This article is from WeChat official account:Zhibenshe (ID: zhibenshe0-1) , author: SD president, title figure from: vision China span> p>
Recently, the rhetoric of “selling foreign exchange against the hegemony of the dollar” has become popular again. Many supporters believe that selling foreign exchange and reducing holdings of U.S. debt can combat the arrogance of U.S. dollar hegemony. Of course, there are many opponents.
Does the dollar have hegemony? What is the root cause of the dollar expansion? Can you sell foreign exchange against the United States?
For everyone, foreign exchange is a relatively unfamiliar field. However, only by understanding foreign exchange can we truly understand the true power of a country, and we can also better understand the conflict between emerging countries and the United States. This article analyzes the “dollar hegemony” from the perspective of currency.
The logic of this article:
1. U.S. dollar hegemony and public goods
2. Selling foreign exchange and public expenses
3. World currency and free currency
1. U.S. dollar hegemony and public goods
All foreign currency assets held by a country can be called foreign exchange. Today, foreign exchange is mainly the US dollar, euro and US debt held by the state. The more popular a country’s currency is, the more reliable the country’s currency is. For now, the US dollar is still the largest international reserve currency, and many countries around the world reserve US dollars to issue currencies. In other words, the currencies of many countries are anchored by the credit of the U.S. dollar.
If the U.S. dollar is easing, the currencies of these countries must also follow the easing; if the U.S. dollar tightens, the currencies of these countries must also follow the tightening. It’s just that the strength of easing and tightening is different, otherwise it will easily trigger the risk of foreign exchange fluctuations. If the U.S. dollar collapses, it will surely affect the currencies of these countries.
The question is, does the dollar have hegemony?
Hegemonists believe that every easing of the US dollar floods the global market and collects luxury seigniorage; every time the US dollar tightens, it triggers debt crises and currency crises in emerging countries. This is the most popular saying, does it belong to dollar hegemony?
This is a statement that exaggerates nationalist sentiment. First of all, there is definitely a problem with the flood of US dollars. The specific problems are analyzed below. butYes, as I analyzed in “Emerging Countries Are on the Verge of Currency Crisis”, the root causes of the debt crisis in Latin America, the Asian financial crisis, the Russian crisis, the Turkish crisis, and the Venezuelan crisis lie in emerging countries whose currencies are over-issued. The government debt ratio exceeds that of the United States during the same period.
Whether the U.S. dollar has hegemony cannot be simply judged by this. We need to understand the nature of the dollar and its credit currency. Is the dollar a private item or a global public item?
If the U.S. dollar is a personal product and the Federal Reserve is a private bank for profit, then the easing and tightening of the U.S. dollar are normal market behaviors. Any individual, business, and government have the freedom to buy or sell U.S. dollars at any time. For example, you have just bought a new house from a certain real estate agent, and the second phase will open a month later. The supply scale has increased greatly, and the promotion is 20% off. At this time, you may feel angry or frustrated. You can continue to hold, sell, or blacklist the real estate agent, but you can’t regret it (except Outside the contract).
Many people support this view, believing that the status of the US dollar as the “world currency” is the result of competition in the international currency market. When the U.S. dollar expands, the foreign exchange on hand will depreciate, and you can continue to hold it, or you can sell it, and you can also give up buying the U.S. dollar forever.
During the Latin American debt crisis in 1982, Latin American countries generally adopted a fixed exchange rate pegged to the U.S. dollar while borrowing a large amount of U.S. debt. The dollar appreciates and the crisis breaks out. Is the pot American? This is like your car actively hooks a sports car, and the sports car accelerates and bursts your car. Is the sports car responsible?
Today, global foreign exchange has basically achieved marketization, and the status of the U.S. dollar is the result of competition in the international currency market. This is part of the marketization of the U.S. dollar, but the U.S. dollar is not entirely a product of marketization. Because the U.S. dollar is not a private item, but a public item, a global public item. The Federal Reserve is not a private bank, but a public institution composed of private shareholders.
Previous metal currencies and commodity currencies, such as gold, silver, shells, salt, and stone coins, were the result of free market competition. However, credit currency is a public contract determined by the collective will of the country. Credit currency is legal tender and has legal compensation. In the face of fiat currency, traders have no free choice. Renminbi must be used for transactions in China, and U.S. dollars must be used in the United States. If you want to travel or invest in the U.S., you have to buy U.S. dollars, but there is no other way. The state has a monopoly on violence and currency. We cannot say that the outcome of a war is the result of free market competitionIn the same way, we cannot say that the status of currency is the result of free market competition.
This is like a few state-owned enterprises, which do not aim at making profit, but are responsible for the financial losses, selling products at low prices, and defeating all private enterprises in the market. We cannot say that this is an act of free competition, it is a government act, and it represents the will of the country.
Therefore, the U.S. dollar and the legal currency of any country have public attributes and are the core of national credit. The act of expanding or contracting the U.S. dollar is not only a market behavior, but also a national public behavior.
Let’s look at whether the dollar has hegemony?
Hegemony is an unjust act based on manipulation. In the free market, price cuts, price hikes, production capacity reductions, and supply increases are all justified. However, at the national level, the legitimacy of behavior is not easy to discern.
For example, in the 1960s, when the U.S. dollar depreciated, the French government dumped the U.S. dollar, and the U.S. government threatened to reduce European defense funding. Is the United States unjust, or is France unjust? On the surface, the US government threatened with military power to force the French government to hold U.S. dollars. This is a bullying behavior. However, the monetary system at that time was the Bretton Woods system. The United States, France, and major member states agreed to jointly maintain a fixed price ratio between the U.S. dollar and gold. The French government’s initiative to sell the U.S. dollar was the first breach of contract.
From the perspective of economics, externality is the criterion for judging the legitimacy of behavior. If an individual’s behavior leads to externalities and causes losses to others, such as factory production that pollutes farmers’ farmland, then such behavior is unjustified. If a country’s military actions invade and occupy the territory of another country, this behavior is an act of unjust bullying.
However, the behavior of the U.S. dollar is much more complicated than military behavior. Take the Latin American debt crisis as an example. In 1982, Fed Chairman Volcker raised the US dollar interest rate substantially, which triggered the Latin American debt crisis. Is this dollar hegemony? It is difficult to judge from the perspective of motivation. The Fed’s primary task at the time was to control inflation. It is generally believed that Volcker’s motive for substantially raising interest rates is to curb domestic inflation, not to attack Latin American countries. However, at that time, some American economists, such as Mundell, expected that the US dollar interest rate would rise, and Latin American countries would be in danger, and international capital would return to the United States one after another. The budget department led by Stockman of the Federal Ministry of Finance also established a forecasting model. In other words, it cannot be ruled out that the Fed has the motive to explode Latin America and promote the return of funds.
If Mundell and Volcker’s motive was not to attack Latin American countries, but to “get it right”, then in countless dollar easing-austerity actions since then, the Fed has become familiar with it. In recent decades, every time the US dollar is loose, floods flood the global market. Somewhat newCountries are more motivated to expand their currencies than the Federal Reserve, but major countries have no choice but to follow. Whenever the U.S. dollar tightens, some emerging countries have repeated debt crises and currency crises. The Fed is quite familiar with this path.
As mentioned above, the main problem is still in emerging countries, but does the Federal Reserve have such motives: to blow up the debts of emerging countries, prompt the return of the dollar, and accelerate the domestic economic recovery. This cannot be judged. If it is necessary to say that it is the hegemony of the US dollar, it can only be said to be a conspiracy, not a conspiracy.
Therefore, from the perspective of the free market, the dollar does not have the so-called hegemony, at best, it is “abuse of market dominance.” However, the U.S. dollar is not a private item, it is a public item. The actions of the Fed are national actions. In the era of globalization, national sovereignty is weakened, and national behavior is constrained by the international market. Conversely, excessive state behavior may trigger state conflicts. For example, the U.S. government unilaterally raised tariffs during the Great Depression and announced the decoupling of the U.S. dollar from gold in 1971. These actions will have an impact on other countries.
So, can you sell foreign exchange to fight the Fed’s “state behavior”?
2. Selling foreign exchange and public expenses
Today’s economic globalization, trade and finance are going global, while the legal currency is still nationalized. This is prone to conflicts between responsibilities and rights. The coinage of the US dollar affects the global market, but the Fed does not need to be responsible for the global market, but only for American citizens. Many people criticize the Fed for being irresponsible, only considering inflation, employment, and financial stability in the United States to release or deflate, regardless of the turbulent international market.
However, it is not enough to just look at the disparity between rights and responsibilities, but also to look at profit. Is the U.S. dollar a public good or a global public good, and the Fed does not make a profit in U.S. dollars. The question is, who will bear the public expenses in US dollars?
In the era of the gold standard, the cost of money is real money. The Peel Regulations of 1844 stipulated that the Bank of England issuing department must hold 14 million pounds of securities and precious metals before issuing equivalent bank notes. Today’s credit currency is not “a piece of paper money.” Supporting credit currency requires a lot of expenses, which are public expenses. If the public expenses are insufficient, even the legal currency will depreciate. Where does the public cost of fiat currency come from?
The public expenses of the legal currency shall be borne by the taxpayers of the country. In a closed country, the central bank only needs to find the country’s most reliable assets as collateral to issue currency. This is an exchange relationship, taxpayers don’t need to pay too muchcost. At the same time, once the currency of any country is converted into capital, it can bring income-commercial banks issue credit to obtain interest income. However, the capital income of private commercial banks belongs to private income, and only the taxed part belongs to public income.
In the era of globalization, currencies of various countries compete with each other, and central banks of various countries are seeking better assets to enhance the credit of their currencies. High-quality assets require public expenses.
In some emerging countries, the local currency is issued with U.S. dollars as assets. Where does the dollar come from? Either it comes from exporting foreign exchange, or it comes from the government’s external borrowing. Foreign exchange is the wealth created by taxpayers, and the government’s foreign debt is ultimately paid by taxpayers. If the foreign exchange is insufficient, or the country does not have reliable credit assets, the local currency will depreciate.
There is not much dispute about how taxpayers pay for their country’s fiat currency. If a large amount of domestic legal currency is used in the international market, local people will have to pay a lot of public expenses for this, which will easily lead to conflicts. This is the case with the US dollar.
International trade, investment and financing, and foreign exchange reserves all use a large amount of U.S. dollars. In 2020, the U.S. dollar will account for 87% of international trade payments and about 60% of the foreign exchange reserves of all countries in the world. The US dollar is the world dollar, but who will bear the cost of the US dollar?
The credit assets of the U.S. dollar are mainly U.S. Treasury bonds. A large amount of national debt can build a strong armament for the United States, and can also provide more benefits to low-income families, but ultimately the US taxpayers will pay for it. The more U.S. dollars needed in the international market, the U.S. government must issue more Treasury bonds, and taxpayers will have to bear more U.S. dollars. Will the Americans?
Many people find it strange that the U.S. dollar has brought so many benefits to Americans. Why are they still dissatisfied? Is the United States willing to make the US dollar a “world currency”? Of course I do. Is China willing to make the renminbi a “world currency”? Very eager. why?
Because once it becomes the “world currency”, commercial banks can extend loans to the world and obtain large-scale capital income. In fact, U.S. commercial banks make a lot of profits by “exporting” U.S. dollars. This is equivalent to the gain of capitalization in USD (belonging to private income, not public income).
However, most people’s ambitions don’t stop there. World currency means “you can buy the whole world by printing money”. This is an extremely simple and dangerous truth. Every country wants to collect seigniorage around the world, but they don’t want to give Lei Feng a job in the international market.
The essence of global seigniorage is to spread the “world currencyThe United States tends to expand the U.S. dollar and let the world share the U.S. dollar’s public costs. Why is the expansion of the U.S. dollar equivalent to sharing the U.S. dollar’s public costs? The first is to “export” the U.S. dollar, and the expanded U.S. dollar can be bought globally More assets; second, the depreciation of the U.S. dollar is equivalent to diluting the foreign exchange wealth of other countries; third, the decline in the U.S. dollar interest rate can reduce the interest cost of U.S. debt. Now emerging countries hold large-scale U.S. debt, the interest of U.S. debt Very low, which is equivalent to a large amount of public expenses in U.S. dollars allocated to these emerging countries.
The issue of the US dollar is not a matter of hegemony, but a matter of the cost of global public goods. This question is defined as the “New Kindleberger Trap” in “The Illusion of Great Power Conflict”. Essentially, this is a conflict between economic globalization and legal currency nationalization.
There has been no rational solution to the cost of the U.S. dollar as a global public item. This caused the world to fall into a “prisoner’s dilemma”. The Fed tends to expand the U.S. dollar, reduce the debt burden, and share the U.S. dollar expenses. However, doing so is equivalent to an overdraft of the dollar’s credit. As the US dollar expands, government debt also expands. On the contrary, the scale of the US debt is larger and its currency credit is weaker. Emerging countries tend to be opportunistic and unwilling to bear the cost of the dollar, but they have repeatedly suffered from flooding. Emerging countries are trying to get rid of the “curse” of the dollar, but they are unable to get rid of it. In order to stabilize the position of the U.S. dollar, the Fed is happy to see the emergence of crises in emerging countries when the U.S. dollar tightens. This is a direction towards “lose-lose”.
At this time, the issue of dollar fees can easily be interpreted as an issue of dollar hegemony. If the US dollar is sold to hit the United States, this is equivalent to the “new Kindleberger trap” evolving into a “prisoner’s dilemma” and then a national conflict.
Selling of US dollars can be divided into market behavior, national game, and national conflict according to different purposes and degrees. When the U.S. dollar is loose, the central banks of emerging countries appropriately reduce their holdings of U.S. dollars in consideration of the risk of depreciation of the U.S. dollar to stabilize foreign exchange investment returns. This is the result of competition in the international currency market, just as Wall Street financial institutions short the U.S. dollar. According to this logic, the current US dollar liquidity is approaching an inflection point, and now is the time to increase US dollar holdings. If it is a national act, it is understandable to sell the US dollar to play games with the US, and to put some pressure on the Federal Reserve not to allow the US dollar to depreciate excessively. In fact, every time the U.S. dollar enters the easing cycle, the U.S. dollar’s share of international foreign exchange reserves will drop. This is the result of market competition and national game.
However, if the US dollar is sold strategically and on a large scale, it will easily lead to national conflicts. This is equivalent to a financial war. This is like a country’s prohibition on purchasing agricultural products from another country, which can easily trigger a trade war. Russia has done this before. Crimea 2014After the crisis broke out, the U.S. and Europe imposed economic sanctions on Russia, and Russia dumped U.S. dollars in retaliation. Russia does not have much foreign exchange reserves, economic sanctions, the price of oil has fallen, and oil earns less foreign exchange. Russia simply dumped US dollars. As a result of the US dollar sell-off, the ruble crisis broke out. The ruble lost a sufficiently stable credit anchor and the foreign exchange price depreciated sharply. Emerging countries’ strategic and large-scale de-dollarization must be prepared for a national conflict with the United States, just like the struggle between the United States and Russia.
What should I do?
3. World currency and free currency
Nowadays, the use and circulation of foreign exchange determine the pattern of globalized interests and national relations.
First, there is the issue of the right to use foreign exchange. If it is a foreign exchange settlement system, the state holds foreign exchange instead of private foreign exchange, then the use of foreign exchange is a state act. The country’s strategic and large-scale foreign exchange sales are equivalent to launching a financial war against the United States.
At this time, policymakers need to use foreign exchange rights with caution. How to use foreign exchange affects national relations and even the global economic structure. If most of the US dollar foreign exchange is used to purchase US Treasury bonds, then a large amount of US dollars will flow back to the US financial market, stimulating the prosperity of the bond market and stock market. This is what American Wall Street giants, multinational companies and establishments are willing to see. If the Fed expands the U.S. dollar, multinational companies hold more cheap U.S. dollars to invest in emerging countries, more goods are exported to the United States, and emerging countries have more foreign exchange to continue to buy treasury bonds. Wall Street giants and multinational companies did not bear the cost of dollar expansion, but instead got the benefits of “Dragon King’s precise rainfall.” Therefore, they support Biden to continue to maintain this global interest chain of dollar return.
However, this global interest chain is unbalanced. A large amount of foreign exchange has purchased U.S. Treasury bonds and a small amount of foreign exchange has purchased U.S. commodities. This has led to imbalances in the current accounts of the two countries, a long-term deficit in the United States, and a long-term surplus in emerging countries. At the same time, domestic manufacturing companies and workers in the United States did not enjoy the benefits of the U.S. dollar as the “world currency”, but instead mainly assumed the public costs of dollar expansion.
If most of the U.S. dollar foreign exchange is used to buy U.S. goods, U.S. exports will increase substantially, and manufacturing and agriculture will flourish. This is what American manufacturers, workers, farmers and middle-class families are willing to see. Therefore, they support Trump to break the original US dollar interest chain and increase US dollar foreign exchange purchases of domestically manufactured goods and agricultural products.
Therefore, when the right to use foreign exchange belongs to the country, the use of foreign exchange becomes a national behavior. Excessive use of foreign exchange is similar to selling foreign exchange.Governance. The most rational choice is to avoid raising this to the level of national conflict.
So, what should I do?
Human society has explored two ways to resolve conflicts: The first is the state system of collective action; the second is the free market of spontaneous order.
Compared with individuals, tribes, and city-states, the state system is a more efficient and civilized existence. The greatest invention of the state system is the creation of public power. The state monopolizes violence through public power, which replaces the proliferation of private wars, and eliminates the world of “retribution”. However, when the state monopolizes violence, taxation, currency, and everything else, the state is another existence of terror. After the disappearance of private wars, the state’s public rights invaded private rights internally, collected tax rents and seigniorage, and launched wars externally.
In modern society, the free market of spontaneous order is an important way to suppress or eliminate national wars. The logic of spontaneous order is to let more power and resources return to the individual, and let the individual play, create, produce, and trade. More resources and individuals enter the international market to freely compete, which is more conducive to peace and stability between countries. In countries where foreign exchange is denationalized, foreign exchange is freely controlled by the market. It is up to every market entity to buy US treasury bonds, real estate, stocks, agricultural products, commodities, and services, or buy Argentine beef, French wine, or Italian stones. decided. Even if the United States still has a trade deficit, since everyone’s free choice is justified, it will not trigger the risk of conflicts in state behavior.
Generally, the marketization and liberalization of foreign exchange can curb current account imbalances. If the price of American cars drops, it will attract more people to import American cars. This is where the price mechanism works. Some families are willing to import high-quality milk powder and medicines. This is where the supply mechanism works. At the same time, floating foreign exchange can also curb domestic currency oversupply and inflation. This is Friedman’s theory of floating exchange rate and monetary policy independence.
Of course, the rival to Friedman is Mundell, who advocates fixed exchange rates and world currencies. For this reason, the two had a wonderful debate. Mundell advocates a fixed exchange rate, which seems to be affected by the gold standard. He believes that exchange rate stability is essential. According to his impossible triangle theory, if you insist on a fixed exchange rate, you must choose between the independence of monetary policy and the free circulation of capital. If the free circulation of capital is chosen, the main function of monetary policy is to serve the equilibrium of the external market, that is, to maintain a fixed exchange rate. This is like the fiat currencies of the world are bundled together, similar to the Bretton Woods system. Following this line of thinking, it is natural to deduce the world currency. Therefore, Mundell’s currency proposition is a supranational concept-world currency. The theory that supports the world currency isHe proposed the optimal currency area theory in 1961. This theory eventually led to the world’s first regional currency-the euro.
The optimal currency area of Mundell is an important way to solve the public cost problem of world currencies. As mentioned above, we raised the issue of public expenses in U.S. dollars. Mundell’s idea is to “solve” the US dollar and turn all legal currencies into one or more regional currencies, and everyone will pay for it together.
However, Mundell’s “super-national concept” world currency is not about denationalization, but looking for a larger “country.” The European Union is this larger “country”. Mundell’s monetary proposition continues the thinking of state power, relying on a stronger central bank. However, what matches the supranational central bank is the supranational central finance. The weakening of the central finance is the main problem of the current euro. I believe that integration is inevitable, but the key force of integration is not a centralized state organization or a supranational organization.
According to the Mundell Impossible Triangle, under a fixed exchange rate, if the independence of monetary policy is chosen, it means the implementation of capital controls. This, on the contrary, has strengthened the control of the financial market by national forces. Financial control is equivalent to building a financial wall, and large-scale foreign exchange has built a sufficiently wide moat on the surface. However, the safety of this kind of control is a greater danger. The currency oversupply brought about by foreign exchange funds has triggered asset bubbles and formed a terrible “block lake”. Asset bubbles have allowed individuals to stand under the dangerous wall of high bubbles and high debts, and have also given birth to illusory national sentiments.
Therefore, the “world currency” and financial control under a fixed exchange rate all have the uncertainty of resorting to the power system. I am not opposed to and support excellent state governors or global village chiefs. What I really oppose is the intervention of ignorant or excellent governors on market supply and prices. The direction of the evolution of the monetary system is exactly the opposite of Mundell’s proposition, that is, marketization and liberalization.
The shallow level of marketization is interest rate liberalization and exchange rate liberalization. Let more currency minting rights be delegated to the market and return to the legitimacy of free trading and competition. In an open economy, the exchange rate is floating and capital can flow in and out freely, so domestic assets, such as stocks and treasury bonds, are priced by the international market. Such high-quality assets are relatively reliable and can be used as credit assets in the national currency. In this way, the government of an open country does not need to reserve huge amounts of foreign exchange.
In-depth marketization is the marketization of money supply and the de-publicization of currency attributes. Going back to the topic of U.S. dollar hegemony, the reason why people believe or suspect U.S. dollar hegemony is because the U.S. dollar is not a private item but a public item.behavior. The best way to solve this problem is for the Federal Reserve to delegate currency issuance power to commercial banks. Commercial banks use land, real estate, stocks, and treasury bonds as collateral to provide external loans, and then exchange reliable assets such as treasury bonds to the central bank for an equivalent “certificate of indebtedness” to issue currency. The Federal Reserve is responsible for formulating the currency issuance system and financial supervision, and commercial banks are responsible for supplying currency, allowing the credit market and foreign exchange market to determine the price of currency.
The public expense of the U.S. dollar as the world currency has also been resolved. The central bank cannot be a for-profit department, but the commercial bank is a profitable department that specializes in money and credit. Commercial banks have earned all the proceeds from currency conversion into capital, and should be the real bearers of currency expenses. Commercial banks weigh costs, profits, and risks in free competition, and manage currency credit.
In this way, the Fed has no power to expand the currency, nor does it have the motivation to exercise the hegemony of the dollar. This is the fundamental logic to solve the so-called “dollar hegemony”. The liberalization of legal currency is not enough. It is necessary to break the monopoly of legal currency and allow private currency to compete with and be regulated on an equal footing. This currency system, I call it free currency.
However, the monetization of the global economy, the politicization of currency debt, and the politicization of debt are the crux of the problem.
This article is from WeChat official account:Zhibenshe (ID: zhibenshe0-1) , author: SD president span> p>