World Trade - January 2009 - (Page 8)

POLICY PERSPECTIVES Is the Dollar’s ‘Exorbitant Privilege’ as the Global Standard At Risk? I BY DANIELFREIVALDS BY JOHN GRISWOLD t was in the 1960’s when then French President Charles DeGaulle lamented that the U.S. Dollar enjoyed an “exorbitant privilege.” He said that for a half century successive U.S. administrations had benefited from the U.S. dollar’s role as the world’s reserve currency. According to Professor Phillip Cerny of Rutgers University, this has allowed the U.S. “to featherbed consumers, run up huge budget and current account deﬁcits, and fund foreign adventures, like the wars in Vietnam and Iraq.” DeGaulle uttered the phrase when the U.S. was still on the gold standard. Then U.S. President Nixon said “don’t worry we have enough gold to back up our currency.” DeGaulle called his bluff and symbolically sent a French battleship full of dollars to exchange them for gold. The British followed soon thereafter. The U.S. had far more dollars than gold to back it up and it ran its ﬁrst trade deﬁcit ever. So, in 1971 Nixon unilaterally changed the rules of the game and took the U.S. off the gold standard. He basically said the dollar is worth what we say it is. The change was “spun” by saying the U.S. favored “ﬂoating exchange rates.” “Any other country that lived beyond its means would have to devalue its currency, print more money to pay its bill, cut spending, and endure the inﬂation that follows.” Nixon’s Secretary of the Treasury John Connally was blunter to quip to European Central bankers “the dollar may be our currency but it’s your problem.” This whole affair of going off the gold standard and the ﬁnancial readjustments that followed became known as the “Nixon Shock” and the beginning of the design of the Euro, something to counter if not replace the inﬂuence of the dollar. Up until the Nixon Shock, the U.S. dollar served the world well to have one reserve currency. Trade could be priced in one currency: “I’ll sell it to you at US$159 CIF per ton.” Ship8 WORLD TRADE JANUARY 2009 ping costs could be in one currency. Currencies would have a common dominator—the dollar—to determine its relative worth. And, perhaps most importantly, the industrial commodity—oil— was priced in dollars. Besides the advantages of commodity pricing in dollars, as long as the U.S. wasn’t in disarray it could be a safe place to “stash your cash” as one New York private banker once told me. The shock we are in now is bigger. As The Economist, to cite but one source, has consistently warned, “Today’s America lives beyond its means more ﬂagrantly than before.” Others have taken note of this abuse of national privilege. French President Nicholas Sarkozy, for one, noted when he was ﬁnance minister that “any other country that lived beyond its means would have to devalue its currency, print more money to pay its bill, cut spending, and endure the inﬂation that follows.” But the U.S. didn’t have to resort to this dire option since the rest of the world needed to keep buying dollars in order to transact trade (and through this institutional demand artificially sustaining the currency’s value). The game, though, looks like it’s nearly up. Expert sentiment is that the current financial crisis is going to hasten the end of the dollar as the world’s reserve currency. “For the first time ever,” said one expert in October, “we are seeing in the financial markets it costs money to guarantee you against a U.S. government default. And that’s a sign that the markets are saying that America’s taking on an enormous burden in bailing out its banking system and in ﬁghting its foreign wars and that maybe this is a burden too far.” What now? I like what James Flaherty, Canada’s Finance Minister, wrote in the Financial Times, that we need to follow Canada and “be boring.” Specifically “we need to regulate all pools of capital that rely on leverage. The crisis that demonstrated the devastating impact that unregulated entities can have.” Outgoing U.S. President Bush still doesn’t get it as evidenced by his comment at the recent G20 Summit that “we all have the same problem”—that same problem being ﬁnancial contamination by way of the “exorbitant privilege” given the dollar. WT John Freivalds is the publisher of the Periodic Table of Money (www.jfamarkets.com). http://www.jfamarkets.com

Table of Contents Feed for the Digital Edition of World Trade - January 2009

World Trade - January 2009 Contents Supply Chain Finance Conference: The Right Stuff at the Right Time! Is the Dollar's 'Exorbitant Privelege' as the Global Standard at Risk? Supply Chain Watch Tradewinds The Rise of the 4PL An Evolving Tech Backbone Makes 4PL Service More Effective The Changing Landscape of U.S. Railroads Intermodal Grows Up Port of Hamburg Grows as Distribution Point to Eastern Europe Outsourcing Without Fear Measuring the Carbon Footprint

World Trade - January 2009

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