Americans defend the dollar’s status as reserve currency for two reasons: It reduces the cost of imports and it lowers the cost of government borrowing.
Michael Pettis writes in a newsletter that both reasons have been obsolete for decades:
In the first case, Americans already over-consume, and so it is hard to argue that they will benefit in the aggregate from lower consumption costs, especially when lower consumption costs come at the expense of employment. Remember that reducing the cost of consumption may increase consumption relative to household income (i.e. lower the savings rate), but if it causes unemployment to rise, it can easily lower overall consumption by reducing household income faster than consumption ratios improve. In that case American consumers are worse off.
As for borrowing cheaply, what matters to a government’s borrowing cost, as countries like Switzerland clearly demonstrate, is not major reserve currency status but rather creditworthiness. And since reserve currency status actually increases US borrowing, it is more likely to undermine the ability of the US Treasury to finance itself cheaply than the loss of reserve status would.
Pettis says the government should take the lead in ending the dollar era. Although painful, this is the only way to level the playing field with China:
If the world were forced to give up the dollar, there is no doubt that there would be an initial cost for the global economy – it would reduce global trade somewhat and it would probably spell the end of the Asian growth model. But giving up the dollar would also lower long-term economic costs for the US and reduce dangerous global imbalances.
Don’t miss: The 9 Stages Of Global Monetary Breakdown >
Business Insider Emails & Alerts
Site highlights each day to your inbox.