The Monetary Basis of the Imperial Economy Part 2
Going Global
Last week I went over the foundation of the Imperial Economy. This foundation is inflation, as defined by an increase in the money supply. As I stated:
The zenith of any government’s power is control of the money supply. This allows them to control the economy to a high degree. The zenith of a government’s influence internationally is to have its money achieve the status of the Reserve Currency.
I focused solely on the domestic basis of monetary control, and who benefits from it. It is now time to dive into the international basis of the Imperial Economy. The drive to attain global monetary hegemony is the main reason behind the empire and once attained is the main way that the empire directs resources to it (in reality the power elites in the U.S.).
Any money is simply a medium of exchange. A true market based medium of exchange would be something like gold (the choice for thousands of years). A modern fiat currency (backed by no real good or commodity) should be viewed as a forced money because it is maintained by geopolitical dominance rather than a market preference. So, a reserve currency is a globally dominant medium of exchange. The rise of the U.S. dollar as the world’s reserve currency came about specifically as an outgrowth of the U.S. victory in WWII. Given the dominant size of the U.S. economy in 1945 and the fact that it alone among the belligerents was not in ruins made it the only real choice.
In banking a “reserve” is the asset that the bank must have on hand to meet the obligations of their depositors. Today that means enough cash on hand to meet the withdrawal needs of bank customers. It also means the larger assets that a bank must have in case a large number of depositors wish to withdraw money at the same time. This is not the time to get into the topic of “fractional reserve banking”. The Bretton Woods Conference in 1944 where the dollar was set up as the reserve currency established a system whereby the 44 allied nations would peg their currencies to the U.S. dollar, and the U.S. promised to redeem those dollars at a fixed rate of $35/ounce. So, what does all this mean practically, or better put whose bread is getting buttered?
The Blessings of Reserve Status
In short, the main blessing of being the reserve currency is that you can mitigate, for a time, the domestic consequences of inflating your money supply. That is to say, the U.S. can export inflation. Briefly this is how it works. In a standard economy, when a central bank creates new money (inflation), that money quickly circulates among the domestic population. As the supply of money increases relative to the supply of goods, the purchasing power of the currency drops, and domestic prices rise.
However, because the dollar is the global reserve currency, it serves as a “sink.” Central banks around the world (especially in exporting nations like China, Japan, and oil-producing states) act as the largest sinks. They sell their local currency to buy dollars to keep their own currency’s value stable, then “sink” those dollars into U.S.Treasury bonds (which helps explain how Uncle Sam’s bar tab got so large. Central banks, foreign corporations, and international investors around the world have a nearly bottomless demand for dollars to:
- Settle international trade (oil, gold, etc.).
- Hold as a stable store of value in their own reserves.
- Service dollar-denominated debt.
By creating new dollars and sending them abroad to purchase real goods and services (the trade deficit), the U.S. increases its domestic money supply without an immediate, equivalent rise in domestic prices. The price inflation is effectively “exported” to the foreign holders of the currency who now possess paper notes that will eventually lose value.
One of the most important concepts in economics is the Cantillon Effect. This states that the first recipients of new money benefit because they can spend it at current prices before those prices have risen. I discussed this in last week’s post. The last recipients lose out because they receive the money only after prices have already inflated.
- The U.S. as the First Recipient: As the issuer of the reserve currency, the U.S. government and its financial institutions are the “first recipients.” They can print money to fund government spending or provide cheap credit to domestic industries.
- Foreign Nations as the Last Recipients: Foreign nations provide the U.S. with real resources (cars, electronics, raw materials) in exchange for these new dollars. By the time these dollars circulate back through the global economy or are used by foreign nations to buy goods, their purchasing power has been diluted.
The U.S. effectively extracts a “seigniorage tax” from the rest of the world. It consumes real wealth from abroad in exchange for paper that it can produce at zero marginal cost.
When the Federal Reserve engages in expansionary monetary policy, the resulting “excess liquidity” (extra cash in the system) does not stay within U.S. borders. This does several things:
- Lower Domestic Pressure: Because the dollar is used globally, a significant portion of the newly printed money is absorbed by the international banking system.
- Asset Bubbles Abroad: Instead of causing immediate inflation in U.S. grocery stores, the new money might flow into emerging market stocks, European real estate, or global commodity markets.
- The Delayed Correction: Eventually, if the world decides to hold fewer dollars (de-dollarization), those “exported” dollars will flood back into the U.S. domestic economy. Only then does the “exported” inflation return home as a rapid and painful increase in domestic prices. I will discuss this possibility next week.
Economics teaches that this privilege creates a false sense of prosperity. Because the U.S. can “export” the inflationary consequences of its debt, it can sustain massive trade, and fiscal deficits for decades.
Under a gold standard or a non-reserve currency system, a country with such a deficit would see its currency devalue rapidly, making its exports cheaper and imports more expensive until the trade balanced out. The reserve status short-circuits this feedback loop, allowing the U.S. to live beyond its means by trading “inflated” paper for “real” wealth.
Parting the Clouds
I am not breaking any new economic ground, either theoretically or historically. I am merely seeking to explain in plain language what is the driving economic force behind U.S. imperial foreign policy. It should be clear what a massive advantage Reserve Currency status gives the nation that holds that crown. I should clarify. It gives the connected political elites a massive advantage. The same first receivers of the newly created money that benefit domestically, as I outlined last week, are the same ones who benefit from this international rip-off courtesy of Reserve Currency status.
It should start to be clear why the U.S. is so adamant about being involved in the internal affairs of so many nations around the globe. It is the same reason Great Britain was when the Pound Sterling was the global reserve currency.
The ability to control the international monetary system confers enormous coercive leverage over other nations. It means that they will have to fall in line with U.S. imperial demands or see their currency crushed (I will outline some instances of this in coming posts).
It is to maintain the primacy of the U.S. dollar that drives the U.S. system of alliances, foreign military interventions, and the need to maintain a large military. This explains the 800 or so U.S. military bases in over 80 nations around the globe. It should no longer be a head scratcher as to why the U.S. acts as the world’s policeman. It is all in defense of the primacy of the U.S. dollar. Even as lazy an intellect as Donald Trump understands the importance to the Empire of this reserve currency status. In this clip he states that losing reserve currency status is like losing a major war (at the 57 second mark in case you don’t want to listen to the fact free claims Trump made prior).
The Greek Tragedy of It All
Like any good Greek tragedy, the decades long living beyond your means, and the U.S. drive to maintain Reserve Currency status is the very thing that will cause the U.S. to lose that status. Along the way the U.S. economy gets warped (even more than it already has), the market becomes less free and more rigged, and ordinary people suffer. Worse, all the innocent blood that is shed makes the U.S. as ruthless and bloodthirsty as any empire that has ever existed.
Nest week I will outline the fundamental ways that this inflationary process has warped the U.S. economy and created what I call the Great Deceleration. I will also review how all this might end. Have no doubt, all this will end. It is just a question of when and how hard the landing will be.
Praise Be to God
