In 1965, French Minister of Finance Valéry Giscard d’Estaing complained that the dollar’s dominance as the global reserve currency gave the United States an "exorbitant privilege." I had heard that expression used many times before and picked up this book hoping to more fully understand the nature and extent of that privilege. Unfortunately, despite the clarity of the title, “Exorbitant Privilege: The Rise and Fall of the Dollar and the Future of the International Monetary System” left me with as many questions as answers.
How does reserve currency status confer a privilege to the issuing country? Author Barry Eichengreen, one of the most esteemed monetary economists in the nation, addresses the question somewhat haphazardly. In fact, it feels as though the book is missing an entire chapter, one devoted to articulating the advantages and (yes) disadvantages of being a reserve currency, along with estimates of the tangible economic impacts. Instead, the book is structured thematically with commentary concerning the advantages of reserve currency peppered throughout.
One thing is for certain: despite many premature predictions of the dollar’s demise, the greenback is still very much on top of the currency world. Over 60% of foreign reserves are held in dollars. The Euro is a distant second at 25%, with gold at 10%, and sterling and the yen at 4% and 3%, respectively. Moreover, 85% of foreign exchange transactions worldwide are in dollars. Nearly 50% of international debt securities are denominated in dollars. Indeed, the dollar reigns supreme, even as America’s role on the global economic stage has declined nearly 50% over the past half-century, from 40% in 1960 to around 20% today. Meanwhile, the US share of world exports has slipped to 13%.
Eichengreen never clearly delineates, ranks and estimates the various aspects making up the so-called “exorbitant privilege,” so I will try to do it here, with the help of several third-party studies and essays.
First, because foreign governments must buy US government bonds to hold as reserves, the additional demand for Treasury bonds lowers US interest rates. “The effect is substantial,” Eichengreen writes, “the interest that the United States must pay on its foreign liabilities is two to three percentage points less than the rate of return on its foreign investments.” The upshot is that the US can consistently run an external deficit, “importing more than it exports and consuming more than it produces year after year without becoming more indebted to the rest of the world.”
It was this aspect of reserve currency status that Valery Giscard d’Estaing had in mind when he made his claim about an “exorbitant privilege.” Eichengreen notes that if the dollar loses its reserve currency status “We will no longer be able to consume and invest a trillion dollars more than we produce each year simply because central banks and other foreign investors have a voracious appetite for dollars that require no real resources to supply.” The trillion-dollar estimate is derived from the fact that the United States runs an external deficit of 6% of national income on an annual basis. With US GNP at $18.75 trillion in 2016 (I had to look this figure up), that comes out to over $1 trillion, but Eichengreen never provides this level of detail and only mentions this fact in the last few pages of the book. Talk about burying the lead!
Not everyone seems to agree with Eichengreen’s perspective and estimates on the benefits of being a global reserve currency, however. Anyone reading this book should also consult the discussion paper, “An exorbitant privilege? Implications of reserve currencies for competitiveness,” published by the McKinsey Global Institute in December 2009. That study estimates that all the extra demand chasing dollar securities because of its reserve status pushes down the US borrowing rate by 50 to 60 basis points (i.e. roughly half-a-percent), resulting in a net borrowing benefit to the US government, households, and companies of about $130 billion. A significant sum, no doubt, but hardly the trillion-dollar windfall Eichengreen projects.
The second material benefit accruing to the issuer of the global reserve currency is something called “seignorage,” which is the difference between what it costs the government to print dollars and what a foreigner must pay to procure them. About half of US currency circulates outside of the country (Eichengreen estimates the number at $500 billion; McKinsey reports $400 billion). McKinsey estimates that the seignorage income generated by the Federal Reserve comes out to roughly $10 billion a year (the vast majority of notes outside of the US have been in circulation for years). Eichengreen never hazards a guess.
A third advantage to being a reserve currency is monetary policy independence. The US Federal Reserve has two core missions: maintain low inflation and low unemployment. Central banks around the world have a third mission in their remit: maintain exchange rate stability against the dollar. This was particularly true in the first couple of decades after the Second World War when the global economy was managed under the Bretton Woods System. As the only country that maintains its national debt in its own currency, the Fed doesn’t have to worry about exchange rate risk. For the rest of the world, where over 60% of national currency reserves are held in dollars, a sharp slide in the exchange rate could result in significant losses.
Finally, there is arguably some prestige in being the global reserve currency. Indeed, non-other than former Fed Chairman Ben Bernanke argues in a recent white paper “…the benefits of having an international currency are arguably mostly symbolic.” British pounds sterling once held the mantle. Now the dollar stands alone. Not because it is perfect, but because there is no viable alternative. Or, as Eichengreen colorfully puts it, the dollar is the “least dirty shirt in the pile.”
What about the downsides? Does issuing the global reserve currency come with any costs? Eichengreen barely acknowledges the fact that being a global reserve currency has tangible drawbacks, but it does. For example, when foreigners actively buy dollar assets they force down the value of their currency against the dollar. McKinsey estimates that global demand for dollars because of its reserve status pushes up the price of the dollar by 5%-10%. US manufacturers are thus penalized by the overvalued dollar and so must reduce production and fire American workers. The only way to prevent unemployment from rising then is for the United States to increase domestic demand — and with it domestic employment — by running up public or private debt.
This higher dollar exchange rate disadvantages US companies that export goods and services as well as US firms that compete against imported goods, but benefits Americans consumers of imported goods and services. In a recent essay in Foreign Policy Magazine (“An Exorbitant Burden: Why keeping the dollar as the world's reserve currency is a massive drag on the struggling US economy.” September 7, 2011), Michael Pettis argues that the overvalued dollar and chronic current account deficits amount to compulsory overconsumption and under production. McKinsey estimates that the overvaluation of 5%-10% leads to $45 billion to $85 billion in lost US exports annually. Even worse, the safe haven status of the dollar exacerbates the situation for American firms when global economic conditions are most difficult, as the jittery foreigners race to the safety of dollars, pushing up the exchange rate even higher.
So, is being a reserve currency an “exorbitant privilege”? Eichengreen certainly seems to think so. I’m not so sure after reading his book and doing some independent research. For instance, McKinsey estimates “Taking the income costs and benefits together generates an overall net benefit from reserve currency status of $40 billion to $70 billion a year. This is equivalent to a financial transfer of an amount in this range from the rest of the world to the United States in return for the provision of a liquid reserve currency.” In other words, the tangible benefit of being a global reserve currency is a boost equivalent to 0.3% to 0.5% of US GDP. A privilege, for sure; but hardly an “exorbitant” one. Or, as Ben Bernanke puts it: “the fact that English is the common language of international business and politics is of considerably more benefit to the United States than is the global role of the dollar. The exorbitant privilege is not so exorbitant anymore.”
Are there any credible challengers for the privilege, exorbitant or otherwise, of being a global reserve currency? Not anytime soon, Eichengreen says. However, the historical example of the dollar suggests that, under the right conditions, change in the international system can be swift. In the opening chapter, “Debut,” Eichengreen notes “From a standing start, in 1914, the dollar had already overtaken sterling by 1925.”
What does it take to be a global reserve currency? “Historically, the leading international currency has always been issued by the leading international power,” according to Eichengreen. But he is quick to point out that there is more to it than that. “Stability is the sine qua non of a currency that is widely used in international transactions.”
And what generates stability for a global reserve currency? Broadly speaking, a professionally managed central bank and a deep and liquid market for trading the currency. It is these two elements that have assured the continued dominance of the dollar over the nearest challengers, the euro, and renminbi. “The US treasury market is, quite simply, the most liquid financial market in the world,” Eichengreen says. Nobody else even comes close. As for the euro, the “absence of a euro-area government is the main factor preventing the euro from matching the dollar in international importance.” According to Eichengreen, the challenges facing China are broad and significant. “Markets must first become more transparent. Banks must be commercialized. Supervision and regulation must be strengthened. Monetary and fiscal policies must be sound and stable, and the exchange rate must be made more flexible to accommodate a larger volume of capital flows.”
In summary, the benefits of being a global reserve currency are tangible but limited and not without costs. The US dollar, while far from perfect, is the only international currency capable of filling the role for the foreseeable future. Eichengreen does a poor job explaining the first point and an excellent job on the second.
- Capa comum: 226 páginas
- Editora: Oxford University Press, USA; Edição: Reprint (1 de setembro de 2012)
- Idioma: Inglês
- ISBN-10: 0199931097
- ISBN-13: 978-0199931095
- Dimensões do produto: 23,1 x 15,2 x 1,8 cm
- Peso de envio: 426 g
- Avaliação média: Seja o primeiro a avaliar este item