Does Dollar Dominance Actually Benefit Americans?
Recently, the US Senate Banking Committee held a hearing titled “ Cryptocurrencies: What are they good for?” where one Senator worried that Bitcoin threatens the worldwide dominance of the US dollar. Others have raised similar reserve currency concerns about China’s “digital Yuan” in order to push US policymakers to imitate China’s totalitarian CBDC.
Both assume that reserve currency status is good for the US.
Some in the Bitcoin space think not. Alex Gladstein of the Human Rights Foundation emphasizes the trillions we spend maintaining hegemony, including paying billions to dictators and starting endless wars.
Meanwhile, investment analyst Lyn Alden thinks dollar hegemony mainly hurts regular Americans because it keeps the dollar over-valued, which hurts exports and leaves American manufacturing gutted. I think regulatory burdens had a bigger hand in creating the Rust Belt, but indeed a strong dollar certainly doesn’t help.
Of course, the common thread here is that both Gladstein and Alden are talking about impact on regular Americans, not the US government. After all, it’s regular Americans who pay for never-ending wars in blood, debt, and Patriot Acts packed with surveillance and police power. Meanwhile, it’s also regular Americans whose communities are gutted by uncompetitive exports — federal bureaucrats and Fed employees eat well no matter what tragedies befall flyover country.
So that’s the crux of it: reserve currency status is fantastic for the US government, but it’s a lot less fantastic for regular Americans.
So today I’ll run through the gory details of the alleged benefits to reserve status. To ask what’s a dominant currency good for, anyway — and for whom.
Every dollar spent makes the dollar weaker
First off, this isn’t only about Bitcoin. After all, any time you sell a US dollar for anything at all, the dollar gets a little bit weaker. Because you personally reduced aggregate worldwide demand to hold dollars. Whether you buy Apple stock, Swiss Francs, houses, or just groceries, your spending made the dollar a little bit weaker.
Of course, people buying groceries is a good thing since the dollar’s purpose in life is serving Americans — we don’t serve it. But this simple fact means that Bitcoin will likely threaten the US dollar no matter what the US government does. Simply by drawing off demand with its superior ability to hold value.
So, unless the Fed can credibly commit to a lower inflation schedule than Bitcoin — which it will not, since it’s addicted — there’s not much the US can do to stop Bitcoin eating dollar demand. At best they can delay.
So should they?
Reserve Status — What is it good for?
Reserve currency status for the dollar means you can print lots of scraps of papers, hand them to foreigners for useful things like cars or toasters, and the foreigners will bury them in the ground and ask for more. They do this because they believe dollar scraps will hold value better than other scraps, particularly the scraps they use in their home country.
Now, this is obviously a super deal if you’re the one printing the scraps of paper. But is it a super deal for Americans?
Well, imagine if foreigners no longer wanted to park their savings in dollars. This would mean all those new scraps of paper stay in circulation, rather than being buried as savings. This would drive up inflation, so the Fed would have to print less money lest the people get angry about grocery and gasoline prices.
How much less money could the Fed print? Well, let’s ask how much they’ve been printing.
Where did all the new money go?
In raw numbers, since the 2008 financial crisis, the US M2 money supply rose from $7.8 trillion to $20.5 trillion. So $12.7 trillion in new money — about a 163% increase in just 13 years. That’s much more money creation than comparable large economies — for example, it’s four times faster than Canada grew M2.
Good. Next, who got all that new money? After all, $12.7 trillion wasn’t distributed by helicopters, it went somewhere. Well, the Fed used 60% of it — about $7.3 trillion — to buy stuff. They spent two-third on government bonds, and about one-third on mortgage-backed securities (MBS). With the remainder going to corporate bonds and other sundry knickknacks that caught the Fed’s eye, or that served foreign interests.
This buying spree took Fed holdings of government debt from $900 billion to $5.3 trillion — a $4.4 trillion rise. And it took their MBS horde to $2.5 trillion, a substantial hunk of all mortgages in the US.
In other words, the Fed created $7.3 trillion of new money to increase government spending and to prop up mortgage speculators. I’d argue the first was actually harmful to regular Americans, while the second was simply market manipulation and redistribution from savers to borrowers.
$5 Trillion for a Boom-Bust Cycle
Now, what happened to the rest of that stolen purchasing power, the other $5 trillion? That hunk was created, not by the Fed, but mostly by other entities including private banks via subsidized borrowing. This $5 trillion is actually the dangerous hunk according to Austrian business cycle theory. Because subsidized borrowing causes the boom-bust cycle that we know as recessions and depressions. Essentially, easy money sparks a “tissue fire” of unsustainable growth, inevitably followed by a shock when inflation gets out of hand and rates are hiked.
The end result is, at its most extreme, 1920's-style euphoria followed by 1930's-style disaster.
So reserve status bought us $4.4 trillion in government spending, close to $3 trillion in mortgage and other market manipulation, and $5.3 trillion in boom-bust cycle. Sounds pretty lousy for regular Americans.
And, remember, these are the alleged benefits of reserve currency.
Meanwhile, remember that all these $12.7 trillion didn’t come out of thin air — they were siphoned off other dollar holders in proportion to their holdings. Some of them were the very foreigners subsidizing the creation in the first place, but most of them were, indeed, American savers.
So, in sum, reserve status meant the Fed could siphon roughly $1 trillion per year mostly from American savers, and hand it to the Federal government, to speculators, and to other Americans who borrow. Not so super anymore.
What would America Without Reserve Status Look Like?
In a world without USD reserve status, Fed money creation would fall dramatically — perhaps by three-quarters. Their pattern of theft would probably be similar until we End the Fed, but the magnitudes would be much smaller.
This means government would have a much harder time creating trillion-dollar deficits. Meaning it would have to choose its spending priorities much more carefully, with an eye towards actually living within its means, rather than counting on foreigners to keep propping up the debts for our children and grandchildren to pay off.
As for wars, it would indeed mean the US has to choose its wars, and its dictator friends, much more carefully. In fact, the US today is unique both in its reserve currency status and in the enormous number of wars it starts. The Canadians, Swiss, Japanese, or even British don’t come remotely close, since voters actually have to pay for their own wars rather than pass it on to their children.
Impact on Inflation, Exports
Aside from less government spending and fewer wars, what else might change?
Losing reserve status likely means a huge drop in the value of the dollar — perhaps by 1/3, going by how many dollars are probably overseas. This would come from foreigners emptying their caches, putting them back in to circulation where they compete with currently circulating dollars.
This wouldn’t happen overnight, perhaps a decade or so. During which we’d expect elevated inflation and lower purchasing power, paired with possible improvements in export competitiveness. The Fed would probably react fairly quickly to reduce new money creation; the fastest is to simply sell their MBS and Treasuries.
The economic upshot is more expensive Chinese toasters and German cars, and possibly higher US exports although that’s a more complicated picture involving domestic costs.
Longer term, and most important, it would mean American savers receive higher returns on their bank accounts, while borrowers pay concomitantly higher rates. Both could mitigate some of the boom-bust cycle, though it wouldn’t help nearly as much as eliminating the Fed altogether. Still, higher savings and less borrowing themselves could improve America’s pathetic 70 year erosion in our net savings rate, where any improvement would be welcome.
A loss of dollar reserve status would likely mean lower government spending, fewer wars, and a temporary rise in inflation and improved export competitiveness. Longer-term, it would mean less redistribution of wealth from regular Americans to specific beneficiaries of monetary policy, and it would mean an America much more focused on our own country and our own communities, rather than trying to play world policeman.
There would be short-term challenges, to be sure, but you could make an excellent case that losing reserve status would actually benefit regular Americans, albeit at the expense of elites. Indeed, much like Bitcoin itself.
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Originally published at https://cryptoeconomy.substack.com on August 8, 2021.