- Source, The Prospect Group:
Wednesday, August 28, 2013
We Have a Huge Imbalance in the World
I think that’s an issue. I am not convinced that someone in the US really sits and thinks, “What if we lose reserve currency status?” Clearly the US has a huge advantage in the sense that they can print money. Let’s say they go to war in Afghanistan, they actually do not pay for it, they just print the money. They go to war in Iraq, for now, they do not pay for it. The government prints money, creates large deficits, and the Fed buys this. It will have unintended consequences in the future, but for now it is OK. Other countries cannot do that. If you are a member of the EU, let’s say you are Greece or Spain, you cannot do that. If you wanted to do that you would have to leave the EU. In emerging economies if you print money, then the currency collapses and then you have import inflation. So the US has an advantage from the US dollar being a reserve currency. My view is that the dollar will stay as the reserve currency for a while, but I mentioned that in my view that eventually the financial system will collapse and we will move towards a new kind of arrangement with, most likely, the backing of some precious metals for currencies or with automatic stabilizers so that you have countries that are forced to essentially have a contraction if they have trade deficits and an expansion if they have trade surpluses to balance the trade surpluses and deficits. Today we have a huge imbalance in the world with the US having huge deficits externally and the rest of the world with surpluses.
