Jeffrey Frankel: “The Dollar and Its Rivals”

Updated 11/27


From today’s Project Syndicate:

Since 1976, the US dollar’s role as an international currency has been slowly waning. International use of the dollar to hold foreign-exchange reserves, denominate financial transactions, invoice trade, and as a vehicle in currency markets is below its level during the heyday of the Bretton Woods era, from 1945 to 1971. But most people would be surprised by what the most recent numbers show.

The entire article is here. More on reserve currencies here.


Update, 11/27 3:15AM Pacific: An expanded version of this article is here.

2 thoughts on “Jeffrey Frankel: “The Dollar and Its Rivals”

  1. Bruce
    In trade-weighted US$ terms, nothing is happening. The trade-weighted US$ Broad and Other Trading Partners indices have traded around par since 2008 as GDP PPP has effectively achieved parity between the three global regional trading blocs as real GDP per capita and trade has flattened out.
    Adjust for US petroleum imports, which are falling, the US has no “actual” trade deficit.
    Rather, the reported US trade imbalance, apart from oil (some of which is in the form of imports from US oil companies from extraction abroad), is primarily the net of US supranational firms’ exports of capital goods and ag products to their subsidiaries abroad from which goods are “exported” from the countries where the production exists and “imported” to the US.
    With the high price of oil and rising labor costs now restraining growth abroad and the trade-weighted US$ firming at a predictable trend around par, US supranational firms will no longer enjoy growth of revenues and profits from foreign exchange effects from investing and producing abroad, i.e., offshoring and labor arbitrage.
    Put another way, the US will no longer be able to “export inflation” of nominal demand for US capital goods, ag products, and energy via bank loans, FDI, and supranational firms’ “trade” credits in China-Asia in order to pad revenues and earnings.
    The long-term implication is little or no growth of real GDP per capita and trade, and virtually all fiat digital debt-money credit currencies will trend towards par in trade-weighted terms with one another in the years ahead.
    Again, nothing is happening in trade-weighted US$ terms.
    And, no, the Yuan/renminbi will not replace the US$ as a global reserve currency because China’s organic net trade flows less US and Japanese FDI-induced production and exports are a tiny share of net trade-weighted US$ flows as a share of world GDP.
    As global trade and real GDP per capita growth flattens out, so will US and Japanese FDI to China-Asia, reducing dramatically China’s fixed investment, production, and exports as a share of GDP and forcing consumption to rise as a share of GDP; but not because of proactive “rebalancing” but because investment and exports to GDP will decline, causing consumption as a share of GDP to rise by default but at a much slower rate of real GDP growth for China-Asia hereafter, i.e., “middle-income trap”.

  2. don

    I wonder what the trends look like if you subtract Asian currency interventions. These interventions are not explained by the topics JF considers, but rather by the strategies of export led growth and using exports to combat lax domestic demand.

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