Stanley Dundee

Balanced Trade

2020-06-17 v. 1

The exorbitant privilege accruing to the US via the US dollar (USD) as global reserve currency creates a great incentive for others to escape the burdens of a global economy that relies on the USD. A policy of balanced trade is proposed, in which bilateral currency swaps between counterpart central banks provide an alternative to utilization of a global reserve currency for cross-border trade.

Perhaps the most important pillar of US hegemony is the exorbitant privilege associated with the US dollar (USD) as global reserve currency. While this is not the place to particularly examine the imperial role of the reserve currency, may it suffice to say that the edifice of globalization (and the beating heart of neoliberalism) is indelibly linked to that privilege. Does it need to be that way?

As the tendrils of globalization were tightening their strangleholds in subject nations over all the world, trade was mainly denominated in USD, which proved convenient for cross-border trading partners that did not wish to be encumbered by each-other's less liquid, more volatile national currencies.

Likewise, the largest, deepest, and most opaque money markets were found in the transnational network of global banking participants in the Eurodollar market. For outsider nations struggling to modernize, access to dollars for capital-intensive imports was critical. Moreover, oil purchases settled in USD, so oil consumers had to scramble for USD to keep their economies powered. Correspondingly, oil producers had USD surpluses to invest. For this reason, the global reserve currency centered in the offshore Eurodollar marketplace is sometimes known as the petrodollar.

The price of dollar dependence turns out to be high. Put aside momentarily the ever more frenetic use of sanctions to punish dissenting individuals, organizations, and nations. The ability of the global economy to grow (and hence service the USD debt incurred to build and run it) depended entirely on the shadowy offshore Eurodollar system. Participants, including branches of all the global banks, many regional banks, and all sorts of non-bank players, were the principal engine of dollar creation, by virtue of their lending.

Growth stalled in 2008 when offshore trading parties and their nationally-homed parents saw the abrubt collapses of Bear Stearns and Lehman Brothers. Suddenly death had come to paradise. The ensuing fear has yet to dissipate, despite the clownish antics of the US Federal Reserve (the Fed), which turns out not to have been central at all to the actual money-spinning engine of the global economy. Accordingly up until 2020 we experienced recurrent USD squeezes as the money-engine sputtered, with the global economy struggling to grow and most national economies bouncing in and out of recessions. All of this is covered very effectively by Jeffrey Snider, from whom I am mostly paraphrasing on Eurodollars.

Why put up with it? Inertia, ignorance, weakness, and fear, I guess. Nowadays, agreement-incapable, hysterical US leadership flings around sanctions like beads at Mardi-Gras. National economies are choking on USD debt service as the global economy collapses under the combined influence of COVID-19 and the accumulation of failure since 2008. Thus, high incentives for alternatives to the USD-dominated Eurodollar system for global trade.

So far, nobody has come forward to directly challenge the USD. There's a long intellectual legacy teaching that the exhorbitant privilege comes with high costs: running big current account deficits, loss of competitiveness and hollowing out national industry due to currency overvaluation. I'm not sure how trustworthy are those perceptions, although they certainly apply to the US in its experience as currency hegemon. They may or may not be necessary consequences, but as long as they are perceived so, a natural reluctance to take on the USD is understandable. Moreover, there's pretty good evidence that the US will fight to preserve its currency hegemony. That was definitive back when the US was military hegemon, but that day has likely passed. Still, further reluctance would be understandable in light of the enormous destructive capability of the US military, despite its inability to actually win wars.

So nobody really wants the global reserve currency. And, really, it's a stupid idea to even have one. Exorbitant privilege opens wide the pathway to corruption. The hegemon, no matter how seemingly benign in early days, tends towards malign as the imperial wealth pump fails over time (you can only loot until the wealth is gone). But what about trade? How can nations facilitate cross-border trade to their mutual benefit without accepting a powerful third party as the common intermediary?

This actually doesn't seem too hard a problem to solve. Today much global trade is mediated by corporate behemoths in USD, under the sovereignty-stealing purview of multinational trade deals that ensconce unelected tribunals to protect multinational corporations from national supervision. Those trade regimes are not necessary for cross-border trade, they are however convenient and profitable for the multinational corporations whose lobbyists wrote the trade agreements.

Instead, consider bilateral trade agreements that use central banks to swap national currencies. The amounts to be swapped could be determined by trade negotiators. Initially the amounts could be modest until participants gain confidence. Each bank credits the counterparty bank with the agreed amount of its sovereign currency. The respective central banks could then auction the foreign currency to putative traders. Or just offer it at list price, the notional rate at which the swap took place. Variations in the agreements could permit specific policies regarding obtaining funds (e.g. limit transaction size, require proof of actual trade) and uses of funds (e.g. limited to specific agricultural or industrial products, services, military equipment, etc).

A pleasant side effect of bilateral trade deals could be a custom of alternate hosting of trade fairs where buyers and sellers could meet for trade exchanges. I imagine the sellers hosting. A trade fair could showcase the products and services that the host nation is seeking to export. These fairs could be massive attractions with cultural celebration closely attached.

I call this scheme balanced trade, since there's no expectation of accumulation of a third party's currency as a consequence of successful (profitable) trade. On each side, sovereign money is created by the central bank, credited to the counterpart central bank, and sold from there to the counterpart traders. Those counterpart traders purchase goods and services, returning the money to circulation in the sovereign jurisdiction. The balance is in each side behaving symmetrically to its peer. There's no necessity for private banks to originate the trade currency by lending. The attendent risks for the borrower of debt in an external currency are avoided.

Balanced trade is a particular instance of a wider theme which is to deprecate the creation of money by unelected, poorly regulated private banks. Instead, in a truly democratic society, creation of money is steered towards public hands. In this way, incentive for profit can be balanced against the responsibility of a society to care for all of its members. Mobilization of the resources of the society can be shared between private pursuit of profit and public fulfilment of social responsibilities.