myth america
Exorbitant Pillage
The dollar is our currency, but your problem.
Treas. Sec. John Connally to Europeans, 1971
A
CONUNDRUM FIRST POSED IN
the 1960s by French Finance Minister
Valéry Giscard d’Estaing appears set to
reach a resolution in the coming decade.
Giscard referred to the position of the U.S.
as the issuer of the world’s reserve currency
—an ‘exorbitant privilege,’ as he called it—
which has allowed it to draw freely on the
rest of the world to support it’s profligacy
and over-extended standard of living.
When representatives from all 44 allied
nations met at Bretton Woods, New
Hampshire in July 1944 to design a new
international monetary system, the
dominant economic position of the U.S.
following the devastation of World War II
allowed it to virtually dictate the terms.
by martin zamyatin
Karen Bleier
The resulting system required participating
countries to guarantee convertibility of their
currencies into U.S. dollars, with the dollar
itself convertible to gold bullion for foreign
governments at US$35 per ounce of gold.
(At the time, the U.S. controlled fully
two-thirds of the world’s monetary gold.)
This system remained in place until 1971,
when Nixon announced the dollar would no
longer be convertible to gold, after repeated
withdrawals of gold by France and others
threatened to deplete the nation’s stockpile.
Nonetheless, the dollar’s status as the
world’s reserve currency remained, fortified
further by agreements made with Middle
Eastern oil exporters in the mid-1970s to
accept only U.S. dollars in exchange for oil.
This ‘petrodollar’ system required foreign
treasuries to maintain a substantial surplus
of dollars in order to fulfill their energy
needs, artificially propping up the dollar.
 There are growing indications, however,
that America’s long-standing ‘exorbitant
privilege’ is gradually being withdrawn, in
no small part because of decades of abuse.
Lacking a healthy rate of saving at home,
the U.S. leveraged its unique advantage to
borrow surplus savings from abroad, running
ever larger annual deficits and keeping
domestic interest rates artificially low.
In recent years, the role of the U.S. dollar
as the world’s reserve currency has been
begun looking less like a privilege and more
like a burden, with many economists
believing that the advantages of being the
issuer of the reserve currency were always
more political than economic in nature.
Until recently, the privileged status of the
U.S. dollar remained unchallenged, mainly
because only the U.S. economy and
financial system are large, open, and
flexible enough to provide the liquidity
sufficient to maintain global trade.
Moreover, as a last resort, the dollar is
backed, in a very real sense, by the U.S.
military, which has more than once imposed
economic sanctions—or even gone to war—
in response to threats to the status quo.
But while having access to foreign hoards
of dollars allows Americans to consume
beyond their means, it could also be said to
impose that obligation on Americans.
(This is known as ‘Triffin’s dilemma,’ after
its originator, economist Robert Triffin.)
As a result, the U.S. has become wholly
dependent on ever-rising levels of debt—
rather than growing its economy—in order
to sustain not only its economic dominance,
but its unrivaled geopolitical power.
Other nations, notably Russia and China,
have in recent years been forging bilateral
agreements to bypass use of the U.S. dollar,
substituting their own currencies or gold.
Meanwhile, Saudi Arabia is challenging the
petrodollar system, the strongest remaining
pillar to the U.S. dollar’s throne, by
accepting China’s yuan in return for oil.
Short of a sudden and wholesale loss in
confidence by investors, it seems unlikely
that the U.S. dollar will replaced any time
soon as the global reserve currency, but its
dominance has significantly eroded and the
rate of change appears to be accelerating.
In the wake of of the 2018 global financial
crisis, total U.S. debt—including unfunded
future liabilities such as Social Security and
Medicare—hovered somewhere between
US$100 trillion and US$250 trillion.
Of course, these debts will never be repaid
and default is virtually inevitable, the only
unknown being the method and day of
reckoning. The former could take the form
of an outright refusal to honor the debt or,
more likely, a de facto default via inflation.
Thus far, the U.S. government’s method of
dealing with record levels of debt and deficits
has been to simply create more debt, while
allowing the principle to accumulate. This is,
of course, the definition of a Ponzi scheme,
and all Ponzi schemes eventually fail.
Many experts believe the world is getting
close to the collapse of the global monetary
system and a monetary reset, characterized
either by a fragmented, multipolar system—
consisting of a diminished U.S. dollar and
an emerging Eurasian standard—or perhaps
the return to a system based on gold or
some combination of raw commodities.
One thing seems certain: Because U.S.
profligacy has been largely enabled by its
decades long ‘exorbitant privilege,’ the loss
or even decline of that privilege will be
extremely hard on ordinary Americans, the
majority of which are unaware of the danger
and woefully unprepared for the change. ◾