The End of Dollar Hegemony

**Shek** · 25 Sep 07,, 19:51

Versus,

I had a hard time following your post since it had very large paragraphs that had multiple thoughts in them. If you wouldn't mind breaking up future posts, it would greatly help

You get some things right and some things wrong in the post. However, overall, it is off the mark.

For starters, the US was already an industrial power by WWI. The US came of age by 1898 and became a world player where it chose to. There were still large strains of unilateralists and isolationists (there is a large difference in thought between the two groups, but the end effect is what is typically labeled as isolationism), which meant that the US didn't get involved in European matters much, but the latent capability was already there. So, WWI didn't create the US as a world power - it already was but wasn't exercising its capability.

Next, while the US dollar as a monetary hegemon does help out the US economy, a hegemony by design due to the position of the economies at the end of WWII, in the end, this effect isn't the reason for the strength of the US economy. Fiat money requires the underlying economy of the currency in question to be strong. As a counterfactual thought experiment, if the Argentinian Peso were made the official reserve currency of the world today, would countries keep the Argentinian Peso on reserve? Would Argentina see a boom in their economy? If you aren't familiar with Argentinian fiscal policy, they like to monetize their debt by printing more money, resulting in severe inflation and hyperinflation, depending on the speed of the printing presses at their mints.

Additionally, the dollar didn't create the service sector. The invention of computers and the ability to manage information created the sector. As the innovator of information technology and the largest human capital base from which to choose workers, the US was in position to take advantage of it.

Next, the latest oil shocks are the first time that the US has allowed oil shocks to transmit through the economy. Frankly speaking, their impacts are far less than were experienced three decades ago and didn't even create a recession. So, current oil prices don't warrant the importance that you try to place on them.

Finally, international trade has nothing to do with the housing bubble. Speculative behavior due to low mortgage rates and poor risk decisions by mortgage companies (subprime) have created the bubble. Low rates allowed folks to afford more home and created an huge increase in demand. This led to speculative purchases by real estate investors and interest only loans that depended upon continued demand pressures to keep prices raising. Couple that with banks making risky loans, and you've got the bubble we are seeing.

The economy will adjust, but in the end, it is still the fundamentals that determine the growth of the US economy - natural resources, physical capital, human capital, technology, and labor. While there are warts in our education system, it is still a decent one (and high wages attract workers in those sectors that have a shortage of Americans). Our technology and innovation are still world class. We still have large amounts of physical capital, and our labor force is healthy and productive. Whether Iran decides to trade in dollars or euros doesn't change any of the real determinants of growth that I just laid out.

**Versus** · 25 Sep 07,, 20:57

Originally Posted by Shek

Versus,

I had a hard time following your post since it had very large paragraphs that had multiple thoughts in them. If you wouldn't mind breaking up future posts, it would greatly help

You get some things right and some things wrong in the post. However, overall, it is off the mark.

For starters, the US was already an industrial power by WWI. The US came of age by 1898 and became a world player where it chose to. There were still large strains of unilateralists and isolationists (there is a large difference in thought between the two groups, but the end effect is what is typically labeled as isolationism), which meant that the US didn't get involved in European matters much, but the latent capability was already there. So, WWI didn't create the US as a world power - it already was but wasn't exercising its capability.

Next, while the US dollar as a monetary hegemon does help out the US economy, a hegemony by design due to the position of the economies at the end of WWII, in the end, this effect isn't the reason for the strength of the US economy. Fiat money requires the underlying economy of the currency in question to be strong. As a counterfactual thought experiment, if the Argentinian Peso were made the official reserve currency of the world today, would countries keep the Argentinian Peso on reserve? Would Argentina see a boom in their economy? If you aren't familiar with Argentinian fiscal policy, they like to monetize their debt by printing more money, resulting in severe inflation and hyperinflation, depending on the speed of the printing presses at their mints.

Additionally, the dollar didn't create the service sector. The invention of computers and the ability to manage information created the sector. As the innovator of information technology and the largest human capital base from which to choose workers, the US was in position to take advantage of it.

Next, the latest oil shocks are the first time that the US has allowed oil shocks to transmit through the economy. Frankly speaking, their impacts are far less than were experienced three decades ago and didn't even create a recession. So, current oil prices don't warrant the importance that you try to place on them.

Finally, international trade has nothing to do with the housing bubble. Speculative behavior due to low mortgage rates and poor risk decisions by mortgage companies (subprime) have created the bubble. Low rates allowed folks to afford more home and created an huge increase in demand. This led to speculative purchases by real estate investors and interest only loans that depended upon continued demand pressures to keep prices raising. Couple that with banks making risky loans, and you've got the bubble we are seeing.

The economy will adjust, but in the end, it is still the fundamentals that determine the growth of the US economy - natural resources, physical capital, human capital, technology, and labor. While there are warts in our education system, it is still a decent one (and high wages attract workers in those sectors that have a shortage of Americans). Our technology and innovation are still world class. We still have large amounts of physical capital, and our labor force is healthy and productive. Whether Iran decides to trade in dollars or euros doesn't change any of the real determinants of growth that I just laid out.

Ah, I see...Damn, I was confusing and chaotic there.Sorry.
I'll be more careful from now on. I had economy class for only one semester, so my professional economy lingo sucks big time and English is not my native language so I apologize in advance for mistakes in my future posts. I'll try to fix that as soon as possible.

When I write, I tend to speak in general so when I say you for an example it doesn't mean that I'm addressing something to you directly, cause than it can be understood like I'm trying to underestimate other people wittings or opinions. Also the simplicity of my English when I try to describe something doesn't mean that I think that the people are dumb or something like that, I just want to make my wittings more clear. The more English I learn the more my posts will be more common to read.

When I was talking about service type of economy I had actually something else on my mind. It may or may not be true but I tend to divide the economy in three classes. Those three classes of the economy are based on something that I call "the main drive" of the economy and that can be: trade,production and services. Which means that the wealth can be generated trough one or all of those ways.

To put it simple, you can make money by either sell something, make something or offer someone your services or your professional know-how.

So when I was talking about US economy being mostly (another thing I forgot to add in my text) service based, I was thinking that the main generator for US wealth are services, like engineering, medical services,trade services,computer services, consulting and advisory services and things like that.

About Euro and US Dollar. Well if the oil trade is shifted to Euro, that would mean that the demand for US dollars will go down. Which than means that in order to buy oil US will have to buy Euros to pay for the oil. Which will than stress the US economy.

Real estate question.
I've placed that there as one of signs for the psychological effect on the Dollar value. I know that it doesn't have the direct effect on global economy but I think that it has indirect one in terms of shaking the credibility of overall US Economy. Simply it looks ugly when it is in the news.

**Trooth** · 25 Sep 07,, 23:44

A huge amount of interesting stuff to read. And i am sure i have missed important points.

The arguments that state that countries changing from Dollar to Euro as a trade currency will have little impact on the US seem to rarely discuss the probable (in that scenario) glut of dollars that would be present on the world market. China is rumoured to be holding large amounts of dollars (whether they be notes or deonominated bonds etc). If they decided to, if i put it crudely, sell dollars and by Euro the Dollar would drop substantially in value against the Euro (and presumably against the pound and yen et al).

This would make US exports more expensive and in all likelyhood reduce competitiveness of US companies against non-US competitors. In turn this would cause a drop in the amount of export earnings (in whatever currency) for the US.

Further should the oil producers move to Euros the US would be forced to buy more expensive Euros to buy the oil. This would lead to an increase demand for Euros. Other countries would also have to find Euros and since they would need less dollars to buy oil would in all likelyhood trade their $ for € .

The Fed would likely have to try and support the price of the Dollar which of course it can do by making dollar loans more attractive - by increasing its interest rates. However this would raise the cost of borrowing in the US which also would depress the economy.

Finally, if 60% of paper dollars are outside the US and they decreased enough in value that people didn't want them they would come back into circulation and the current hegemony ideal (for the US) of the maximum seigniorage would become the interest free loan that is mentioned. In other words, at the moment the economic trust refers to it as interest free loan at the moment, but without an external jar to the system this is be the full difference between cost of production of the notes and their face value."in perperturity".

Sorry, that last paragraph is confusing, but it is late.

I don't have any idea if this went through people's minds in the build up to the Iraq war, but i think there are economic impacts on the US of a large scale demand for Euros (or anything other than the dollar).

**Shek** · 26 Sep 07,, 02:46

Originally Posted by Trooth

The arguments that state that countries changing from Dollar to Euro as a trade currency will have little impact on the US seem to rarely discuss the probable (in that scenario) glut of dollars that would be present on the world market. China is rumoured to be holding large amounts of dollars (whether they be notes or deonominated bonds etc). If they decided to, if i put it crudely, sell dollars and by Euro the Dollar would drop substantially in value against the Euro (and presumably against the pound and yen et al).

This would make US exports more expensive and in all likelyhood reduce competitiveness of US companies against non-US competitors. In turn this would cause a drop in the amount of export earnings (in whatever currency) for the US.

Trooth,

The exact opposite would occur. Cheap dollars would make US exports look very attractive to foreigners if the value of the dollar decreased in FX markets.

As far as any Chinese decision to dump dollars, it would be a poor decision since their infusion of supply to the market would decrease the price they could get for them, and then they would turn around and increase the price of euros with their demand. This would have to be done over a long time period to unless their goal is to lose a lot of buying power.

Lastly, we're talking about nominal exchange rates, and in the end, it is real exchange rates that drive trade. Don't get me wrong, nominal exchange fluctuations can cause pain as markets adjust, but it still comes back to fundamentals.

**Shek** · 26 Sep 07,, 02:53