The dollar dominance

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This post originally appeared on ZeMing M. Gao’s website, and we republished with permission from the author. Read the full piece here.

Contrary to what most people think, the dollar dominance in the long term is not good for the U.S. as a nation and the American people as a whole.

First of all, the dollar dominance does not benefit the U.S. evenly. It mostly benefits the financial sector at the expense of industries, especially manufacturing.

A stable world reserve currency does benefit the world overall because global commerce depends on it. But as the host country of the world reserve currency, the U.S. enjoys an immediate benefit but carries a large burden in the long term.

While the immediate benefit is obvious and well-known, the long-term burden is not.

The truth is it is the dollar dominance that gives the U.S. superior purchase power and the ability to tolerate persistent trade deficits, which in turn enable other nations, such as China, to maintain a trade surplus against the U.S. In an ideal global commerce with equal trading partners, such imbalance simply cannot last very long, by which I mean a few years or within a decade. But in the real world in which we live, the unbalance has been sustained for over three decades and is likely to continue indefinitely.

Why? Because the Dollar (behind which the entire U.S. economy, military, and government) bears the burden of globalization, something that the U.S. voluntarily took upon itself after the World War II.

In other words, it is an inevitable trade-off (in fact, a responsibility) of the U.S. dollar dominance that the U.S. must run persistent and large trade deficits. While nations like China, Japan, and Germany export manufactured goods to the U.S., the U.S. exports the Dollar to the world.

The consequences of doing that are very clear: while the finance sector reaps huge benefits, the U.S. industries, especially manufacturing, suffer spoilage and become weaker and weaker.

Most people do understand the trade-deficit problem but mistakenly think it is merely a consequence of some wrong national policies of the U.S. government. It is not. The phenomenon is an inevitable consequence of the U.S. dollar dominance, which most Americans think is a great thing.

In most immediate cases, it really is a good thing for Americans. It is a privilege owned by the American power earned and accumulated in the past. But it is also an effective device to ‘consume’ that privilege by gradually destroying American industrial strength.

And without industrial strength, there would be no power.

The world has an interesting way of automatically balancing itself to achieve equilibrium.

But there’s a greater harm beyond the straight economics. There is also human psychology. The dollar dominance spoils the nation and makes it weaker. It induces both the government and the people to do stupid and selfish things.

For example, it makes it easier for the U.S. government to create money out of thin air. Every sovereign nation does it, but it is particularly easier for the U.S. government to do it, thanks to the dollar dominance. For all new money that the U.S. government creates, almost three-quarters of the inflationary burden is actually borne by the rest of the world, not the U.S. That sounds great to the U.S. But wait until the privilege has been spent.

In addition, it gives Americans superior consumer power to enjoy cheaply made goods without producing them. It is an addiction that weakens the nation and the people. It is what addiction does. More broadly, it is also what unearned benefit often does.

Consider two nations, one produces stuff, and the other consumes stuff. The trade between the two nations will be inevitably unbalanced, with one running a surplus while the other a deficit.

Which one enjoys a good life now? We may all agree it is the second nation.

But which one is doing better as an economy? Economists will tell you it is also the second because it shows higher GDP. Right?

I tell you with certainty that’s a wrong answer. Despite the apparent GDP gains of the second nation due to consumption (which is always counted toward GDP), the above first nation is doing better than the second as an economy because it is a more productive economy, and being productive has long-term implications.

But the further question to ask is, which nation will eventually become the master? I think it should be obvious to everyone.

These things don’t happen abruptly. There is a long transition period. The transition may take decades because the system relies on the stability of the status quo.

But the slow transition only masks the problem and makes it even harder to avoid.

I wish U.S. dollar dominance a slow and nonviolent death, slow enough not to cause too much immediate hardship for Americans yet serious and obvious enough to wake people up from the addiction that kills.

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