Defining Globalization: John D. Mueller on the US Dollar's Serving as a Reserve Currency

In analyzing any problem it is important to be specific about cause and effect. Many blame the exodus of US manufacturing jobs on globalization. But the term globalization lacks specificity.  For instance, globalization can mean foreign trade or it can mean US intervention in foreign economies through the International Monetary Fund.  I have previously emphasized that the cause of the exodus of manufacturing is foreign central banks' holding US treasury bonds.  John D. Mueller, in his excellent book about neo-Scholastic economics (in which he argues for the reviving of the economics of St. Thomas Aquinas), Redeeming Economics: Rediscovering the Missing Element, makes the point clearly on page 338.  Mueller is director of the Economics and Ethics Program at the Ethics and Public Policy Center and former speechwriter for Congressman Jack Kemp.   I am reading his book because Dr. Oskar Gruenwald suggested it to me in conjunction with a paper I am writing for his Journal of Interdisciplinary Studies.

Democrats and anti-globalists believe that trade barriers are the solution to the exodus of manufacturing jobs. But that solution does not cure the underlying disease. The disease is misallocation of resources caused by the US Federal Reserve Bank's and the US government's ability to create and fund treasury debt through paper money and foreign central banks.  The cure is monetary stability, which is only possible through a metallic standard.  Until the 1980s there still could be a case that a paper monetary system could be made to work. But the situation now is so far gone that it makes the volatility of earlier paper money periods look mild.  By buying the treasury bonds and using them as reserves foreign banks subsidize the dollar.  This makes foreign goods cheap and causes firms to exit.  To solve the problem the US dollar should not be allowed to be used as a reserve currency. It should be replaced by gold or silver.  Allow me to quote Mr. Mueller (Redeeming Economics, p. 335):

"This is roughly what being an official reserve currency means for the United States. The fact that other nations' monetary authorities hold securities payable in dollars to back their currencies means that our own doesn't need to hold much, if any, foreign money in reserve; it also ensures that the United States makes more investments and purchases of goods and services abroad than are made in the United States--the difference equaling the amount of dollar reserves acquired by foreign central banks.

"...when foreign monetary authorities invest their reserves in US securities, the inflow of official funds substitutes for an equal amount of private investment and trade.  A rise in foreign official dollar reserves therefore not only permits but requires residents of the United States to have a balance-of-payments deficit with foreigners. This excess of "hot money" flows back to the rest of the world as net purchases of foreign goods and/or securities. In effect, the reserve currency privilege allows the United States to have negative net reserves and so run a chronic balance of payments deficit of the same amount. Hot money represents a demand for non-monetary wealth (goods and/or securities) without a matching supply, and so necessarily bids up the price of such wealth wealth..."

The holding of US Treasury bonds permits foreign governments to subsidize the dollar, stimulating their economies in the short term but depleting resources.  US consumption is increased at the expense of foreign workers, who work hard to produce goods that America gets for borrowed money.  It is true that the Chinese have gained considerable manufacturing expertise, but have done so at the expense of low wages. Under an international gold standard system where gold serves as reserves this situation could not occur. Trade imbalances would correct over time.

In contrast, the costs of imposing trade barriers are high.  David Ricardo showed that trade makes all parties wealthier by enabling global specialization, which he called comparative advantage.  To impose trade barriers would reduce the gains from the specialization, making the world much poorer.  Because the US consumer has benefited from the US dollar's serving as a reserve currency, imposing tariffs, which entail the risk of retaliation, would be extremely risky and self destructive.

Put another way, the difference between trade barriers and a gold standard is that under a gold standard markets will reallocate demand for foreign goods as the dollar's purchasing power with respect to foreign currencies is reduced while under trade barriers the people who have created the current monetary system, politicians and their employees, will reallocate demand.  Hence, trade barriers is a means of ensuring that state power is retained in the face of a failing monetary regime.

Rather than economically self-destructive trade barriers, a return to a global gold standard, or a global silver standard, would create the possibility of a stable world trading system and return its share of manufacturing to America.