Quantitative Easing and the Compromised Hegemony of the U.S. Dollar

An interesting piece, from Sean McEniry:

Obama has defended the Fed's use of quantitative easing to inject liquidity into the US economy1. This process involves the Fed creating money which is backed by no assets and usually using it to purchase government debt from private banks, who hopefully lend the money at low interest rates for domestic investment, creating jobs and stimulating the economy. The Fed, with a government appointed chairman and board of directors, monetizes the government's debt, and in the process the government funds its own spending with money that was created “out of thin air.” Therefore, the benefits of inflation accrue entirely in the hands of the government at the expense of the holders of the government's currency and debt, since there is an increased supply of currency in relation to the assets which back up that currency and the purchasing power of that currency goes down.

The international acceptability of the US dollar as a medium of exchange has resulted in its use as a reserve currency, an anchor currency, and even as an official currency in some countries. In addition, the US government's bonds are considered one of the most secure investments on the market. Universal holding and use of US currency and debt means that these notes are backed by foreign-owned assets as well as Americans' assets, which allows the Fed to effectively mobilize the resources of non-citizens in order to make improvements inside the country. A large portion of the loss of US purchasing power is offset onto other currencies and economies, and as a result the US economy is able to realize a net gain from inflation. The removal of the US dollar's convertibility to a commodity has thankfully allowed for flexibility and autonomy of monetary policy in dealing with temporary crises, but if the Fed continues to rely on inflation to stimulate the economy, an increasingly vigilant and adaptive financial system will reduce the benefits of this policy. *As the international use and acceptability of US currency is a result of its stable exchange rate and the US economy's capital mobility and security, the US government must surrender some of its autonomy to manipulate its currency by removing the Fed's central banking privileges and moving to a currency that is fully backed by assets if it wishes to remain market leader as the top currency. Otherwise, increased fear of inflation will drive the international market to look for inflation protected investments or even to switch to more solidly backed reserve currencies, and the US economy will cease to benefit much from inflation.

As a result of globalization, networking, and interconnectedness, competition among currencies is increasing, and the reduced transactions costs provided by computers and the internet will allow markets to flee from the dollar quickly in case of any lack of confidence in the stability of the exchange rate. In an ongoing process called currency deterritorialization, national currency systems have been unable to maintain a monopoly of money use within a territory. Typically, this takes the form of currency followership, in which a country with a weak national currency adopts a stronger, more internationally acceptable national currency, such as the dollar or the Euro. There are, however, also examples of interpenetration by complementary currencies such as elderly “caring relationship tickets” in Japan and business to business credit in Latin America, which is modeled after the Swiss Wir bank. Due to the fact that "currency choice is becoming less restricted, and cross-border competition is once again becoming the rule," the American government must maintain anti-inflationary monetary policy if it wishes to keep the international seignorage advantages that are provided by the current universal acceptability of the US dollar ...

More a the link.

This last paragraph is documented with a lot of citations to my old IPE professor, Dr. Benjamin J. Cohen, of whom I'll have more tomorrow.

RELATED: At Doug Ross, "Photos of the Quantitative Easing Krugman, Weimar Edition."