A Faustian Bargain
Economics isn't my strong point, but I think that the upshot of the article is: "The US trade deficit is going to decrease its long-term politico-economic strength".
Guardian Unlimited Business | | America is living beyond its means
The US has struck a Faustian bargain with its trading partners, particularly China, responsible for about one third of the $700bn-plus trade total last year. As the American economist Tom Palley puts it: "US consumers get lots of cheap goods in return for which they give over paper IOUs that cost less to print. Meanwhile, China creates millions of jobs and builds modern factories that are transforming it into an industrial superpower, and it also accumulates billions of dollars in financial claims against the US. From this perspective, trade deficits don't matter because there are no limits to either government or private borrowing, and because manufacturing doesn't matter either." The logic of this, Palley notes drily, is that the US would benefit even further if China devalued its exchange rate and ran a larger trade surplus...
What would happen if, as a result of global developments over the coming decades, the dollar ceased to be the reserve currency of choice. This was a point raised by Avinash Persaud, one of the financial sector's more original thinkers, in a recent lecture in New York. Persaud's argument is as follows.
Throughout history, there has always tended to be one dominant reserve currency along with a host of lesser rivals. In the 19th century Britain was the pre-eminent economy and sterling was the main reserve currency. Yet currencies don't retain their dominance forever... The US is living beyond its means, hoping that nobody cashes the cheques it has been merrily writing as the current account has gone deeper into the red. That's the advantage of being a reserve currency, even though, as Persaud notes, there is no rule which says that you have to run current account deficits simply because you are a reserve currency.
Britain didn't a century ago. In the decade or so up to the first world war it had a trade surplus of 5% of GDP. "That is a mirror image of the US today. The UK was in surplus by as much as the US is in deficit." That deficit has enabled the Chinese to build up their industrial strength at a rapid rate, so much so that it is probable that China - and perhaps India - will have overtaken the US as the world's largest economy (on a purchasing power parity basis, at least) by 2050. Persaud thinks that the upshot of this will be that in the next few decades the dollar will start to lose its reserve status just as sterling did in the last century.
