Nevertheless, the US has a persistent current account surplus in excess of half a trillion dollars a year. Robert Blecker, Dean Baker, Jamie Galbraith, Wynn Godley and others have demonstrated, convincingly to me, that this is unsustainable even before the long run comes calling. The relative attractiveness of US asset markets has taken a big hit in the last year or so; hence it is extremely likely that our payments are being balanced by a buildup of external reserves. (Krugman thinks this as well.) That is a dangerous situation. It is also a politically anomalous situation, because it suggests that foreign governments, through their ostensibly autonomous central banks, have increasing leverage over US financial prospects.
The advantages of the privileged position of that dollar are not so much the seigniorage that Krugman refers to, as they are the ability to acquire a very large external debt. At some point in the future, this will not look like such a great deal, but right now it means that Americans as a group can enjoy relatively high living standards without have to do the grubby work producing stuff that we or others actually want.
To repeat: left economists who specialize in these things should be writing popular pieces discussing the political economic relationship between global finance and war. The best response to faulty analysis is better analysis.
Peter
Max B. Sawicky wrote:
Krugman argues that the issue is a crock:
http://www.wws.princeton.edu/~pkrugman/oildollar.html
His argument looks right to me.
max
