Calling all economists. I need your help.

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cassowary
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Calling all economists. I need your help.

Post by cassowary » Sun Oct 07, 2018 9:26 pm

https://www.wsj.com/articles/to-bring-back-u-s-manufacturing-get-the-world-to-dump-the-dollar-1538950979 wrote:To bring back US Manufacturing, Get the World to Dump the Dollar
Donald Trump promised to “make America great again,” but he might make America Great Britain. To re-industrialize the U.S. economy, President Trump must avoid the mistake that de-industrialized Britain: namely, he must end the dollar’s role as the world’s chief reserve currency.

A century ago when Britain began to lose its place as the world’s leading power, it was suffering economic maladies today’s Americans will find familiar: declining exports, large government deficits, and a huge amount of foreign debt. The British pound’s role as the world’s chief reserve currency was a major driver of this economic decline.

John Maynard Keynes promoted the British pound’s use as the world’s reserve currency, writing in 1913 that replacing gold with foreign-exchange reserves was a step toward “the ideal currency of the future.” But it didn’t take long for the markets to prove that currency reserves are not a foolproof form of savings. The monetary system Keynes recommended was established throughout Europe after a 1922 conference in Genoa, but it collapsed in 1931 at the onset of the Depression.

French economist Jacques Rueff described the fatal weakness of foreign-exchange reserves in a 1932 lecture. He explained that when a monetary authority accepts dollar or sterling claims for its official reserves rather than gold, purchasing power “has simply been duplicated,” so that, for example, “the American market is in a position to buy in Europe, and in the United States, at the same time.” In other words, when a foreign nation accepts repayment in U.S. dollars it increases its money supply without diminishing the U.S. money supply, allowing both countries’ central banks to lend in dollars.

This credit “duplication” is not only inflationary in the reserve-currency country and any country whose currency is tied to the reserve currency; it also necessarily causes the average price of goods to rise faster in the reserve-currency country than among its trading partners. This is why Britain’s and America’s manufacturing industries lost their competitiveness as exporters, resulting in deindustrialization.

This so-called Triffin Dilemma, though first described by Rueff, was named around 1960 for the Belgian-American economist Robert Triffin, who described the post-World War II unraveling of the Bretton Woods gold-exchange system. Under the gold standard, the world-wide increase in monetary gold equaled the world’s net exports. The problem of the Triffin Dilemma is that every additional dollar of foreign-exchange “reserves” must be matched by an equal deficit in the reserve-currency country’s net exports—that is, by net imports.

The glut of reserve currencies made the 20th century a period of intense inflation. The average price of British goods increased 72-fold from 1900 to 2000, while U.S. prices rose 18-fold over the same period. These increases far outpaced inflation in other major export countries that did not provide international reserve currencies. The prices of German, Japanese and Chinese goods all have fallen compared with U.S. exports.

Tariffs and other forms of protectionism can’t restore America’s export competitiveness. They invite retaliation, inhibit trade, and raise prices even higher. The uncompetitive U.S. price level is effectively a tariff on American goods. Thinking that another tariff will help American workers makes no more sense than believing one can heal the injuries of a pedestrian hit by a car by backing up over the victim.

The Triffin Dilemma can’t be solved without a monetary reform that ends the dollar’s use as the world’s chief reserve currency. Here’s a deal that could place Mr. Trump in Alexander Hamilton’s league: Persuade America’s sovereign creditors that the U.S. will convert every penny of foreign dollar reserves into long-term government-to-government debt, to be paid off in gold over, say, 30, 40 or 50 years. Hamilton’s plan paid off the debt from the American Revolution by the mid-1830s. The gradual repayment of all outstanding official foreign dollar reserves would reverse America’s industrial decline by restoring the price competitiveness of U.S. manufacturing.

The most essential step would be establishing a schedule for paying off the outstanding dollar reserves, which would require long-term planning and consensus between the White House and Congress. But if a payment schedule were finally set, it would remove the deflationary threat of foreign dollar reserve liquidation overhanging the U.S. market. Then the beginning of the actual payments would set in motion the relative price changes necessary to reverse the reserve-currency curse.


Like Mr. Trump, Hamilton’s contemporaries originally thought his glaring character flaws far outweighed his virtues. But after the formerly penniless immigrant managed to make a fortune for his adopted country, even those who had been his worst political enemies found it in their interest to carry out his plan for decades. Today, young people whistle the songs not from “Jefferson” but “Hamilton.” There will be no whistling of tunes from “Trump” if he makes America Great Britain.

Mr. Mueller directs the economics and ethics program at the Ethics and Public Policy Center.
This is what Neverfail said. The role of the US$ as a world reserve currency has made US exports uncompetitive. But I can't understand John Mueller's arguments above. Maybe what Mueller was trying to say is that demand for the US dollar increased because all governments need to have it in their reserves. This makes the $ expensive and thus makes US exports expensive.

But he sure explained it in a complicated way that is difficult to understand. For example, Mueller said:
The problem of the Triffin Dilemma is that every additional dollar of foreign-exchange “reserves” must be matched by an equal deficit in the reserve-currency country’s net exports—that is, by net imports.
Why? Anybody knows?

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Milo
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Re: Calling all economists. I need your help.

Post by Milo » Mon Oct 08, 2018 12:15 am

I think it means that when your country creates a reserve currency you either produce more than your country should as a national currency or demand will drive up the price for the currency.

IOW, you have to print money for everyone.

Sounds like another version of the Eurodollars problem.

https://en.m.wikipedia.org/wiki/Eurodollar

I have heard many dire predictions about this over the years, usually from people trying to flog gold or survivalist wackos. It never seems to turn into anything like their doomsday scenarios.

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cassowary
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Re: Calling all economists. I need your help.

Post by cassowary » Mon Oct 08, 2018 12:51 am

Milo wrote:
Mon Oct 08, 2018 12:15 am
I think it means that when your country creates a reserve currency you either produce more than your country should as a national currency or demand will drive up the price for the currency.

IOW, you have to print money for everyone.

Sounds like another version of the Eurodollars problem.

https://en.m.wikipedia.org/wiki/Eurodollar

I have heard many dire predictions about this over the years, usually from people trying to flog gold or survivalist wackos. It never seems to turn into anything like their doomsday scenarios.
Thanks, Milo. I have also come across this argument from gold nuts. Is it true? So far, all predictions of doom have failed as you said.

But what is this "Triffin dilemma?"

neverfail
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Re: Calling all economists. I need your help.

Post by neverfail » Mon Oct 08, 2018 3:24 am

cassowary wrote:
Sun Oct 07, 2018 9:26 pm


This is what Neverfail said. The role of the US$ as a world reserve currency has made US exports uncompetitive. But I can't understand John Mueller's arguments above. Maybe what Mueller was trying to say is that demand for the US dollar increased because all governments need to have it in their reserves. This makes the $ expensive and thus makes US exports expensive.

Cass, I want to thank you for honouring me by that acknowledgement.

Alas! Even if the US dollar were to cease being the World's reserve currency and the US dollar exchange rare were to decline relative to other widely traded currencies; I cannot see the lost manufacturing jobs returning as a consequence. The reason is that even if the US dollar were undervalued, average real wages in the USA would still be too high to make old style assembly line manufacturing cost competitive.

Despite this, I could forsee a something of a revival of manufacturing in the US but it would be more likely in the form of computer directed robotic production requiring only a small, highly skilled specialist staff per unit for maintenance and upkeep: not mass production employing masses of semi-skilled workers. That type of manufacturing has been lost forever.

In addition to some improved exports of finished products, a cheaper dollar would see enhanced sales of certain US basic commodities like LNG. It would also eliminate (or at least radically reduce) the need for export subsidies for wheat and other cereal grains. That would be a boon for cereals producers worldwide.

Working against the prospect of massive economic gains from (a market forces) devaluation of the US$ would be (1). the sheer critical mass size of the US economy combined with the fact that (2) The US depends on exports for only a low pro-rata percentage of its annual GDP - in the order of 5% to 8%. This compares to just over 20% for both the UK and Australia; over 30% for Canada and just over 50% for Singapore. It stands to reason that exports are far less potent as a driver of growth in the US (and domestic demand proportionately more important) than in the case of these others.

What is the solution.? Sorry, but the answer to that is beyond the bounds of my wisdom.

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Re: Calling all economists. I need your help.

Post by SteveFoerster » Mon Oct 08, 2018 8:21 am

Milo wrote:
Mon Oct 08, 2018 12:15 am
I have heard many dire predictions about this over the years, usually from people trying to flog gold or survivalist wackos. It never seems to turn into anything like their doomsday scenarios.
As a libertarian whose done stuff in gold and alternative currencies, I've been hearing about the imminent collapse of the U.S. dollar for twenty-five years now, but in reality it just keeps inflating "within normal parameters"... so far.
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Milo
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Re: Calling all economists. I need your help.

Post by Milo » Mon Oct 08, 2018 4:30 pm

cassowary wrote:
Mon Oct 08, 2018 12:51 am
Milo wrote:
Mon Oct 08, 2018 12:15 am
I think it means that when your country creates a reserve currency you either produce more than your country should as a national currency or demand will drive up the price for the currency.

IOW, you have to print money for everyone.

Sounds like another version of the Eurodollars problem.

https://en.m.wikipedia.org/wiki/Eurodollar

I have heard many dire predictions about this over the years, usually from people trying to flog gold or survivalist wackos. It never seems to turn into anything like their doomsday scenarios.
Thanks, Milo. I have also come across this argument from gold nuts. Is it true? So far, all predictions of doom have failed as you said.

But what is this "Triffin dilemma?"
As I said, I think it's that one is forced to make monetary policy for everyone, and that might be to ones detrement.

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cassowary
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Re: Calling all economists. I need your help.

Post by cassowary » Mon Oct 08, 2018 8:02 pm

neverfail wrote:
Mon Oct 08, 2018 3:24 am
cassowary wrote:
Sun Oct 07, 2018 9:26 pm


This is what Neverfail said. The role of the US$ as a world reserve currency has made US exports uncompetitive. But I can't understand John Mueller's arguments above. Maybe what Mueller was trying to say is that demand for the US dollar increased because all governments need to have it in their reserves. This makes the $ expensive and thus makes US exports expensive.

Cass, I want to thank you for honouring me by that acknowledgement.

Alas! Even if the US dollar were to cease being the World's reserve currency and the US dollar exchange rare were to decline relative to other widely traded currencies; I cannot see the lost manufacturing jobs returning as a consequence. The reason is that even if the US dollar were undervalued, average real wages in the USA would still be too high to make old style assembly line manufacturing cost competitive.

Despite this, I could forsee a something of a revival of manufacturing in the US but it would be more likely in the form of computer directed robotic production requiring only a small, highly skilled specialist staff per unit for maintenance and upkeep: not mass production employing masses of semi-skilled workers. That type of manufacturing has been lost forever.

In addition to some improved exports of finished products, a cheaper dollar would see enhanced sales of certain US basic commodities like LNG. It would also eliminate (or at least radically reduce) the need for export subsidies for wheat and other cereal grains. That would be a boon for cereals producers worldwide.

Working against the prospect of massive economic gains from (a market forces) devaluation of the US$ would be (1). the sheer critical mass size of the US economy combined with the fact that (2) The US depends on exports for only a low pro-rata percentage of its annual GDP - in the order of 5% to 8%. This compares to just over 20% for both the UK and Australia; over 30% for Canada and just over 50% for Singapore. It stands to reason that exports are far less potent as a driver of growth in the US (and domestic demand proportionately more important) than in the case of these others.

What is the solution.? Sorry, but the answer to that is beyond the bounds of my wisdom.
A lower dollar will mean a smaller current account deficit. The old line assembly will not return and that is a good thing. Nowadays we will increasingly use robots for that. What we need is to train workers to do the kind of jobs that pay well in the new economy.

A weaker $ will also mean that it will be harder to sell US T bonds. This means that the US government has to be more fiscally responsible. Cut spending. This will be wrenching.

neverfail
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Re: Calling all economists. I need your help.

Post by neverfail » Tue Oct 09, 2018 2:26 am

ifm the World cannot treat the US dollar as the reserve currency for international trading purposes them what can it use? The Yuan?

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Sertorio
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Re: Calling all economists. I need your help.

Post by Sertorio » Tue Oct 09, 2018 3:21 am

neverfail wrote:
Tue Oct 09, 2018 2:26 am
ifm the World cannot treat the US dollar as the reserve currency for international trading purposes them what can it use? The Yuan?
Industrialised countries could create an international account unit, based on a basket of currencies, minus the US dollar, which could serve as the currency for international trade. Such account unit could be managed by an independent international bank, and should be based on a reserve fund created from deposits made available by all major trading countries.

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SteveFoerster
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Re: Calling all economists. I need your help.

Post by SteveFoerster » Tue Oct 09, 2018 11:59 am

Sertorio wrote:
Tue Oct 09, 2018 3:21 am
neverfail wrote:
Tue Oct 09, 2018 2:26 am
ifm the World cannot treat the US dollar as the reserve currency for international trading purposes them what can it use? The Yuan?
Industrialised countries could create an international account unit, based on a basket of currencies, minus the US dollar, which could serve as the currency for international trade. Such account unit could be managed by an independent international bank, and should be based on a reserve fund created from deposits made available by all major trading countries.
You mean SDRs taken to their logical conclusion?

https://www.imf.org/en/About/Factsheets ... -Right-SDR
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