Commentary on Political Economy

Tuesday 19 July 2011

This comment just appeared at the FT's Gavyn Davies Blog

A brief clarification on a comment Gavyn Davies made below. First, he is entirely right about the dollar 's reserve currency status not explaining why world capitalists are flocking to treasuries. If anything, it is the fact that capitalists flock to treasuries that... indicates why the dollar has reserve currency status! So we need to look at "why" treasuries are considered to be a "haven". We will not go into that here - we have done it below and in other posts here.
The next question is "the loss of confidence in the dollar in the early 70s". At the time, the dollar was emerging from the Bretton Woods system or Gold Dollar Exchange Standard with FIXED exchange rates, which meant that the greenback was badly over-valued and the US were financing the Vietnam war and its balance of trade deficits through "benign neglect".
Of course, that is not the case now! Exchange rates are "flexible" and the US dollar is already at a level where any "loss of confidence" in US monetary and fiscal policies would ALREADY be reflected in its exchange rate!!
This is not to say I disagree with Davies - not at all. But it is a very important point to bear in mind. Cheers.
(Incidentally, has a short piece on exchange rates today.)

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