Thanks for this really Interesting and revealing analysis. I particularly agree with focussing on currency-pairs and also on bilateral CA balances / flows. That said, I have a broader question, which I hope you can address in Part III or a later post. My apologies upfront for this longish comment but my question basically is this: to what extent does any administration's dollar policy matter really in light of the fact that the US, being the issuer of the global reserve currency, is structurally bound to run a CA Deficit (CAD) ? To be sure, there is a view in International Economics / Econ History / International Political Economy that the issuer of a top international (reserve) currency does not really have to run a CAD. As you may already know, this "minority view" as it is known, was first advanced by Despres, Kindleberger and Salant (Despres, Emile, Charles P. Kindleberger, and Walter S. Salant (1966), The Dollar and World Liquidity: A Minority View (Washington, DC: Brookings Institution)), and which argues that a reserve currency issuer such as the US can simply supply global dollar liquidity via the Financial Account by essentially playing the role of a "banker to the world" (i.e., borrowing short (liabilities) and lending long (assets)). Sure, econ history (e.g., Barry Eichengreen) offers evidence for this as both the Pound Sterling and the US Dollar reached reserve currency status when the UK and the US were running a CA surplus. And, while those holding the minority view (such as Eichengreen and Benjamin Cohen) acknowledge that CADs followed in both, the case of the UK as well as the US, they don't see as a necessary condition for *sustaining* reserve currency status. The minority view is only partially correct In my opinion, for in order to sustain reserve currency status, the US for instance, has to run a persistent CAD. How else would the Rest of the World (RoW) "earn" dollars to payback (interest + principal) what is lent and/or invested long by the US via the Financial account? In short, as opposed to the minority view, both the CA and the FA are at work for a reserve currency issuer, with the CA having to be in a deficit for there to be demand in the global economy (that is a la Kindelberger the role of the hegemon after all). So, now coming back to my question, if the US has to run CA Defs, to what extent does any dollar policy matter? We may not be able to quantify it, but the way I see it, the US for sure cannot be a net exporter unless some other economy such as China become a net importer (highly unlikely at least as things stand).
Thanks again for your posts that I enjoy reading regularly.
Thanks for this really Interesting and revealing analysis. I particularly agree with focussing on currency-pairs and also on bilateral CA balances / flows. That said, I have a broader question, which I hope you can address in Part III or a later post. My apologies upfront for this longish comment but my question basically is this: to what extent does any administration's dollar policy matter really in light of the fact that the US, being the issuer of the global reserve currency, is structurally bound to run a CA Deficit (CAD) ? To be sure, there is a view in International Economics / Econ History / International Political Economy that the issuer of a top international (reserve) currency does not really have to run a CAD. As you may already know, this "minority view" as it is known, was first advanced by Despres, Kindleberger and Salant (Despres, Emile, Charles P. Kindleberger, and Walter S. Salant (1966), The Dollar and World Liquidity: A Minority View (Washington, DC: Brookings Institution)), and which argues that a reserve currency issuer such as the US can simply supply global dollar liquidity via the Financial Account by essentially playing the role of a "banker to the world" (i.e., borrowing short (liabilities) and lending long (assets)). Sure, econ history (e.g., Barry Eichengreen) offers evidence for this as both the Pound Sterling and the US Dollar reached reserve currency status when the UK and the US were running a CA surplus. And, while those holding the minority view (such as Eichengreen and Benjamin Cohen) acknowledge that CADs followed in both, the case of the UK as well as the US, they don't see as a necessary condition for *sustaining* reserve currency status. The minority view is only partially correct In my opinion, for in order to sustain reserve currency status, the US for instance, has to run a persistent CAD. How else would the Rest of the World (RoW) "earn" dollars to payback (interest + principal) what is lent and/or invested long by the US via the Financial account? In short, as opposed to the minority view, both the CA and the FA are at work for a reserve currency issuer, with the CA having to be in a deficit for there to be demand in the global economy (that is a la Kindelberger the role of the hegemon after all). So, now coming back to my question, if the US has to run CA Defs, to what extent does any dollar policy matter? We may not be able to quantify it, but the way I see it, the US for sure cannot be a net exporter unless some other economy such as China become a net importer (highly unlikely at least as things stand).
Thanks again for your posts that I enjoy reading regularly.