Ever since the financial crisis devastated the global economy in 2007/8, I have been putting as case for the de-coupling of the Barbadian dollar (the Bajan) from the Greenback, as part of a radical restructuring of the local economy. I have suggested as alternatives, fixing the Bajan against a basket of currencies and commodities, devaluation, given that the Bajan is grossly over-valued, floating or a combination of the three approaches.
The idea has been savagely dismissed by the great and the good in the policymaking and economic community, including the central bank. I said at the time, and I sill do, that they are al wrong, in the main basing their views on a flawed analysis of the local economy and the notion of an island punching above its weight – which has become a sort of religious creed, and on the anti-intellectual idiocy of party politics, which crowd out any objective analysis.
However, rather reassuringly, I have just received a paper by Professor Barry Eichengreen, one of the leading economic historians, author of the influential 2001 book, Exorbitant Privilege, on the weakening US dollar, and a front-runner every year for the Nobel Prize. The new essay updates Professor Eichengreen’s original case, and a powerful argument it is.
Since the end of the Second World War, the US dollar has been the dominant global currency, and the only one used overwhelmingly for the pricing of commodities and international trade. However, over the last decade, and with remarkable speed over the last five years, the global economic architecture has been changing, and will continue to do so for the foreseeable historic future. In simple terms, the US will become first among equals for another few decades, as far as per capita GDP is concerned, given that workers in China, the second strongest economy, earn on average about 18 per cent of the average US worker. But by 2020 Chins looks set to overtake the US, if its growth trajectory continues, with the US battling it out with Brazil for regional supremacy. It is this global and regional projection which has exposed the tragic weaknesses of Caricom, the scary future facing Barbados and the collapse of the Westphalian model of the state.
Professor Eichengreen suggests that in the future three currencies will become global reserve currencies: the dollar, the euro and the Chinese renminbi. He paints a worrying picture of the end of the dollar dominance: “Consider the foreign exchange transactions; that is, 85 per cent of all foreign exchange trades worldwide are trades of other currencies for dollars. “The dollar accounts for 60 per cent of the reported foreign exchange reserves of central banks and governments around the world. It accounts for 45 per cent of all international debt securities. “ It is the dominant funding currency for international banks; of all cross-border liabilities of non-US banks denominated in a currency other than that of their home countries, nearly two-thirds are in dollars.”
The exorbitant privilege that the US enjoyed for having the only global reserve currency was that it had a free run on its current account deficit. But, as Professor Eichengreen has observed, those days are fast coming to an end, as critics have observed. He states: “They have observed that the United States is no longer as dominant economically as it once was, diminishing the convenience of using the dollar. Using dollars made perfect sense after World War Two , when the United States accounted for half of all industrial production and trade outside the Soviet bloc. “It makes less sense today, when the US accounts for just 20-25 per cent of the global economy, depending on details of measurement and currency conversion, and an even smaller fraction of global trade.” He also makes the point that the US is no longer a financial monopoly and, more important, the first-mover advantage enjoyed by the US for most of the post-war years is no longer true. Commodities and services can now be priced in euros, and in some markets in renminbis, with the same confidence as those priced in the dollar.
In fact, until recently the China central bank had invested over US$3 trillion in US Treasuries, but has been quietly rebalancing its reserves by buying more euros, so much so that Japan has returned to being the leading holder of US gilts. Another factor which challenges US dominance “….is the limited fiscal capacity of the United States. “The global economy needs a supply of safe and liquid assets to be held as reserves by central banks and other investors.“ The fact is the US now accounts for a diminishing share of global trade and is becoming more marginal to the global economy than at any time since the end of the First World War.
Professor Eichengreen goes on: “The world economy is growing faster than the United States. This is simply another way of saying that the US accounts for a declining share of global GDP and that the trend will persist as emerging markets continue to emerge and developing countries, via catch-up growth, join the ranks of those closing the per-capita GDP gap vis-à-vis the United States……the international liquidity provided by the dollar will not suffice; it will have to be supplemented by other sources. Additional safe assets will have to come from somewhere else.”
In other words, we are hitching our kites to a falling star and to safeguard the medium and long-term economic future of a small island economy we have got to give serious consideration to the new reality, that post-war protection provide by fixing to the Greenback, no longer holds. But we have been here before. In 1929, (see JK Galbraith, The Great Crash: 1929), sterling and the dollar were punching about equal weight as reserve currencies, but by 1931, following a collapse of the pound sterling and a following banking crisis in the US, a number of leading European and Latin American central banks liquidated about two-third of their foreign reserves, opting to buy gold instead. As is now history, the mad rush for gold, which was in short supply, led to the Great Depression.
Recent events in the US have not restored any confidence in the currency: the downgrading by Standard’s and Poor, the slow march towards the fiscal cliff, which the economy should reach by January, even before the new President takes up office, the resistance of the employment market, the economy bouncing along at a below trend growth and the failure of the so-called super-committee, which was meant to come up with an answer to the macro-economic problems. “The weak economic growth to which this political uncertainty contributed forced the Federal Reserve to keep interest rates close to zero”, says Professor Eichengreen.
And he adds: “The fear abroad was that the Fed chairman Ben Bernanke’s hidden agenda was to push the dollar down against foreign currencies in order to boost US exports. Federal Reserve policy, in this view, was designed to stimulate economic growth at the expense of America’s trading partners.” Moreover, he could have added, along with those currencies currently fixed to the Greenback. The reality is simple: by managing the devaluation of the US dollar, American exports would become cheaper and its imports more expensive. With is low base rate, more and more central banks and multi-national companies are shifting their capital to higher-interest economies, feeding inflationary growth and risking asset bubbles.
Since our trade is mainly with Caricom economies and most of our tourists come from the euro zone, with a growing number from Canada, any devaluation in the US dollar is in reality a devaluation of the Barbados dollar. In short, the US economy is not only declining, but it is on the brink of total disaster, which short of a war, will see China returning to where it has been for most of the last millennium.
Analysis and Conclusion:
Returning to the scene of the crime is one of the old investigative tricks, but it remains a cornerstone of good crime detection because it works. The management of the Barbadian currency, likewise, will remain the symbol of the way this government has managed monetary policy in a time of crisis. And, from all objective available evidence, it has failed badly.
What has kept total financial disaster of both the US and Barbadian economies at bay, are the problems with Southern Europe, as seen through the crisis in Greece and the shown down between Germany and France. But, in time, this crisis will be seen as no more than a hiccup in the development of the euro zone and the powerful European economy – with or without the UK.
With a population of nearly 500 million people, a per capita income equal to that of the US, a higher standard of living, only the European Union has the capacity to stall the onward march of China. However, the battle for control and influence is delaying its further union and development which is giving the US the breathing space it so badly needs.
Time is short for the DLP government, but missing opportunities to restructure the economy, de-coupling from the Greenback and even revaluing against other Caricom currencies, must be seen as part of the failure of its management of the economy. In the final analysis, the people of Barbados have been let down by the government, the minister of finance and his leading economic advisers.