Some Debt and Policy Considerations for the U.S. Dollar
and the EMU Euro as the World’s Reserve Currencies
Dr. John N. Kallianiotis
University of Scranton
The U.S. has so far been able to get away with massive debts and unsustainable deficits for one simple reason, but this artificial state of the economy cannot continue forever. The reason is that the U.S. dollar is still the world’s reserve currency, as it has been effectively since World War II and literally since the early 1970s. This does not hold for the member-nations of the Euro-zone; their debt must be minimum (zero, during periods of growth), there. All governments and banks in the world accept and hold U.S. dollars as the comfortable majority of their reserves; thus, the U.S. is able to simply print more money (a liability of the central bank backed by U.S. government debt), whenever it cannot afford to pay for things that it needs. Besides this, the country can borrow money in its own currency at incredibly low interest rates that have been approached closed to zero, in nominal terms or negative real rate of interest (cost); inflationary finance. This benefits the American citizens, since the national government is able to provide numerous social services (if Republicans allow them; but, they do not allow them because they do not believe in social services and do not care for the social welfare of the American citizens) that most other EU countries simply cannot afford (but, they used to offer more than the U.S. before the financial crisis of 2007; now, they imposed on them the American model (sic)). Republicans want to repeal Obama’s healthcare program and shutdown the government on October 1, 2013 to show their power to the president towards the government budget. They want reduction in spending and increase in individual taxes.
Mostly, the real rate of return for depositors has become negative (actually, they pay the bank for accepting their deposits). With the U.S. dollar as the reserve currency of the planet, oil and all commodities are all priced in dollars. This causes oil and the byproduct of gasoline to be incredibly cheap to Americans. The United States has become the wealthiest country in the world as a result of the dollar as reserve currency. Imports can all be paid for in dollars. This is only true in the United States. Other countries, first, have to change their currency into dollars, pay transaction cost, and then to settle their balance of payments on imports and exports. With oil and other commodities cheaply priced in U.S. dollars, you see an enormous range of inexpensive goods available. Food items and other items that use oil and gas as input are extremely cheap. This makes restaurants and similar outings affordable in America. The level of nominal wealth and all these excesses (of course, they follow a business cycle) seen in the U.S., are simply unprecedented, and most of these result from the benefits of the dollar as universal reserve currency and its enormous supply.
Until the early 1970s, the U.S. was the world’s largest creditor. This meant that the country loaned out more money to other countries than any other nation on earth. By the 1980s the country had begun to reverse this trend, becoming a debtor nation (with an unsustainable debt, as the time is passing). It only took another decade to the 1990s to see the U.S. evolve into the world’s largest debtor. The transformation has been dramatic, as the amount of debt that the country has taken on, in the wake of the financial crisis and economic collapse, is closed to seventeen trillion dollars (122% of the GDP). The only reason that this has been possible is because other countries continuously loan America money at impossibly low interest rates. This is not the only way that the country “abuses” the status of owning the reserve currency. The United States also has printed money electronically since 2007 in increasingly larger amounts. The shocking truth is that America has about quadrupled the amount of dollars () in existence in the world in only five years. So far, other countries, in the grips of the devastating financial crisis, have grudgingly accepted this practice, although they have complained loudly over it. There is a high probability that they will no longer tolerate this unfair advantage, especially in the future and the U.S. cannot continue this disequilibrium in its domestic economy.
II. Dollar and Euro as International Reserves, Public Policy of the World’s Debtors, and the Currency War
The soft dollar policy has improved a little manufacturing competitiveness, has attracted more foreign tourists, and has saved employment to become double digits, as it is in Europe (over 60% unemployment in some regions). But this oversupply of dollars has increased salaries and wages (cost of production) and American firms moved to India and China (have become foreign firms because their work force and investors are foreigners). Also, the depreciation of the dollar reduced the capital inflows, which will increase the cost of capital and affect negatively the housing market (falling house prices). China and Japan do not want their currencies to appreciate; for this reason, they expanded their dollars reserves (to appreciate the dollar, due to this artificial excess demand for dollars) by selling their own currencies (to depreciate them) and with their actions they fund the U.S. deficits. China has so many dollars from the U.S. imports that has no other way to get rid of them except to invest in U.S. IOUs. Actually, there is a global “trade war” by a “beggar-thy-neighbor” policy among almost all nations (except the oppressed poor Euro-zone member-nations). Countries that have their own national currency, to keep their exports competitive are increasingly intervening in the foreign exchange market.
In 2011, the U.S. Treasury Secretary, Timothy Geithner, warned Congress that they had to increase the debt ceiling; otherwise the U.S. government could default, which would have catastrophic global economic consequences. Before October 17, 2013, Congress has to increase the debt ceiling above the current level of $16.7 trillion; otherwise the global financial system will be in a big trouble. Many foreign creditors, especially China (the world’s largest creditor) are increasingly worried for the U.S. (the world’s largest debtor) because it may not be able to meet its obligations. Unfortunately, the U.S. has become increasingly dependent on China and Japan to raise money to cover its every-day spending (including its bailout programs) because its aggregate spending exceeds its national product (AD>GDP). Thus, instead of borrowing, it will be better for the U.S., to start producing and reduce its imports and unemployment. The current policy (domestic and foreign) does not lead the country anywhere. The continuing conflicts among Republicans and Democrats are deteriorating the American internal crisis. The same holds for the EU countries; they must be self-sufficient (in autarky) and this to happen, they must be disengaged from EU trap and the national betrayers.
Lately, China encourages importers and exporters to place their orders with approved Chinese companies and settle payments in renminbi yuan. Hong Kong banks are allowed to issue yuan-denominated bonds, a step towards building an offshore yuan market and foreign banks are allowed to buy or borrow yuan from mainland lenders to finance such trade. Also, China struck a deal with Britain’s central bank to give the two countries greater ability to swap currencies [a three-year swap line with a maximum value of 200 billion yuan ($32.6 billion)]; another major step toward giving to yuan a global presence. Of course, to prevent appreciation of the yuan and avoid loss of export competitiveness, the People’s Bank has been forced to aggressively buy dollar and sell yuans (“currency wars”). But, the dollar is still the international currency reserve; it is used for international trade, in pricing globally traded commodities (i.e., oil, grain, coffee, etc.), and foreign banks hold portfolia of dollar assets and liabilities. These Chinese actions cannot appreciate the dollar because the Fed continues to supply more dollars.
Now, that the U.S. interest rate is closed to zero, foreigners are still investing in U.S. Treasury securities, which means that the U.S. government is the safest place in the world; especially, after the debt crisis in Europe. On the contrary, Europe has become the risker continent on earth and the dictated EU policy, the most inhumane for its member-nations and their citizens. The U.S. has been accused by foreigners that it artificially depresses the dollar exchange rate by printing money (“quantitative easing”) to increase exports. When a currency is depreciated the other currency is appreciated, which is similar to the old “beggar-thy-neighbor” policy, but the U.S. has a remarkable answer; “we have to stimulate our economy and get off from the recession”, which is reasonable, but not very effective because countries need fiscal policy, too. Imports are increasing and the growth is so insignificant (2.5% in 2013:Q2) that keeps unemployment over 7.3%. The exchange rates do not reflect market fundamentals any more, but currency games and speculations.
Of course, a number of things could happen to cause the country to lose its status of reserve currency. The oil producing cartel (OPEC) might finally make good on its threat to stop pricing oil in dollars, as it happened with Iran. Enough countries might decide to stop treating the dollar as reserve currency that it finally ceases to be the one. Another thing that could trigger this devastating event is that the U.S. might not be able to service the interest on its enormous debt (Ponzi finance), as some Euro-zone nations are facing, today. This is a possibility that we see getting closer by the day, as the country is rapidly closing in, on that time, when interest rate would be increased. Currently, the U.S. cannot pay off maturing debt; it just rolls over the existing debt with new IOUs. There will be dramatic consequences in the U.S. that we can hardly imagine if the dollar finally ceases to be the reserve currency of the world. Should the dollar be dropped as reserve currency, then the value of the dollar will plummet. The immediate painful effects will be that commodities’ prices skyrocket in the United States. International traded goods would no longer be priced in U.S. dollars, and we would see the falling value of the dollar will buy fewer and fewer commodities. Gasoline priced at five to ten dollars a gallon is not only possible, but highly likely as it is going on in Euro-zone. Along with higher gas prices, would come higher prices for anything that is shipped or uses oil and gasoline as inputs. This means, practically, everything that Americans buy, from food stuffs and airline tickets, to cars and washing machines, would all cost dramatically more. As prices skyrocket, the familiar lifestyle in the U.S. would sustain a punishing drop overnight and forever.
III. Some Concluding Remarks
Some policy considerations for the U.S. and the EU must be the satisfaction of the basic social objectives by policy-makers as it is happening in any democratic nation. Every policy must satisfy the society’s (citizens’) ultimate goals, which include, humans’ freedoms, security, safety, homogeneity, value system, faith, culture, paideia, identity, maximization of their social welfare, the fair distribution of the national wealth and burdens (like, taxes) to all citizens (and legal entities), an affordable health care, and a free education for all children because it is an investment in human capital and they represent the future of the country. Then, the nation (its citizens) will prosper and the continuation of the nation will be secured. With the current policies, markets (and MNCs) are prospering and become arrogant to consumers and governments, and oppressive to their workers. Markets and institutions have been created to improve citizens’ welfare, otherwise we do not need them and we have to come up with new ones.
Lastly, there will be many consequences that we would see of the dollar if it is no longer the reserve currency of the world. Interest rates would rise dramatically. They could easily reach 10%-15% or even higher. This would wreck housing prices far worse than they are today (house prices have dropped 41% in real terms since the peak in mid-2006). It would also cause the stock market to crash and burn by maybe even half in a number of weeks. As the cost of supplies and materials goes up with the falling currency, businesses would be forced to cut back on employees in the light of their similarly falling sales. Unemployment could reach 20%-30% or more as a result of this, as it is in EU, today. As if this is not bad enough, inflation would be sky high along with the rising prices and disappearing jobs. The foreclosure of homes, the bankruptcies in businesses and individuals, the civil unrests, and the social chaos will follow, especially for the U.S., where the carrying of arms is free (“legal”), the heterogeneity among people enormous, and the psychological problems are flourishing. Our socio-political consideration must be to prevent and not to correct future crises. We need to find an immediate solution for the U.S. chronic disequilibria (unsustainable public and private debts and deficits) and for Euro-zone to abandon its common currency and member-nations must go back to their old national currencies and to their independent domestic public policies (monetary and fiscal concurrently); otherwise the second global crisis will make the current one insignificant.
 Which makes: (). This is exactly what the money is today.
 The Monetary Base (MB) was $875 billion in 2008 and reached $2,725 billion in 2011. On October 2, 2013, it was $3,528.279 billion; a growth of 303.23% (60.65% per annum). See, http://research.stlouisfed.org/fred2/series/BASE
 Treasury Bills rates were: and (April 25, 2012). In December 2011, the rate was 0.000%. (Economagic.com). On October 7, 2013, it was and . (The Wall Street Journal, October 8, 2013, p. C9).
 Actually, corporations and wealthy people are paying relatively less taxes compared to the middle class and their tax evasion is very high, too. This is a large proportion of deposits in offshore centers and tax havens. Also, GE paid no taxes; Goldman Sachs paid $14 million in 2010. The GAO reported in 2008 that “two out of every three United States corporations paid no federal income taxes from 1998 through 2005.” Companies have become all too astute at paying for loopholes which allow them to shift profits abroad, or move their gains (on paper) to foreign low-tax/no-tax nations. As the data below shows, the change in corporate taxes — not merely rates, but what they actually paid — over the past half century is astounding. (1) Corporate Taxes as a Percentage of Federal Revenue: in 1955: 27.3% and in 2010: 8.9%. (2) Corporate Taxes as a Percentage of GDP: in 1955: 4.3% and in 2010: 1.3%. (3) Individual Income/Payrolls as a Percentage of Federal Revenue: 1955: 58.0% and in 2010: 81.5%. See, http://www.boston.com/business/globe/articles/2004/04/11/most_us_firms_paid_no_income_taxes_in_90s/. Also see, http://www.ritholtz.com/blog/2011/04/corporate-tax-rates-then-and-now/
 Just compare how much other members of the richest nations, whose currencies are not the reserve currency pay for their gasoline. While the U.S. average price of gas was coming in at $2.72 per gallon, in Germany it was $6.82 per gallon, in Great Britain it was $6.60 a gallon, in Italy it was $6.40 every gallon, in France it was $6.04 a gallon, and in Japan it was $5.40 for every gallon (data are from January 2011). In April 2012, the price of gas had reached in the U.S. the $4.25 per gallon (a 56% increase in one year). In September 2013, the price of gas was about $3.80 per gallon (oil price $110.53 per barrel). On October 10, 2013, it was $101.84/barrel.
 Thus, the U.S. does not satisfy the Maastricht criteria (national debt 60% of the GDP) and at the moment cannot join the Euro-zone. But, this can happen later, when the criteria will change.
 Where, MB = monetary base, C = currency in circulation outside Federal Reserve Banks and the U.S. Treasury, and R = reserves (deposits) of depository financial institutions at Federal Reserve Banks.
 The return to a foreign investor is: ; where, = return to foreign investor, = U.S. rate of return, and = forward discount of the U.S. dollar. Then, as the dollar is depreciated, is falling and affects negatively the foreign investments in the U.S. Thus, U.S. has to increase to attract foreign capital.
 China and Japan are worrying for possible U.S. default as the debt ceiling limit is approaching, which is the October 17th , 2013. http://www.ft.com/intl/cms/s/0/a73a3728-2f41-11e3-ae87-00144feab7de.html#axzz2hEwscabP
 A beggar-thy-neighbor policy is an economic policy through which one country attempts to remedy its economic
problems by means that tend to worsen the economic problems of other countries. The term was originally devised to characterize policies of trying to cure domestic depression and high unemployment by shifting effective demand away from imports onto domestically produced goods, either through tariffs and quotas on imports, or by competitive devaluation. The policy can be associated with mercantilism. “Beggar thy neighbor” strategies of this kind do not apply only to countries: overgrazing provides another example, where the pursuit by individuals or groups of their own interests leads to problems. This dynamic has been called the “tragedy of the commons”, though it appears as early as the works of Plato and Aristotle.
 Actually, Greece is under occupation by foreign powers and her pseudo-leaders, who are responsible for the country’s suffering, are still in government pretending the patriotic and faithful saviors of Hellenism and Orthodoxy. Greeks have to wake up.
 See, “Debt ceiling increase allowed by Senate”. See, http://www.politico.com/news/stories/0112/72027.html .
 On March 24, 2009 and on June 26, 2009, the People’s Bank of China (central bank) called for the creation of a new international reserve currency (“a super-sovereign reserve currency”) to replace the dollar, which was devaluated and was reducing the value of the Chinese investments in U.S.-denominated assets. See, Sharma, Shalendra D. (2011). “U.S. Debt, Deficit, and the Falling Greenback: Does it Mean Currency Wars and an End to the Dollar’s Reign?”, SERI Quarterly, 4(3), July, pp. 67-78. The major foreign holders of U.S. Treasury securities, with July 2013, are: (1) China: $1,277.3 billion, (2) Japan: $1,135.4 billion, (3) Carib Bnkng Ctrs: $287.7 billion, (4) Oil Exporters: $257.7 billion, and (5) Brazil: $256.4 billion. See, http://www.treasury.gov/resource-center/data-chart-center/tic/Documents/mfh.txt
 See, The Wall Street Journal, June 24, 2013, pp. A1, C1, and C2.
 The U.S. and the EU cannot compete with China because the Chinese culture (“sub-culture”) has nothing in common with the western Christian culture. An example to show the barbarism in China was on the all TV News on October 4, 2013. The authorities entered forcibly a home and took in front of her husband his six month pregnant wife and put her in a hospital and aborted her child because she already had one boy. The News was showing the poor mother crying and praying for her killed child. Then, for the west it will be impossible to make any fair business with these primitive and barbarian people. See, http://www.dailymail.co.uk/news/article-2443753/Mother-dragged-home-middle-night-forced-abort-baby-SIX-months-pregnancy-China.html. Of course, the “civilized” west has legalized abortions, too.
 Ancient Greeks were saying, Tav paidiva paivzei (“children are playing”).
 It would take an average of 4.3% growth per year for the U.S. to reach the lowest trend by the end of 2016, which appears unlikely judging from the rate of recovery to this point. See, Atkinson, Tyler, David Luttrell, and Harvey Rosenblum (2013). “How Bad Was It? The Costs and Consequences of the 2007-09 Financial Crisis”, Staff Papers, Dallas Fed, No. 20, July, pp. 1-22.
 The zero interest rate in the U.S. and the increase in its debt continue to depreciate the dollar, which further widening the division between the U.S. and the other G-20 members. This year’s G-20 meeting in St. Petersburg, Russia, was occupied with the Obama’s persistence to bomb Syria, which will harm the global economy according to Chinese and Italian officials and the U.S. economy even more. The BRICS countries pledged to create a $100 billion pool of currency reserves to guard against shocks. See, The wall Street Journal, September 5, 2013, pp. A1, A8, and A9.
 Already, credit cards’ rates (APR) in the U.S. are reaching the amazing rate of 39.99% per annum for the poor people with bad credit. Even, 71 U.S. Senators have no credit cards, because of their bad credit. See, http://wiki.answers.com/Q/How_many_senators_have_criminal_records
 How much have U.S. house prices fallen since their peak in mid-2006? It depends on whether you measure them in nominal or inflation-adjusted terms. According to the S&P/Case-Shiller National House Price Index, the fall has been about 34% in some regions. That is in nominal terms, and that is a lot. But since inflation has continued, the fall in real terms is even bigger. Adjusting for Consumer Price Index inflation, the drop in house prices since the peak has been 41%. This is a number nobody predicted! See, Alex J. Pollack, “How Much Have House Prices Really Fallen?”, The American, April 19, 2012. http://www.american.com/archive/2012/april/how-much-have-house-prices-really-fallen
 See, Thomas Herold, “What If The U.S. Dollar Loses Reserve Currency Status?”, http://chloris-mygardengate.blogspot.com/2011/02/now-imf-is-calling-for-new-reserve.html