Exorbitant Privilege by Barry Eichengreen, Oxford University Press 2011
Review by Hazel Henderson © 2011
Barry Eichengreen is a doyen of academic historians of currency, central banking and the evolution of global finance. This latest book does not disappoint and is timely. US politicians, not content with talking down the US dollar, battle it out over budgets, deficits and how to accommodate to the receding power of empire. Republicans, egged on by their Tea Party wing, have taken to the airwaves, continually claiming that the USA is broke. They seem unaware that such dire pronouncements are transmitted to China Daily, Le Monde, the Financial Times, Bloomberg and Reuters and global bond markets in real time.
All this loose talk for political advantage is pandering to US neocons and deficit hawks is funded by billionaire Peter Peterson, Dick Army’s Americans for Prosperity, the now infamous Koch brothers and others. These groups are still trying to repeal FDR’s New Deal, in place since the Great Depression of the 1930s.
Of course, the USA can cut its deficit – largely caused by Wall Street’s debacle and the consequent contraction of tax revenues due to job losses, lower property tax receipts, etc., increasing payouts for unemployment, welfare and food stamps, as well as retaining of the Bush II tax cuts for upper income brackets. Deficit cuts can come mostly from reducing the massive subsidies to coal, oil, gas, nuclear and ethanol, to corporate military contractors for un-needed weapons and many other special interests, particularly on Wall Street. The Fed’s QE2 of $600 billion mostly went offshore via Wall Street – pumping up stocks and commodities and as unwanted “hot money” into China, Brazil, India and other emerging markets. Meanwhile, the Fed’s discount window is still open to banks and government support is still-implied for those too big to fail. A start on the deficit would be the $200 billion of cuts over the next 5 years, proposed in the Green Scissors 2010 report by Taxpayers for Commonsense, Public Citizen, Environment America and Friends of the Earth. Eichengreen, like most economists, is not up to speed on such issues (www.transformingfinance.net, www.beyond-gdp.eu, www.greentransitionscoreboard.com, www.calvert-henderson.com).
Even so, Eichengreen’s calm historical background covering dollar diplomacy, competing powers and their once dominant currencies: British sterling, Germany’s deutschemark, France’s franc and other lesser players, is a wonderful antidote to today’s hysteria.
While clearly pointing out the weaknesses of geopolitical arrangements, the dangers to the US dollar and its global reserve status, Eichengreen shows us the forces at work. He believes, and I agree, that the euro will remain a global currency and continue to rival the US dollar in spite of the current agonies of Greece, Ireland and Portugal. The euro was always, like the European Union, a political response to preventing further wars on that continent. I agree with PIMCo’s Mohamed A. El-Erian’s assessment (Bloomberg April 7, 2011) that Portugal’s recent meltdown does not auger more falling dominoes (however gleeful those betting with CDSs). Instead, El-Erian agrees more with Eichengreen’s analysis in this book, and that Portugal will be the tipping point, pushing the EU into closer fiscal and political alignment. The time is nigh for a “jubilee” and debt restructuring in the EU, following Iceland’s pattern.
Creditors will now have to take haircuts, since foolish governments tapped themselves out and impoverished their citizens. More cuts and “austerity” forced onto their citizens will simply trigger more revolts and demonstrations in this age of social media. Britain’s sad experience shows the cuts only tanked their GDP, now shrinking, created no more jobs and is leading to higher inflation – the worst possible outcome, which will warn other politicians. Congress members and the Obama administration take note!
Eichengreen sees the newly multi-polar world leading to a global multi-currency regime. The US dollar will give ground to the euro, the Chinese renminbi and probably the Brazilian real – with some future, larger role for SDRs. Eichengreen’s analysis of China’s role and the wise stewardship of Xiaochuan Zhou, president of the People’s Bank of China is spot on – and mirrors my own, as a frequent lecturer there since 1986. China-bashing by US politicians will not help and ultimately will simply cause more inflation and geopolitical retreat. Eichengreen is correct in stating firmly that it will be US domestic policies that will be crucial in whether the dollar retains its status as one of the world’s reserve currencies going forward. Congress members and deficit hawks playing chicken with the US debt ceiling – you have been warned!