Reserve Currency Status Benefits US Institutions But Not Regular Folk: Labor Economist

The US dollar being the world’s reserve currency has only benefited American institutions and not regular workers, according to labor economist, founder, and president of the Economic Strategy Institute Clyde Prestowitz.

Prestovitz has served as an adviser to Presidents Ronald Reagan, George HW Bush, Bill Clinton, and Barack Obama, and as a counselor to the secretary of commerce in the Reagan administration.

He spoke to NTD’s Paul Greaney at the 2022 National Conservatism conference on Sept. 13 where he explained the downsides of the US dollar holding the world’s reserve currency status.

Reserve currencies are those widely held by central banks and other major financial institutions, including governments and private institutions, and are used for large investments, transactions, and international trade.

Along with the US dollar, other currencies with the same status include the euro, Japanese yen, Swiss franc, British pound, Canadian and Australian dollars, and the Chinese renminbi (RMB).

However, the US Dollar is the most popular, making up around 60 percent of all central bank foreign reserves, according to the International Monetary Fund, due to the fact that it is widely trusted across the globe given the general political and economic stability of the United States.

This has many benefits, Prestovitz noted, as people all over the world are borrowing and trading in US dollars.

“I think it was Charles de Gaulle who spoke about the extra exorbitant privilege of the dollar as the world’s reserve currency. And he was right in the sense that, if you have the world’s mean currency, you can accumulate power and you can do things that other countries can’t do,” he said.

But challenges are also presented by governments manipulating the currency market. “The problem is that the currency market is not free, the currency market is manipulated,” he explained. “The treasury departments or the finance departments of many major governments are intervening in the market, they’re selling dollars or buying dollars, or they’re, in some way, limiting the flow of capital in and out of their own countries.

This manipulation has seen the dollar generally valued higher than other currencies due to its trustworthiness as a reserve currency. But this has, in recent decades, seen domestic manufacturing and production go offshore at a disadvantage to Americans.

“China is a good example, you can’t just send money to China, you can’t just take money out of China. So the Chinese currency is artificially undervalued. And what that does is, of course, stimulates exports from China,” he said.

Meanwhile, things like US stocks, US treasury securities, or other financial assets have enjoyed significant investment but the wealth has generally remained concentrated in the nation’s institutions.

This has left America lacking in basic infrastructure, as little of the benefit from being a reserve currency has flowed through to the average American.

Tackling Overvaluation

Despite the COVID-19 pandemic and soaring inflation, which dropped slightly to 8.3 percent in August from 8.5 percent in July, the dollar has continued to gain strength.

In order to slow the overvaluation of the US dollar, Prestovitz proposed what is called a market access contribution (MAC). Through MAC, a charge would be placed on incoming investment into the US in things like treasury bonds, real estate, or entire businesses.

“The charge could vary but let’s say we had a 4 percent charge,” the economist explained. “So that 4 percent charge would effectively be a decrease in the interest rate that would be paid on the investment, and money accumulated from it could be put into an infrastructure reconstruction fund that would fund the reconstruction of US infrastructure.”

“That kind of policy would tend to work against the overvaluation of the dollar and also fund the reconstruction of US infrastructure,” Prestovitz said.

The proposed charge on incoming investment would also tend to push up the value of the RMB and “make it more difficult for the Chinese to run the export machines,” the economist noted.

Chinese Reserve Currency?

Prestovitz also said he’s not opposed to the RMB becoming more of a reserve currency.

“Whereas I oppose a lot of Chinese policies, I hope that the Chinese RMB would become more of a reserve currency because then it couldn’t be easily undervalued,” he said.

Another benefit is that the competition would force the United States government to exercise more self control.

“Because we have the world’s currency, it makes it easy for us to accumulate debt,” he said of the US government’s habit of running a budget deficit without raising the taxes needed to match its spending. “If we were going to discipline ourselves, we’d have to dramatically [raise]I mean like double, taxes, particularly on the wealthy and middle income in the US I don’t know of any American politician right now calling for a dramatic increase in taxes, so I think it’s not going to happen.”

As for the reserve currency, “You can borrow more or less indefinitely, you can accumulate trade deficits, it doesn’t matter,” he said.

“But it doesn’t matter. It matters over the long term,” he said of prevailing financial policy. “When I was in the Reagan administration in the 1980s, the rest of the world owed the United States money. Today, the United States owes the rest of the world $20 trillion, more than a year’s GDP of the United States economy. And that will accumulate; that’s going to rise this year by another trillion dollars.

“We’re now running debt with the rest of the world at a trillion dollars a year. Well, ultimately, this is not supportable and there needs to be some kind of discipline. Ideally, the United States itself would realize this is not feasible long-term and would take steps to withdraw. But history tells us it’s probably not going to do that. So, having a competitive system might be a way of forcing the US to be more careful about its international debt situation.”

He added that he’s not worried about China displacing the US dollar, because “China is beginning to run out of steam”—they’re running out of things to copy, there are now other places where it’s cheaper to manufacture, and they have weak demographics.

“I think this is where a question of the political system comes into play; ultimately, people trust the dollar globally,” he said. “They trust it because they know that there’s rule of law in the United States. And they know that the US government can’t just arbitrarily take actions that might be deleterious to their interests.

“They also know that there’s no rule of law in China, so they’re not really going to trust putting their last dollar in China.”

Katabella Roberts

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Katabella Roberts is a news writer for The Epoch Times, focusing primarily on the United States, world, and business news.

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