Thread by @michaelxpettis

1/14
Barry Eichengreen warns, correctly, that "The dollar’s international primacy isn’t eternal. To be sustained, it has to be actively fostered and preserved."

But why sustain the dollar’s international primacy? Is this merely a modern monetary fetish?
wsj.com/finance/curren…

2/14
While the primacy of the dollar is certainly good for bankers, financiers, and very wealthy owners of movable capital, what's much less obvious is the extent to which it benefits or harms American workers, manufacturers and middle class households.

3/14
Some analysts will argue that being able to transact in dollars benefits American exporters and importers by reducing currency hedging costs, but the more honest ones will acknowledge that the benefits are tiny, at best, and that their lack doesn't seem to hamper rivals.

4/14
More importantly, USD primacy doesn't just mean that American businesses transact in dollars, something which occurs anyway in most very large economies. It means that the US dollar dominates International trade and capital flows in a way never before seen in history.

5/14
It means that when a Belgian company sells chemicals to Argentina, it does so in dollars, and when Argentina pays for these by selling soybeans to China, it does so in dollars. It also means that developing countries borrow mostly in dollars (even though they would be...

6/14
much better off diversifying away from the volatility associated with borrowing in one currency).

But while these transactions may benefit American banks, it is hard to see how American workers, manufacturers or middle-class households benefit at all from any of this.

7/14
What's missed in this fetishization of USD primacy are the costs. In order to maintain USD primacy, the US must, among other policies, maintain a completely open capital account in a global trading regime in which many of its most important trade partners and rivals...

8/14
restrict their capital accounts, manage their currencies, and intervene in trade.

We live, in other words, in a world in which countries have chosen radically different positions in the tradeoff between economic sovereignty and global integration.

9/14
But every country's external and internal imbalances must be consistent, and every country's external imbalance must be consistent with the external imbalances of its trade partners. This means that the domestic economies of countries that have chosen...

10/14
more global integration (like the US) must accommodate the industrial policies of countries that have chosen more economic sovereignty. Dollar primacy is part of a system that requires that the US economy accommodate external imbalances.
carnegieendowment.org/china-financia…

11/14
Is it worth the cost? In 1925, England returned to pre-War gold parity because of an almost mystical belief in gold parity. This return was aggressively supported by London bankers, eager to restore national pride and the prestige of London's financial sector.

12/14
But it came at a huge cost to British manufacturing and mining, including high unemployment and falling wages. Keynes criticized England's willingness to subordinate its economy to the needs of its financial sector as being based on little more than a kind of gold "fetish".

13/14
Many Americans today are equally willing to subordinate the needs of the economy to USD primacy (which also includes sanctioning capacity and a little bit of dubious national pride), but this too may involve little more than a near-mystical commitment to a monetary fetish.

14/14
I'd argue that the purpose of US monetary policy should be to support growth and reduce fragility in the domestic economy. The role of the US dollar in the global trade and capital regime should just be a residual that reflects the health of the US economy.