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The Ant and the Grasshopper: A Window into Macro Part I

Summary:
Spurred by a few op-ed pieces and a couple of investment bank "research" notes, the mainstream and social media have been talking about others talking about the dollar losing its reserve status or its larger role in the global economy.  Few appear to really think it is likely in anything that approaches the time horizon of most investors.  It is also notable that most accounts show no awareness that these claims have been made ad nauseam over the past half-century. In fact, my first book, Making Sense of the Dollar (Bloomberg  August 2008), that was published between the demise of Bear Stearns and the collapse of Lehman argued against such views and envisioned a multi-year dollar bull market.  It was a self-conscious attempt to push back against the permeable doomsday crowd that has

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The Ant and the Grasshopper:  A Window into Macro  Part I
Spurred by a few op-ed pieces and a couple of investment bank "research" notes, the mainstream and social media have been talking about others talking about the dollar losing its reserve status or its larger role in the global economy.  Few appear to really think it is likely in anything that approaches the time horizon of most investors.  It is also notable that most accounts show no awareness that these claims have been made ad nauseam over the past half-century. In fact, my first book, Making Sense of the Dollar (Bloomberg  August 2008), that was published between the demise of Bear Stearns and the collapse of Lehman argued against such views and envisioned a multi-year dollar bull market.  It was a self-conscious attempt to push back against the permeable doomsday crowd that has long foretold the dollar's demise.

In this context, it is only fitting to recognize the approaching anniversary of the end of Bretton Woods, when the US unilaterally severed the last ties between gold and the dollar (August 15).  The dollar-gold standard was the basis of the post-war financial system.  It was not liberal, as we understand the meaning today.  Exchange rates were fixed, and capital mobility severely limited.  Tariffs were high.  It was the closing of the Gold Window that ushered in the current era of floating (and therefore volatile) exchange rates.  What was once an anomaly and something to be avoided, is now embraced as a virtue. Indeed, the policies under which the US, Europe, and Japan enjoyed prosperity, and rapid growth were being abandoned, and more, denied to others. It gave rise to a criticism that after they recovered, high-income countries insisted on policies that made development for others more difficult (see Ha-Joon Chang's "Kicking the Ladder Away," a provocative book summarized in his essay here).

US interests outgrew the system that it insisted on in 1944.   The US refused to devalue the dollar in terms of gold and forced European countries and Japan to revalue their currencies.  The US did not want to lose any more of its gold either.   It was not the Soviet Union or "Red China" that was demanding gold for their dollars, but US allies in Europe.

The dollar's role was not just maintained; it deepened and broadened in our post-Bretton Woods era.   Despite the chin wags and finger-pointing, the fact of the matter is that we still live in a dollar-centric world.  The euro, for example, the second most traded and important currency in the world, is smaller than the sum of its parts, the share of reserves that previously were held in the legacy European currencies.

Calls for a new Bretton Woods Agreement ebb and flow from think tanks and policy wonks.   Sometimes Beijing seems to push in this direction, but it lacks any specifics and maybe part of its rhetorical campaign to push against the US and the dollar.  The odds of a new Bretton Woods are somewhere between slim and none.   Three big reasons are top of mind.

First, in the period we are in is one of growing nationalism. The priority the would be given to the exchange rate or international price of one's money may require the sacrifice of domestic objectives that runs contrary to the rising nationalism.  

Second, the ideological current is against fixed exchange rates.  Small (for the most part), incremental, near-constant adjustments are preferable and cheaper than defending a fixed rate.  Currencies act as shock absorbers that help facilitate less volatile economies.

Third, even if there is an acknowledgment that the status quo is not desirable, it is not clear that there is a consensus on how to change it.  One does not have to believe in the "G-zero" framing to recognize that the US does not have the power or will to impose a new order, but it is too strong to be subject to someone else's will.

Former Governor of both the Bank of Canada and the Bank of England, Mark Carney, advocated a digital international currency.  It was, to use Samuel Johnson's phrasing both good and original, "but the part that is good is not original, and the part that is original is not good."  Carney's proposal seems more like a modern re-packaging of Keynes' idea at Bretton Woods for "bancor" than true innovation.  Keynes's proposal was defeated then for the same reason that Carney's idea has had little impact. It begs the critical question of whose interest will be served. 

There is a change afoot with far-reaching implications.  There is an intellectual current that recognizes that the US is a net debtor and wants to overturn centuries of tradition and realpolitik and force the adjustment on to the creditors.  Books, like "Trade Wars are Class Wars," share much in common with the claim that providing the main reserve asset and numeraire is really an exorbitant punishment rather than the exorbitant privilege (that Giscard d'Estaing initially claimed during the Bretton Woods era).

To be sure, the class war the title references is not in the US, but in other countries, especially Germany and China, where consumption is not as high as in Anglo-American economies.  It speaks to the broader resurgence in US nationalism and the attempt to realign US interests.  Others in this vein, have argued that the US suffers from a version of Dutch disease, that its exports of bonds prevent the dollar from falling to a level that would balance the external account.  The exporting of bonds, of course, is borrowing (importing of savings) from the rest of the world in the common understanding.

Traditionally, the US penchant for running current account deficits was associated with its political choices and cost of running the world's biggest economy a bit hot, often financed with government borrowing.  The US is seen as unwilling to tax itself to pay for its corporate, social, and military policies.  The idea that the US fundamental imbalances are due to actions in Germany and China turns the traditional approach on its head.  Pity the United States, we are told.  It has to overconsume and over-indulge because the short-sighted Germans and Chinese not consuming enough.

Sadly, the US cannot live within its means if others insist on saving so much, the revisionists argue.  There is no point in altering US policies because the key to US prosperity it to be found in Bejing and Berlin.  The destabilizing imbalances are not the result of "oligopolized" industries, as some critics argue, or extreme income and wealth disparities, leading to permanent indebtedness.  The dysfunctional political process that has generated widespread regulatory capture, and a tax code that favors debt, with loopholes that make tax schedule rates nearly irrelevant for large businesses, are not to blame, we are instructed.

It is sometimes fashionable in literary circles to re-tell classic stories so that the villains are really the heroes, and the heroes in the traditional telling are revealed to be the true evildoers.  It is as if these revisionists in the political economy want to recast the Aesop fable about the industrious ant and the lackadaisical grasshopper. In the modern re-telling, the grasshoppers are complaining that the ants are working too hard. And more, by working so hard, the ants force the grasshoppers to consume more.  The harder the ants work, the more the grasshoppers consume.  The obvious solution is to force the ants to stop being so industrious.  Some of the grasshoppers want to use the power of the state and of multilateral institutions to coerce the ants to consume more.

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Marc Chandler
He has been covering the global capital markets in one fashion or another for more than 30 years, working at economic consulting firms and global investment banks. After 14 years as the global head of currency strategy for Brown Brothers Harriman, Chandler joined Bannockburn Global Forex, as a managing partner and chief markets strategist as of October 1, 2018.

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