Eric
King: “What we are looking at right now is a financial war between the U.S. and
China.”
Dr.
Steil: “That’s right. In
the 1940s the U.S. was the world’s largest international creditor, and Britain
was the world’s largest international debtor. Today, China is the world’s
largest international creditor, and of course the United States is the world’s
largest international debtor.
And
it’s fascinating to see that the United States today takes the same position in
terms of identifying the flaws in the global monetary architecture that Keynes
and the British took in the 1940s. For example, former Treasury Secretary Tim
Geithner, in 2010, proposed imposing caps on persistent current account
surpluses. Of course that was aimed at disciplining Chinese economic
behavior....
“This
was exactly the sort of position that Britain was taking in the 1940s, Harry
Dexter White and the FDR administration condemned. So where you stand depends
on where you sit at the time.”
Eric
King: “This is also a quote (from Dr. Steil) ‘At present, the United States has
no need to accommodate calls for it to sacrifice its exorbitant privilege
(having the world’s reserve currency) to some vague vision of the global good.
It will only waver when the market initiates a clear shift toward
alternatives.” What about that (Dr. Steil)?”
Dr.
Steil: “Well, in the 1940s
there was a deal to be done between the United States and Britain. It was a
harsh deal, and it was an imbalanced deal as I explained, but nonetheless it was
a deal to be done. Britain needed financing to get through the war, and the
Americans needed British acquiescence to make the dollar the global unit of
account.
But the
situation with China today is not the same, and let me give you just one little
anecdote to illustrate this: In 1956, the Eisenhower administration forced the
British out of (the) Suez (Canal) by threatening to withhold emergency IMF
support.
Now,
the United States, at the time, could afford to provoke a sterling crisis at no
cost to itself because in 1956 U.S. holdings of British securities amounted to
only one dollar per U.S. resident. Now, compare that to today, where Chinese
holdings of U.S. securities amount to over (a remarkable) $1,000 per Chinese
resident.
So
China cannot afford to provoke a dollar crisis today because it would be hurting
itself at least as much as it would be hurting the United States. And that’s
why there is really not, in my view, a deal to be done right now between the
United States and China to remake the global international architecture ... As
you quoted, China has a vast stash of dollar-denominated assets, and it doesn’t
want to do anything that would undermine the global purchasing power of this
hoard. So they are in quite a bind.”
Eric
King: “What about the Chinese accumulating so much gold?”
Dr.
Steil: “No doubt they are,
and one reason is that they view gold as being a potential alternative reserve
to the U.S. dollar. Gold, similarly to the U.S. dollar, tends to do well in a
crisis, and can play a similar role to the U.S. dollar when a country gets into
financial difficulties.”
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