Kimstu - Short answer: Immensely plausible to this non-economist. However, I feel the only way to judge the theory is to consider the possible/probable consequences. Fwiw, I did a while back and it still looked good to me.
Longer answer: Utterly fascinating issue. In some ways the myriad of ways the US has manipulated international commerce and capitalism thought the device of $US represents (at least to me) the last great wilderness. Fwiw, there have been several threads over the past year or so that tried to address this but none –save possibly one which I couldn’t locate – really got off the ground. I fear we just don’t have the necessary heavyweight economists to do the subject justice, save for Hawthorne who, if I recall accurately, surprised me with his scepticism for the theory.
Fwiw, I feel far more comfortable asserting that a key motivation behind the entire euro project was always to present the financial community with a means by which to challenge US economic hegemony, to, if you will, hold the $US accountable by offering a measure by which it’s actions and performance could be judged – indeed, I take some pleasure in the knowledge that, at the end, Saddam allegedly held 10% of his near $1 billion in cash in euros. If Europe is to successfully challenge the early 21st century Gold Standard, then dictators need to believe !
For those unfamiliar with what Kimstu is talking about, this provides appropriate context:
- The dollar is the de facto world reserve currency: the US currency accounts for approximately two thirds of all official exchange reserves. More than four-fifths of all foreign exchange transactions and half of all world exports are denominated in dollars. In addition, all IMF loans are denominated in dollars.
But the more dollars there are circulating outside the US, or invested by foreign owners in American assets, the more the rest of the world has had to provide the US with goods and services in exchange for these dollars. The dollars cost the US next to nothing to produce, so the fact that the world uses the currency in this way means that the US is importing vast quantities of goods and services virtually for free.*
- "Ever since 1971, when US president Richard Nixon took the dollar off the gold standard (at $35 per ounce) that had been agreed to at the Bretton Woods Conference at the end of World War II, the dollar has been a global monetary instrument that the United States, and only the United States, can produce by fiat. The dollar, now a fiat currency, is at a 16-year trade-weighted high despite record US current-account deficits and the status of the US as the leading debtor nation. The US national debt as of April 4 was $6.021 trillion against a gross domestic product (GDP) of $9 trillion.
"World trade is now a game in which the US produces dollars and the rest of the world produces things that dollars can buy. The world’s interlinked economies no longer trade to capture a comparative advantage; they compete in exports to capture needed dollars to service dollar-denominated foreign debts and to accumulate dollar reserves to sustain the exchange value of their domestic currencies. To prevent speculative and manipulative attacks on their currencies, the world’s central banks must acquire and hold dollar reserves in corresponding amounts to their currencies in circulation. The higher the market pressure to devalue a particular currency, the more dollar reserves its central bank must hold. This creates a built-in support for a strong dollar that in turn forces the world’s central banks to acquire and hold more dollar reserves, making it stronger. This phenomenon is known as dollar hegemony, which is created by the geopolitically constructed peculiarity that critical commodities, most notably oil, are denominated in dollars. Everyone accepts dollars because dollars can buy oil. The recycling of petro-dollars is the price the US has extracted from oil-producing countries for US tolerance of the oil-exporting cartel since 1973.
"By definition, dollar reserves must be invested in US assets, creating a capital-accounts surplus for the US economy. Even after a year of sharp correction, US stock valuation is still at a 25-year high and trading at a 56 percent premium compared with emerging markets.
“. . . The US capital-account surplus in turn finances the US trade deficit. Moreover, any asset, regardless of location, that is denominated in dollars is a US asset in essence. When oil is denominated in dollars through US state action and the dollar is a fiat currency, the US essentially owns the world’s oil for free. And the more the US prints greenbacks, the higher the price of US assets will rise. Thus a strong-dollar policy gives the US a double win.”
*
- It’s beautiful!
I’m actually uncomfortable with expressing any kind of view on the specific economics because I sense this subject is exceptionally complex. Having now the means to face down the $US seems to me to have huge significance, if not because the experts can figure out what would happen if the euro did replace the $US but because they can’t; we haven’t been there before and no one understands the full implications of effectively calling ‘Game up’ on the currency of the empire at the heart of worldwide capitalism.
It’s rather a big deal. More reading is required, I’m afraid!
I guess the conlusion I have to settle for until more conclusive information comes to light is whether it’s a strategic war to protect the supply and price of oil, or protect the $US as the currency for oil, it’s still (pretty much) all about oil.
Where are the economists when you need 'em !
Oddly enough, I was just reading an editorial in the business section of the Hindustan Times today discussing the US current account deficit situation, and whether the dollar slide might result in inflation, and whether the Fed would be willing to raise interest rates to squeeze inflation at the risk of slowing growth, etc. It ended with a recommendation for Indian investors and institutions to hold more forex in euros while waiting to see what happens to the US$ in 2004. Hmmmmmm.