H| Contemplating the ACHILLES HEEL of the U.S.

A quick synopsis on the critical aspects of the development and growth of the United States

Colonialism is the underscoring condition for achieving superpower or world power status.  In our contemporary times, this was the case with the British empire which, as of the early 1930s, maintains its influence over the Commonwealth which numbers 54 countries.  Based on the generic theory of the Cycle of Life empires ascend and descend.   The 2nd World War catapulted the United States into the position of a world power.  Its status as an economic world power was affirmed by the Bretton Woods System of 1944 and the institutions it created then.  This System set the U.S. Dollar as an International Reserve Currency with every other currency to be pegged to the U.S. Dollar.  The U.S. Dollar was pegged onto Gold at $35 per troy ounce.  This was masterful as it defined and solidified the indispensability of the U.S. Dollar as the one and only international reserve currency.  One of the institutions created was the International Monetary Fund (IMF) whose mandate was to safeguard the stability of exchange rates and help countries that were running short-term trade deficits to restore their trade balance without having to use policies such as Tariffs, Quotas or Competitive devaluation.  To achieve this mandated goal the IMF offered short-term Special Drawing Rights (SDRs) to those countries that ran a trade deficit, thus discouraging them from engaging in a policy of Competitive devaluation.  This design was effective for a regime of Fixed Exchange rates.  In a regime of Floating Exchange rates, the supervision of the IMF is not relevant because in a "floating" environment exchange rates are determined by demand and supply of currencies.

Incipient challenges to the U.S. Dollar - The era of the 70s and 80s

The Bretton Woods System collapsed in 1973.  This collapse was caused by the 1965 to 1968 macroeconomic policy decisions of the U.S.  At that time the U.S. was financing extensive welfare programs and the Vietnam War by increasing its money supply, causing high inflation.  Other economies, knowing that as inflation increases the value of the currency decreases, speculated that the dollar would have to be devalued relative to other currencies.  They began to increase the value of their currencies by reducing their dollar holdings.  In essence, the Bretton Woods System collapsed because of macroeconomic mismanagement such as, increasing the money supply, running high trade deficits and persisting high inflation.  In August 15, 1971, following President Nixon’s policy to discontinue trading gold for U.S. Dollars, the Smithsonian Agreement was signed through which fixed exchange rates were to be maintained but with no gold as a currency-backer.  In 1976, the IMF’s Articles of Agreement were revised to reflect the new reality of Floating Exchange rates.  That was the Jamaica Accord of 1976.   The U.S. Dollar, vis a vis the gold, was devalued from $35 to $38 per troy ounce.  Following these initial setbacks, in September 1985, the Plaza Accord was signed by France, Germany, Japan, UK and the U.S. which aimed to drive down the price of the U.S. Dollar because the U.S. was experiencing a large trade deficit.  Two years later the goal of the Plaza Accord, having been realized, was abandoned through the signing of the Louvre Accord.

 

The U.S. Dollar - The Imperial Character and Future of the U.S.

As discussed earlier, the U.S. Dollar is the world’s international reserve currency which is widely held by central banks and financial institutions for guarding and securing international trade and other transactions.  So, the U.S. Dollar is in demand and its value is determined by the demand for it and its available supply.  Now, the U.S. economy supports the U.S. Dollar through its economic infrastructure meaning its productivity, competitiveness, international trade dominance, financial innovativeness, technology, level of education, level of industrialization, and an optimum politico-economic environment.  At this writing, the economic infrastructure of the U.S. is challenged given that the sovereign debt of the U.S. has increased to $31.4 trillion, its GDP is about $24 trillion, and its debt-to-GDP ratio is around 124%.  These figures are prohibitive for any economy.  For instance, the EU’s debt-to-GDP ratio is around 95%, when the Maastricht Treaty specked a ratio of no more than 60%.  A plausible question would be, "What is going on?"  The central banks of major foreign countries, the military power, a supranational leadership behavior, and, an internationally popular socio-politico-economic image of the U.S., keep safeguarding and sustaining the continuing dominance of the U.S. Dollar.  However, dark clouds are beginning to gather in the horizon.  I am talking about the current inflationary environment in the U.S.  The issue is a bit complex.  At this writing, inflation is around 8.5%.  The Federal Reserve’s (U.S. Central Bank) continued increasing of the interest rates, in order to curb inflation, threatening to put the economy into a recession. 

It is widely accepted that the COVID virus has been the pivotal reason for this inflation, but not only.  First, the Virus affected the supply chains, causing an imbalance between Supply and Demand.  This has been exacerbated by an erroneous policy decision of the Biden Administration to distribute “free” money to Americans, and, a liberal monetary policy to increase the money supply, a decision implemented by the Federal Reserve.  But, inflation always comes back to “bite” the people through sustained price increases.  Inflation is an orderly economy’s social enemy because it changes the character of institutions and poses a direct threat to the society.

In the current global polyarchic environment the U.S. Dollar will likely face a greater challenge to maintaining the international reserve currency status. As a result, it must be more disciplined with the growth of its money supply.  Certainly, the current global environment being inflationary, supports and even enhances the dominance of the U.S. Dollar because foreign investment pours into the U.S. given that foreign investors view the U.S. Dollar as the safest currency in the world.  Nevertheless, the U.S. should keep in mind that inflation must be curbed and that such action may bring about recession.  Furthermore, such exchange may produce stagflation, which is defined by lower employment hiring, persistent inflation and therefore low economic growth because of low demand.  The downing of past powerful countries has been the result of mismanaging inflation. For instance, the Roman Empire lost its economic rigor and international trade because it failed to control inflation.  In addition, the global economy may be threatened due to an uncontrolled global-wide inflation.

In summary, the weakest link of the U.S. is its currency and its international reserve currency status. Losing such status will be catastrophic for the U.S. economy, the internal socioeconomic functioning of the U.S. and it will deprive the U.S. of its global economic power.  How likely is that?  There must be seismic events in the world such as, long-term persistent high inflation, drastic loss of economic competitiveness, withdrawal of support for the U.S. Dollar by the major Central Banks and/or refusal to use the U.S. Dollar in international trade transactions resulting from global polyarchic conflict.  Such conflict has given rise to an attempt by other countries to refuse the reserve status of the U.S. Dollar and replace it with their own currencies.  The dominant move is being attempted by the countries of BRICS (Brazil, Russia, India, China, South Africa).  If and when the U.S. Dollar loses its international reserve status the U.S. will be at a “free fall.”  Moreover, the advantage that the global reserve currency status gives to the dollar creates the responsibility to safeguard such reserve currency and protect the integrity of the global economy.

Question: Under the doctrine of economic fairness, what moral grounds allow the U.S. to print money without control; thereby, adversely affecting foreign economies’ export/import activity, their foreign exchange policy of competitive devaluation, their monetary policy, and broadly, the global economy?

Author: CGP .+.