For non-monetary sovereign states tax is income because there is nothing else. For them deficit is BAD.

    Partha

    • Patrice Ayme Says:

      Agreed. Your point, that the deficit grows the economy is very important (and not understood at all by some far right Republican extremists in the ISA…)

  4. EugenR Says:

    Trade deficit is just like having booze. While you are drinking you feel good, but next day, when you wake up, the hangover is unbearable. Other problem is that the surplus country is a drinking partner of the deficit country. Big parts of Chinese manufacturing capacity are export oriented. To stop drinking will be easy for either of them. More than that, reshifting whole economy needs fundamental changes and huge investments. It can’t be done overnight. If these changes will come in one day, in one moment, like Donald the Great wants to do it, to continue the metaphor, it is like to drive home after the booze in high speed, against the traffic. Can catastrophe be avoided in this situation?

    Luckily the trading partners of US, still don’t react, they rather try to speak to the crazy driver to stop the vehicle. But even so, there are other drivers on the road. Can anyone be sure that they will not panic?
    One of the panic can be in form of disapearance of US dollars value. It already happened twice in the last century. The US dollar lost more than half of its value against the D.Mark in seventies and once again in eighties. But then the US debt was still in its diaper phase.

    So what would happen with half trillion US dollar current trade deficit of US, if suddenly the dollar would be let say two dollars to one Euro? Or even better, if the Cinese RMB would become 3 RMB to one dollar insted of 6.5 today?
    Just imagine all the Made in China product prices would double. What a disaster for the American consumers society. And what a disaster for Chinese Manufacturers of export items.

    • Patrice Ayme Says:

      I think the situation is not as prior. It’s true the US tariffs in 1930 (“Smoot Hawley” Bill) launched a tit for tat and collapsed the world economy, causing the Great Depression. Right now, is different. The might of the USA is truly enormous, and the others won’t win a trade war, or a war war (although Chinese keep on firing lasers at US pilots over international waters). Moreover, US PLUTOCRATS produce in China. So it’s going to be Plutos getting punished, directly. Also the USA can go autonomous: and, moreover rumors of the death of NAFTA are exaggerated… The North Korean situation is still the most dangerous: if the N Koreans desist, and resist, it HAS to be war… Everything is tangled up.

  5. ianmillerblog Says:

    What puzzles me is why anyone would not expect a trade deficit if all jobs are exported to somewhere else, and thanks to the inequality, all your plutocrats accrete all the cash and invest somewhere else? How can it be anything else? Basic equilibria at work. Too much is flowing out, and if anything the reserve status is helping hide the problem.

    • Patrice Ayme Says:

      Indeed. And it’s all a very simple plot: one weakens the core, by making the citizens impotent, so the dictatorship can run unopposed. We are at the stage where the global Plutos started to push hard down on the Roman Republic… At that point annihilations wars were made against Numantia, Carthage, etc… They distracted the population, although some guessed: the Roman imperator destroying Carthage wept, and confided to his friend Polybius, the historian, that it would be some day the fate of his city, Rome…

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