* in the short run, the US seignorage privileges are based on the fact that the US$ is used as a means >of payment all around the world. Neither Japan nor Europe have run large enough trade deficits to >broadcast their currencies into world circulation enough that they can be used that way. Without a >currency to switch to, a "flight from the dollar" will be relatively weak.
* in the long run, the strength of any currency -- and seigneurage power -- is based on its issuing >state's military power (as Ellen Frank points out). Fiat money is based on state power, both within and >between countries. The US is clearly in the saddle here. Now, in the long run, the weak state of US >manufactuing (and increasing external debt, etc.) might undermine this power, as may the quagmire >in Iraq. But that's not happening yet.
I do think that a steep fall in the dollar is possible (it's happened before), but I don't see this as >permanent until US political-military hegemony goes away.
I agree that US military supremacy undergirds dollar primacy. Most of us here on pen-l agree to a greater or lesser degree that the US' little misadventure in Iraq was and is at least partly about rescuing dollar primacy by means of gaining additional leverage over erstwhile allies/would-be rivals in the global system. Despite occupied Iraq morphing into a potential disaster for US imperialism, in the short-run at least one desired pay-off has come to fruition -- the dollar has strengthened relative to the euro.
But the converse is also true: dollar primacy undergirds US military supremacy. Ruling groups in other key areas of the world, especially the Franco-German core of the EU, are less and less willing to subsidize a globo-cop that they regard as a lawless predator, rather than a benign defender of their interests. If the central banks of the world refuse to foot the bill for preemptive wars in geostrategic locales until death do us part, then who will ? US taxpayers, increasingly middle- and low-income taxpayers. That won't fly over the long haul, because it portends some kind of domestic revolt.
That the US faces this dilemma -- it has to be a bald-faced looter and plunderer these days in order to sustain the dollar, but in so doing it antagonizes its putative creditors -- has me a bit confused as to why Snow and company are taking such a hard line on the yuan-dollar exchange rate issue. As no less an authority than the Wall Street Journal has pointed out, the current US-China relationship has a strong neo-imperial flavor to it, with the CCP cadre capitalists playing the role of loyal compradors, ensuring that the sweat and toil of Chinese export sector workers is parlayed into dollar-denominated liquid assets. Why topple the whole applecart just to win a few votes in Pennsylvania ? Either it's all a bunch of huffing and puffing to signal to the PRC that it must stay within the dollar-denominated fold, or Bush and company are even worse stewards of US hegemony than they have already proven to be. (That is, they just want to get reelected so they can dole out more lucrative federal contracts family and friends).
Your point about the EU being a net exporter and there not being enough euros in circulation outside the eurozone is well-taken, but you can bet US ruling groups were squirming when EU finance ministers got together in July and vowed to relax some of the tight money strictures of the Growth and Stability pact. It appears that the EU is inching toward a more internal demand-led model of economic governance and fiscal-monetary management.
John Gulick
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