Why is this?īB: The worse the monetary quality of the dollar, the more likely in principle it is that a foreign country would be defiant at considerable cost to US monetary hegemony. Moreover, the central banks of key currencies can also “make life more difficult” for other countries. RM: You’ve also noted, however, that the dollar is not the only player here. Yield-hungry, “maddened” dollar-based investors influence the behavior of asset markets even in sound money countries-as for example equity sectors enjoying speculative narratives or sometimes a speculative bubble in their currencies. In any case, the defiant country would still be subject to asset inflation spread by the US. Hence, they have direct exposure to US inflation risk. Individuals (in the defiant country) would still hold the domestic money in some combination with dollars to reduce their exposure to a sudden fall in international purchasing power if and when the dollar rebounds.
Moreover, money which boasted of intrinsic superiority (in terms of quality) to the dollar could become subject to large fluctuations in global demand as a haven. This would result in losses for politically powerful economic groups in the traded goods and services sector of the economy. In any event, defiance of US monetary policy, whether achieved ideally, via monetary base control, or by interest rate policy implementation, means potential sharp currency appreciation. Instead, independence refers to interest rate policy, whose potential outcomes are largely unknown except by those who pretend to know the neutral rate level. In fact, we are now in a world with no such anchor anywhere. At best the given foreign country’s monetary system has a solid anchor attached to a well-functioning monetary base whose supply is independent of US influence. Foreign countries are not tied (as under a fixed exchange rate system built around the dollar) to inflationary US monetary policy. How does this work?īB: In principle, where currencies are freely floating, each country can choose its own monetary path. RM: One important factor in this that is rarely understood is how monetary inflation with the dollar can spread inflation in other countries as well. Hence in the years 1880–1914 the pound remained the number one global money even though Britain had been overtaken as an economic power by first the US and then Germany.
One national brand of gold money can become dominant-but this will depend less (than for fiat money) on the criterion of economic size (though this still counts) and more on whether there is trust in the given country keeping to the rules of the gold standard.
There, all countries in the gold bloc have a common monetary base consisting of above-ground supplies of gold bullion and coin. This is all quite different from in a world of gold monies. Smaller countries in defying the lead of the dominant money, whether by choosing an alternative type of monetary regime or simply pursuing a different type of monetary policy, become subject to severe economic stress. The currency of the largest economy, so long as it is freely tradable and meets minimally sufficient standards as a store of value, becomes the dominant international money. At the heart of this seems to be what you call “globalized money without a global money.” What do you mean by that, and what does it have to do with the dollar’s global importance?īrendan Brown (BB): Globalization of money under the fiat regime magnifies and extends national monetary power. But a lot needs to happen in terms of unwinding the present system before that can happen. Ryan McMaken (RM): There is a lot of talk these days about the US losing its global monetary hegemony.
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