Commentary on Political Economy

Thursday 8 September 2011

Michael Pettis on the Dollar as Reserve Currency

Pettis is always great value and this short article conveniently summarises what I have tried to say in many places on this site. There are a couple of "theoretical" matters that need to be understood and that Pettis would not point out because he probably does not wish to be too blunt, or because his "analytical premises" are different from ours.

The first thing to remember is that "capital" is the monetary expression (as "value") of the legal entitlement by its owners to the ownership of social resources, even between countries. The "conversion" of this ownership between countries takes place in the form of "exchange rates". With "free capital and currency markets" that means that capital will generally flow to where its "investment" is most "profitable" and less "risky". That means that if capital flows into the United States that will mean that the US will have to pay "interest" on it unless it can be invested profitably. Therefore, capital inflows from other more profitable countries into the US for the reason of "safe parking" will constitute a cost to the US economy which then has to devote real resources "repaying" the interest on the investment and will be penalised with a higher exchange rate for the dollar and loss of "competitivity".

In such a world with "free capital markets" and flexible exchange rates the US is penalised for being the "safe harbour" of world capital in terms of higher prices and unemployment and currect account deficits. Higher productivity can help but these days US corporations can invest anywhere in the world where wages are lower - so that "productivity" through innovation simply does not count. (China's dictatorship actually "steals" the technologies, anyhow.)

So that is why international capital flows and balance of payments imbalances feel like a "zero-sum game": it is not in "political" terms, but it is because capital and its "conversion" through exchange rates is treated as a "signal" of the ability of capital "to command living labour and social resources" anywhere in the "freely convertible" world. OK, here is Pettis's piece:,0

1 comment:

  1. Every currency is worth trading for. It's how you adjust on the market.