Abstract

The Unstoppable Decline of a Reserve-Currency Country

This paper discusses the response to the most recent dollar rate movements by the monetary theory of determining exchange rates on the basis of assumptions for the Purchasing Power Parity (PPP). This approach can only be adapted on the basis of arguments changing with the dollar rate movements. Therefore, such an approach is unsatisfactory in the assessment of developments other than very long-term ones, in which causalities are no longer identifiable. For this reason, the assumption that exchange rates are determined by national price levels (active PPPs) is rejected. Instead, a presentation of passive PPPs on the basis of a Keynesian money economy theory is given, which defines exchange rates in terms of the scarcity of currencies that are freely convertible and compete with one another in international credit markets. The PPP is formed by price and quantitative adjustments on national resource and goods markets to the credit market equilibrium. From this angle, a definitely adverse judgement must be passed on US economic policies. The dollar rate level does not reflect confidence in US economic developments, but is the direct result of the more or less vigorous public-sector borrowing requirement in the USA. As a consequence, capital and goods import surpluses support the high level of prosperity in the USA at stable prices at present. Since government spending will not result in any increasing volume of tax revenue, the ability to expand the national debt is invariably bound to come to an end. The cessation of the reverse demand for the dollar will be the cause of the dollar rate decline which, contentually, is a pure credit market phenomenon, i.e. rising demand for non-dollar deposits by credit suppliers to expand their lending operations on the basis of a currency with a convincing wealth securing function. Big losses in real income as a result of “success in exports” at lower exchange rates will then accompany the reexportation of the present creditfinanced prosperity from the USA and result in structural shifts toward the production of exportable products. Such development can be avoided in the USA by sharp deflation which will, however, be confronted with competing efforts of other currency areas striving for the reserve-currency privilege