I’ve used the Guardian’s George Monbiot as a straw man before, but I’ll use him again, for his piece today, arguing that the only way Britain can resist the US’s power is by joining the Euro. Military competition is futile, and trade boycotts would simply be symbolic he argues. Instead, Monbiot wants to attack the US at what he sees as its vulnerability: the role of the dollar as the international medium of exchange:
Almost 70% of the world’s currency reserves…takes the form of US dollars. The dollar is used for this purpose because it is relatively stable, it is produced by a nation with a major share of world trade, and certain commodities, in particular oil, are denominated in it, which means that dollars are required to buy them.
The US does very well from this arrangement. In order to earn dollars, other nations must provide goods and services to the US. When commodities are valued in dollars, the US needs do no more than print pieces of green paper to obtain them: it acquires them, in effect, for free. Once earned, other nations’ dollar reserves must be invested back into the American economy. This inflow of money helps the US to finance its massive deficit.
Fortunately for us, Paul Krugman posted an excellent discussion of the subject a couple of weeks ago. Krugman concedes that the US gains something from its role as a reserve currency, but points out that the seignorage value should be taken in perspective. “The US advantage,” he writes, “comes to the extent - and only to the extent - that the international role of the dollar lets us borrow money more cheaply than we otherwise could.” He discounts the theory that fear of Euro-denominated oil payment is the reason the US went to war; only dollar-denominated transactions using hard cash give the US any seignorage benefit, and oil transactions do not fall into that category.
This is another instance of an unnecessarily complicated leftist political economic theory. A European trade boycott would actually be more disruptive to US economic stability than a mostly symbolic seignorage play by the Euro, though of course it would be disruptive to Europe’s economy as well, and its effect on the US would be limited by the fact that most of our economic activity is domestic, not global. The UK and Europe can best resist US hegemony by spending a comparable proportion of their economic output on military development; they have good reasons for not wanting to do so, but that’s the trade-off involved.
Nonetheless, Monbiot does have one thing right: the current account deficit is a major source of US economic vulnerability. If European and Asian investors pull out or sell their assets, the economy will necessarily contract. That such a move will be more likely a result of the anarchy of the market rather than a well-organized political statement shouldn’t give the US much comfort.
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