USD Unsustainable Privilege ... and the Deadly Embrace (US-China)

Extract from an Essay I wrote in Political Economy in 2012 that I put in my blog for the benefit of my friends - please note that I am not an authority, but that I read quite extensively on the subject in order to address the question put to me below

Explain why, despite being a huge debtor economy, the US seems able to operate in a privileged position in the world economy? Is this sustainable?

In 1965, a while ago, Valery Giscard d’Estaing, De Gaulle’s finance’s minister, would describe the position of US economy as one of ‘Exorbitant privilege’. The term refers to the benefits held by the US as a result of having the US Dollar being the international reserve currency: the outrage was about the European nations financing the Vietnam war whether they liked it or not, simply because of the privilege of the US being able to print dollars. Already then, Giscard was pointing out a major ‘anomaly’ in the world economic system. Today, L. H. Summers, a key economic advisor in the US administration, uses the term ‘Balance of Terror’ to describe a situation when “we rely on the costs of others (surplus economy countries like China principally) not financing our current account deficit (US Deficit) as assurance that financing will continue” (2004: 8). Something has gone wrong, but the USD is still the currency of choice for world finance transactions, investments, international trade, and foreign exchange reserves for most countries.

Why is it that despite running a huge debtor economy, the US economy still occupies such a privileged position?

There are different reasons for that. First, I will briefly look at the historical background: the Bretton Wood II legacy and explain how as a result of holding the world currency, the US can afford to run huge debt with little to no ‘real cost’ of finance, without impunity, nor ‘tears’. I will then show how the current political climate in China also contributes to the US being able to operate in a privileged position in the World Economy at the moment. Finally, I will take a critical stance on the word ‘privilege’ for the US economy and explain the reasons why there is not a better solution at the moment.

From Bretton Wood I to Bretton Wood II - The US dollar became the world currency in the aftermath of WWII, as part of the grand post-war international monetary and financial order endorsed by 44 countries in Bretton Woods. The idea was to avoid a return to the previous classical liberal international economic order that lead to the Great Depression in the pre-30s, by giving governments the means to control speculative private investments. Public international institutions were assigned the key role in allocating short term and long term credit at an international level. There was a wish to establish a world of international currencies stability and enable domestic policy autonomy, what Ruggie (1982) would call ‘embedded liberalism’. The dollar was linked to gold which meant that Washington had to take action whenever trade deficits translated into depleted gold reserves. In 1960, Robert Triffin warned about the weakness of such a system: international liquidity could only be expanded if the US could provide the world with more dollars. According to Boltho, having the USD as world currency as part of Bretton Wood I order was not a bad thing: the world trade and growth expanded in the post war period after Bretton Woods in the developed world and many countries in the developing world have done extremely well thanks partly to the dollar’s presence during the pre-70s period. America provided the liquidity which growing world trade required (2011: 150). This is not so true after the deregulation period that followed. As the US started to print more dollars, soon the dollar could not be converted into gold. A crisis of confidence followed and in 1971; the US chose to free itself from the constraints that the gold convertibility imposed. This was the end of the governments using economic tightening to reverse structural trade deficits. After that, many OECD governments dismantled capital controls with the US and UK leading the way in 1974 and 1979 respectively. This is what Murphy called: Bretton Wood II, a new order with no formal institutional requirement for anyone to support it, in which the US could still take advantage of holding the world currency, despite having now the competitive advantage to have its creditors finance the US trade deficit out of their vested interest in the continuation of a US-led financial system (Murphy 2006: 41).

I am now going to expose the mechanisms behind The US derives huge privileges out of the dollar being the world currency

The US is a debtor economy (see below chart).

In such a case, according to market laws, a declining of its currency over time is supposed to reduce imports and help exports, thus reducing the deficit. Yet, the USD did not depreciate as hugely as it should have. Why?

The first reason the US takes advantage of its position as world currency holder is that the US can issue dollar assets at very low rates of interest to finance its deficits, in other words, it has access to cheap money. Due to its role as the international reserve currency, the demand of US assets (principally Treasury Bonds) is higher than it should otherwise be. The dollars of surplus economies are invested in US Treasury Bonds, but because so many surplus countries want them as their economies expand and their central banks want to augment their dollar reserves, the US Bonds interest rate is low and has been going down over the last decade (Boltho 2011: 148) this lowers the price of borrowing for the US. The US pays less than other countries for the price of borrowing and the US find itself in a situation of competitive borrowing advantage.

The second advantage is that the US is the only country in the world that does not need to fear slow depreciation of its currency ‘Since almost all US foreign liabilities are denominated in its own currency and about 70% of US foreign assets are in foreign currencies, a dollar depreciation represents a net transfer of wealth from the rest of the world’ (Lucarelli 2008: 25). A cheaper USD lowers US debt repayments since the debt is typically denominated in USD. In other words, dollar depreciation reduces net external debt. It is the opposite for other countries who cannot afford to have too low currencies as it would make their debt repayments higher. Furthermore, a slow depreciation of the USD does not cause too much of problem for imports as it should under normal market laws, as long as the US has access to very cheap imports.

The third advantage is that ‘the US acting as an international financial intermediary enjoys higher returns on foreign investments than foreigners earn on their respective US investments’ (Papadimitriou, et al, 2006: 4). In sharp contrast to the other economies, the US is able to invest abroad in its own currency. It earns more on its investments abroad than foreigners do in the US.

This is how the US has been able to exploit the USD as key global currency: borrowing short and lending long aided by the dollar’s reserve currency status with no ties. As a result, the difference between what the US pays and what it earns from the rest of the world (NIIP) has not deteriorated as much as one would expect when the US is incurring such large current account deficits (Lucarelli 2008: 24).

The last but not least advantage is that the key currency role of the dollar provides the US not only economic advantages, but consequently ‘structural power’: it increases political influence. The necessary money to finance military projects is created by the Federal Reserve, in exchange for goods and services from foreigners, and borrowed back by the US Treasury. This leads to the outrageous situations mentioned in the introduction and restates questions such as, should European countries have facilitated the financing of the war in Vietnam, and China the Iraq war, without a say? Why should surplus countries indirectly finance US military projects? The question is all the more relevant that even if the US wishes to keep its world currency holder status, can it be trusted that when its interests conflict with those of the rest of the world, will it choose unilateral action? (The scope of this essay does not allow further development of this point, but the question needs to be raised)

Another main reason why the US has been able to operate in such a privileged position in the world economy is linked to the world main economies of US and China’s respective domestic situation.

Let’s begin with China – Unlike the US, China has been running gigantic surpluses in current account (trade) and capital account (FDI), so it should be enjoying a strong currency, access to cheaper imports and a higher standard of living for all. This is evidently not the case. Instead, the Chinese government has artificially contained the Chinese currency, the RMB, and a large part of the country’s surplus are going instead to the US in the form of US bonds remunerated at around 0.2% , furthering the US privileged situation.

The Chinese government tries to artificially contain its currency for several reasons. Firstly it aims to keep the exchange rate competitive for exports to the US, since they consider that the current Chinese market has not yet developed into a fully mature consumer market. It is clear that if the PBC did not try to contain the pressure on the value of the RMB artificially, an appreciating currency would eventually correct the trade surplus over time. Secondly, the domestic monetary impact (possible inflation that Chinese authorities fear) could lead to local unrest in an authoritarian, highly unequal society. Thirdly it wards off any potential speculative attacks on the currency, thereby guaranteeing a stable competitive currency. Thus market forces are functioning artificially.

Will the US be able to take advantage of this access to cheap finance (US Bonds) and cheap goods made by the Chinese rural-poor who do not see their wages go up as they should for very long?

In the longer term, China should be able to rely more on its domestic consumption and/or another alternative to full-blown export-led growth, and thereby rely less on US markets for exports. We will then see an appreciation of the currency and less competitive exports. It is not known when this will happen. We only know it will take time. For now, there are still very large inequalities: Chinese households are not big consumers – house consumption 30% of GDP in China as opposed to 50% of GDP in US, and there is a need for more equalisation of earnings in order to help spread consumption in the country. Without a social security system, the Chinese poor are forced to make savings. These savings are further exploited by very low return, again as a direct result of policies distorting the market laws. As a result, the Chinese peasants’ low wages and savings are fuelling Western debt. It is not clear how sustainable this urban bias will last without creating serious social unrest.

In 2008, when the export engine stalled, the PRC rolled out a gigantic USD $570 fiscal-stimulus package. However no more than 20% was social spending. The rest went into fixed-assets investments in the steel, cement running in overcapacity, and high speed rail system construction with uncertain prospects (Hung Ho-Fung 2009: 22). The PRC has not yet begun to show a real willingness to promote domestic consumption.

Until the Chinese government stops holding the value of the RBM artificially low, the US will access cheap credit through US Bonds remunerated at 0.2%, financed by Chinese workers who try to save for their pension funds.

Let’s take a critical stance at this ‘privilege’ - what Chinese Premier, Wen Jiabao, denounces an “unsustainable model of development”. Is it a real privilege for the US to have access to such cheap credit and goods?

In the Western World Economies, as a result of the sudden massive access to cheap credit from South East Asia (China principally), we find ourselves in a US consumption model which depends more on credit creation than income growth: a non–fordist type of capitalism (Lucarelli 2008: 28)

In the US, the rapid expansion of liquidity has created enormous wealth but only to serve asset price inflation, namely the housing market and speculative financial assets. We find ourselves in a capitalist world without redistribution for labour. We are departing from real economy to speculative economies. The average household or

retiree is increasingly exposed to uncontrollable and increasingly more frequent speculative assets bubbles crashes – dot.com bubble in 2000, retirement investments funds debacle in 2008 - that comes down to affect the average household capacity to housing and pay its grocery bill. This situation does not seem sustainable.

Emerging markets complained that as their economies expanded, and their central banks felt compelled to augment their dollar reserves, they were obliged to provide cheap finance for the US external deficit, like it or not’(Boltho 2011:146)

We have an outrageous situation where people in China, for example, are working in poor conditions and saving safety net money at artificially low interest rates in order to fuel debt ridden rich economies.

Status Quo - Why is there no better solution at the moment?

We can easily imagine that as US large budget deficits and public debt are unlikely to come down soon, in the present situation, this could lead eventually to upward pressure on domestic interest rates or lead to higher inflation. Growth would slow down. Even that would not create a sudden flight from the dollar as there is a lack of sufficiently attractive alternatives. A massive selloff of US Bonds is not much of a solution for surplus countries as they would see the value of their holdings decline. China may sell some of its US Gvt bonds and increase its euro and yen assets to diversify the risk. Eichengreen foresees a world of multiple international currencies, with the euro and the renminbi playing more significant roles at regional levels – not unlike the 19^th century experience when the sterling’s predominance was tempered by the presence of the franc and the mark. For now, the Euro is a currency with not enough state (not enough fiscal or political integration of the independent Maastricht Central Bank) and one with a distinctly uncertain future (Boltho 2011: 147). Political integration in Europe will follow as it always has but it will be slow, because institutional reforms are slow.

The Chinese renminbi is still inconvertible with too much state (China has strict capital control, reluctant to let foreigners hold, buy and set its assets, barely ready to give its own people financial freedom: interest on banks deposits is capped; shares are largely owned by state entities; and bonds are chiefly held by banks – in turn owned by the state (Economist 2011: 12), but overtime this may change .There are talks about the renminbi become convertible as early as 2020 (Eichengreen 2011 cited in Boltho 2011: 147). It may be the only way forward: no one will want to borrow in a currency that is only going to strengthen, increasing the value of their debts. So China needs a currency that can go up and down like the rest of the world. China will have to loosen its currency’s peg and let it rise.

Another concern is that the World Central banks are bound together in a Prisoner’s dilemma situation - if a growing number of central banks feel obliged to protect themselves against a falling US dollar by diversifying their foreign holding, the whole system of dollar recycling would collapse with quite devastating consequences. ‘There is a classical dilemma akin to the prisoner’s dilemma in game theory: all central banks would be assured stability if no single central bank decided to diversify out of US dollar reserve assets’ (Lucarelli 2008: 20). Unfortunately, this is not stopping the problem as the risk of a dollar crisis increases in the meanwhile.

The best solution at hand is still the US Dollar: no country in the world comes near the level of stability the US still offers. US Government bonds have never defaulted in history – fixed income investment – safe reserves for China – buffer against crisis to pay current account deficit. They are a very liquid kind of asset, can be sold quickly to get cash quickly. For the main US Bonds purchaser, China, SAFETY is the first concern, LIQUIDITY the second, and PROFIT the last. The US contemporary economy is robust: twice the size of the combined economies of Germany, France and Britain, it has institutional depth, vitality, and political stability and unmatched physical security (Kirshner 2008: 419). The US military supremacy acts as a warrant of stability and this is a vicious circle: In The Invisible Hand of the American Empire, Robert Wade argues that ‘the economic benefits that accrue to the United States as the result of the normal working of market forces within this particular framework then provide the bias of American Military supremacy, which help to protect the framework’ (2003: 77).

Conclusion:

While there is no formal institutional requirement to support the Bretton Woods II order, the US is still in 2012 the world currency holder. We have seen the exorbitant privileges the US derives from this position. I have described how the US current deficit feeds on the developing world foreign exchange reserve assets. The two major players in the world economy, the US and China, are currently paralysed in a deadly embrace. This essay does not question the economic liberal model but instead points out to the extreme trade and finances deregularisation movement that started in the 70s, which went as far as compromising independent finance safety mechanisms that led to world a number of large scale financial crisis. Likewise, I showed how, despite some cautious attempts, the market laws have not been able to function properly at all in China and that it may be too late to reverse this trend. The two major players’ economies’ respective local political situation does not allow them to make the necessary moves towards sound economic practices. While it does not seem right that the developing world economies should provide cheap money out of hard won savings they ‘have to build’ as a social safety net, or against foreign speculative attacks, the lack of alternative sustains the status quo. The question is for how long?

Working as a Community Interpreter ...

Working as a Community Interpreter is not what it seems. There is more prestige associated with Conference Interpreting which requires more qualifications, more agility with speed of processing accurate linguistic information and well structured sentences. But as you watch the video below, you will wonder if Conference Interpreting would not be more straight forward and an attractive option after all.

With Community Interpreting, you cannot just be good at interpreting Languages, you need to be able to interpret Culture, you need to build a rapport with All persons involved in order to understand as much as possible their reference system, while keeping impartiality.

It may seem obvious that as a professional interpreter, one should remain impartial at all times, but in reality, it is a very difficult thing to achieve.

More than often, you are called as an interpreter for very sensitive cases (the government does not like to waste their money on such things) - like woman giving birth (and afraid she may forget her second language during the ordeal), doctor's appointments, attempted murder, child custody, refugees family conflict resolution with children involved, schizophrenic clients involved in crime, recorded trials, as I have.

You dwell in the depth of what is part of our humanity. Your client will often see you as an ally, not so much because you speak the same language as it is suggested in the below movie, but because they think 'someone understands' and they are desperate for 'someone to understand' (my experience).

I spend a lot of time saying "please beware that I will translate everything you are telling me", I am ONLY a "tool", I am using that precise word so that they can objectify my presence, dehumanise me (yes, I have to do that, and yes, it is painful). I make the analogy of a tube transmitting information from Them to the Other person. I make sure my two clients face each other, and I am physically in between, and I make sure they should look at each other in the eyes 

(the most powerful medium of communication).

This is how impartiality can be achieved.

Why should I do that?

From the time I start taking side, my presence is no longer required. I then may become a specialist (psychologist, lawyer, doctor) that I am NOT. It is not about me, it is about other people's voices, whatever this voice is about, and I shall not be the judge of that. I am only defending her/his freedom of expression and a right to a fair trial.

When I am asked by a psychologist that may be present in an audience alongside a prison warden 'what do I think' (of a client), I HAVE TO SAY 'Sorry, this is beyond my competency' even if I think I know more. When I think that other questions should be asked, I have to shut up. When a person tells me what she would not even dare telling her mother, I have to warn 'Please I have to translate everything'.

What if it is the only way you can help your client?

It is.

I noticed in this movie that the community interpreters voices were in all cases very soft, like soothing, and I could relate to doing the same thing. I believe it helps a lot, it helps 'relax the mind and conduct information better' (no interfering noise of ANY kind).

Here is a video of Community Interpreting that my translator and interpreter colleagues may find interesting.

http://www.youtube.com/watch?v=1de0kvn1bjM&list=PLx15JSWFqoqCm5ycG6CKzxAQHE-YfrgIj&index=6

This video has been created as one of 6 films in 6 European cities in order for interpreters and police officers to improve best practices in France, Scoltland, Italy, Tcheck Republic, Germany and Belgium under UNITI (University Network of Interpreter Training Institutes) in a collaborative and comparative project.

This is what I do from time to time, when I am called. I cannot say that I 'like to be called' for such jobs, but it is the most difficult kind of work I have ever done, and well worth the trouble.

After such jobs, I feel exhausted intellectually and emotionally, but I know I have genuinely helped a human like me. I give a voice to a voiceless.