Barry Eichengreen Exorbitant Privilege Pdf Download
Laverne Levenstein
That's why I'm confident that we will see that as China's currency grows stronger, it will be in the common perceived interest of more people to open renminbi-denominated accounts at the Bank of China. It will be another step toward enhancing the appeal of China's currency globally.
There could be potholes on this road. There could be financial problems in China emanating from the property market lurking in the loans of the banks to Chinese construction companies or in other places. That could throw this process off-course. So nothing is guaranteed.
QUESTION: Thank you very much, Professor Eichengreen. I'm Karthik Sankaran.
One of the arguments against Chinese renminbi reserve status has been that it's not convertible on capital accounts. Now, historically, until 1971, capital accounts were not freely convertible. They kind of became gradually convertible.
Since then you've seen a massive increase in capital flows relative to trade flows and the capital account tail wag the current account dog in some sense, according to some arguments at least.
With IMF acceptance of capital controls for some countries, particularly emerging markets, do you think the process of capital account convertibility, free capital flows, just continues, or do we actually see a reversal in some sense where things become less convertible on the capital accounts and we go back to a more current-account-driven world?
BARRY EICHENGREEN: The growth of capital flows has created severe discomfort for a variety of countries. Most recently, with very low interest rates in the United States, it has become profitable for financial operators to borrow here and invest abroad where yields are potentially higher. That has driven up exchange rates, driven up stock markets, driven up property markets, in a variety of emerging markets.
They have responded in a variety of ways. They have let their currencies rise to make investments there more costly for us. Some of them have tightened fiscal policy a bit to prevent their economies from overheating. Most recently, the Brazilians have tightened up on the regulation of their banks. If all the aforementioned doesn't work and they still have the problem, they resort to taxes or controls on capital inflows.
Do I expect to see more of that? Yes, I do. Do I think that that will roll back the process of financial globalization that we have experienced in recent decades that you have described? No.
What the Brazilians have done is to put basically a 6 percent tax on foreigners who want to buy financial assets there, and they have limited the ability of the banks to access some sources of foreign currency funding. But if you still want to buy financial assets in Brazil, you still can. My guess is that will be true five years or ten years from now.
JOANNE MYERS: Thank you. It certainly was an exorbitant privilege to have you speak to us this morning. Thank you very much.
The term exorbitant privilege (privilège exorbitant in French) refers to the benefits the United States has due to its own currency (the US dollar) being the international reserve currency. For example, the US would not face a balance of payments crisis, because their imports are purchased in their own currency. Exorbitant privilege as a concept cannot refer to currencies that have a regional reserve currency role, only to global reserve currencies.[clarification needed]
Academically, the exorbitant privilege literature analyzes two empirical puzzles, the position puzzle and the income puzzle. The position puzzle refers to the difference between the (negative) U.S. net international investment position (NIIP) and the accumulated U.S. current account deficits, the former being much smaller than the latter. The income puzzle is that despite a deeply negative NIIP, the U.S. income balance is positive, i.e. despite having much more liabilities than assets, earned income is higher than interest expenses.[1]
In the Bretton Woods system put in place in 1944, U.S. dollars were convertible to gold between countries. In France, it was called "America's exorbitant privilege"[2] as it resulted in an "asymmetric financial system" where foreigners "see themselves supporting American living standards and subsidizing American multinationals". As American economist Barry Eichengreen summarized: "It costs only a few cents for the Bureau of Engraving and Printing to produce a $100 bill, but other countries had to pony up $100 of actual goods in order to obtain one."[2] In February 1965, President Charles de Gaulle announced his intention to exchange its U.S. dollar reserves for gold at the official exchange rate. He sent the French Navy across the Atlantic to pick up the French reserve of gold and was followed by several countries.[3][4] As it resulted in considerably reducing U.S. gold stock and U.S. economic influence, it led U.S. President Richard Nixon to end the convertibility of the dollar to gold on August 15, 1971 (the "Nixon Shock"). This was meant to be a temporary measure but the dollar became permanently a floating fiat money and in October 1976, the U.S. government officially changed the definition of the dollar; references to gold were removed from statutes.[5][6]
Most French people attribute the expression "America's exorbitant privilege" to de Gaulle. Those familiar with postwar economic history may associate it with the name of Jacques Rueff, the independent economist who advised de Gaulle on monetary matters. The "exorbitant privilege" of the dollar has been associated with America's ability to record a "deficit without tears" that gives people the impression "that they can give without taking, lend without borrowing, and purchase without paying", to borrow a quotation from Jacques Rueff. Or, as a Treasury Secretary once famously replied to Europeans worried by exchange rate fluctuations, the dollar "is our currency, but your problem."
But in fact it was not de Gaulle nor Jacques Rueff who used this expression first, and the "exorbitant privilege" is nowhere to be found in their speeches or writings. It was Raymond Aron, the public intellectual otherwise sympathetic to American power, who wrote it for the first time in his column published by Le Figaro in February 1965. The line was a quote from a declaration by Valéry Giscard d'Estaing, finance minister to de Gaulle, and also much less inclined to denounce American hegemony.
The subprime crisis and the 2008-2009 financial meltdown are covered in some detail, with the author still brimming with anger at the follies of financiers stretching for yield and the sloth of regulators asleep at the switch. In the last chapter ("Dollar Crush"), Eichengreen gives us a glimpse of what the world would look like after the dollar comes tumbling down and loses its international status. It is not a comforting sight. The United States are downgraded to emerging economy status, and have to rely on the generosity of others in the event of a crisis. Losing their exorbitant privilege means Americans will have to consume less, export more, and pay higher interest rates on a debt that will be partly denominated in foreign currencies. The Fed will no longer be able to cut interest rates in recessions without paying due consideration for the external value of the dollar, and it will have to raise rates in case of dollar depreciation. The author deems this scenario moderately plausible. As he notes, "people have been wrong before when betting against the U.S. economy. They have been wrong before when betting against the dollar. They could be wrong again. Or they could be right, in which case the dollar's exorbitant privilege will be no more."
What is an international currency? Eichengreen repeats the textbook definition familiar to every student in economics: it should serve the three functions of money as means of payment, unit of account, and store of value. But a definition doeth not a theory make. Exorbitant Privilege doesn't make any reference to theory, neither to the hegemonic regime approach proposed by Charles P. Kindleberger that Eichengreen spent so much energy criticizing in his former essays, nor to the recent conceptualization proposed by Pierre-Olivier Gourinchas and Hélène Rey, who offer a novel theory of the exorbitant privilege of the dollar based on the consideration of U.S. assets and liabilities. As already stressed out, this is not an academic book, but a dose of academic theory would have helped.
Speaker(s): Professor Barry Eichengreen The dollar, the world's international reserve currency for over eighty years, has been a pillar of American economic hegemony. In the words of one critic, the dollar possessed an "exorbitant privilege" in international finance that reinforced U.S. economic power. In Exorbitant Privilege, eminent economist Barry Eichengreen explains how the dollar rose to the top of the monetary order before turning to the current situation. Barry Eichengreen is Professor of Political Science and Economics at the University of California, Berkeley. He has written for the Financial Times, Wall Street Journal, Foreign Affairs, and other publications. This event celebrates the publication of his latest book Exorbitant Privilege: The Rise and Fall of the Dollar. Tue, 22 Mar 2011 18:30:00 GMT
Eichengreen, who teaches at the University of California, Berkeley, is the dean of international economic historians. He combines an encyclopedic range with an ease of writing that if not quite Galbraithian, is nonetheless pleasing as well as instructive. He takes his title from an epithet often attributed to Charles de Gaulle -- actually first uttered by de Gaulle's finance minister and later his successor as French president, Valery Giscard d'Estaing -- that the United States enjoyed an "exorbitant privilege." The privilege lay in America's ability to print the world's money and then to borrow in its own currency rather than incurring the risk of borrowing someone else's. If things went badly, the United States could just print more dollars. If any other nation did that, there would be a run on its money, and the International Monetary Fund would be knocking at the door demanding austerity. The dollar's staying power despite increasing U.S. trade and budget imbalances only proves Giscard's point.
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