Is It a Curse to Have a Printing Press?
Michael Pettis seems to think so, in this blog post (HT2 Tim Swanson):
…I was recently interviewed for a TV show about – yet again – the awful continuing prospects for the dollar as a the dominant reserve currency. Besides expressing my deepest skepticism that the most recent hullabaloo about the dollar was likely to be more reasonable than during all the previous the-sky-is-falling-on-the-dollar periods, I also said that it seems to me that the argument had somehow gotten backwards as far as its proponents and opponents were lining up.
In my view it is the US who should be agitating for an end to the US dollar as the default reserve currency, because this means that any time a country needs to grow reserves or turbo-charge domestic growth with mercantilist industrial policies, thanks to the flexibility of the US financial system and the foreign desire to accumulate dollars, it is almost always the US tradable goods sector that is forced to adjust. In a similar vein it should be foreigners, especially Asians, and most especially China, that should want to maintain the existing currency system.
Wow, isn’t that ironic? The US government shows the world who’s boss during World War II, and as its hegemony becomes apparent, it pushes through a new worldwide monetary system based on the US dollar. Normally when one country gains global dominance, you’d expect it to change the rules to favor its own interests. But we apparently had either altruists or dopes at the helm in 1944.
Pettis is relying on crude mercantilist and Keynesian notions in his post. Rather than pick apart the fallacies, let me try this approach: Suppose you have two printing presses. One of them cranks out US dollar bills, which are indistinguishable from the real thing. The other cranks out Monopoly money.
According to Pettis, you should prefer the latter machine, because there isn’t much demand for Monopoly cash. In the awful scenario where you were stuck with the machine that cranked out US currency, here’s what could happen: You print up say $400,000 in new currency this year, which other merchants are happy to accept. But if you don’t feel like consuming or investing more than $400,000 this year, you will have to quit your job, because of all the cash piling up in your house. Thus that cursed machine has thrown you out of work! Oh the humanity!
