E Henry Kissinger Schools Mercantilist Trump About Reserve Currency

Before explaining Henry Kissinger's lesson for Donald Trump and all of us, I want to issue a disclaimer. I am not a fan of the former Secretary of State. A real respect for the sovereignty of nations would have been preferable to Kissinger's policy.

But that doesn't mean that Henry Kissinger fails to understand the importance of the USA as issuer of the reserve currency. Dr. Kissinger understands that the US must remain issuer of the reserve currency, or else those expatriated dollars will flood uncontrollably back into the United States. Kissinger wrote:

By gaining the global currency reserve status the US effectively forces the world to follow US monetary policy and the US gets to export inflation as the world is forced to hold US dollar reserves, not only could the US control global commerce but it lived above its means at the expense of other nations. Trump doesn’t understand this benefited the US by spreading inflation to the world and mostly insulating the US. 

 

Donald Trump Official: He Is the Greatest Threat to US Dollar as Reserve Currency

Kissinger blames the gutting of the middle class on monetary policy. He doesn't go into detail and I won't attempt to read his mind.

But Kissinger does understand that isolationism by the reserve currency nation results in lack of liquidity to the world. With the reserve currency being entrusted to the USA, the world then reinvests dollars into the United States. Because of the Fed, it is likely that not enough dollars are reinvested in the USA. But the alternative is worse.

We live a higher lifestyle than we would without the dollar as reserve currency. We print money and export money.  We don't save enough to be the mercantile nation that Trump and his minion, Peter Navarro wants. Professor Norman Mogil  says this about the Navarro plan:

The U.S. savings rate is less than 5 per cent and that is woefully inadequate to finance economic growth at home. The shortfall in U.S. domestic savings is being picked up by foreign countries as they amass trade surpluses. Viewed from a different angle, the trade deficits are a result of persistent federal government deficits (negative savings) and insufficient U.S. domestic savings.The modern day mercantilists focus exclusively on one side of the balance of payments ledger, namely, the trade flows. But the other side of the ledger --- the flow of funds back into the United States ----is equally important. Hitting one side of the ledger will have consequences for the other side. No one country benefits from economic nationalism in the final analysis.

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Disclosure: I am not an investment counselor nor am I an attorney so my views are not to be considered investment advice.

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Moon Kil Woong 2 years ago Contributor's comment

Good article. Economics is complex and being the world's reserve currency is all the more difficult, however, as the author correctly states, it is worth it. Losing it would mean that the US couldn't finance its future deficits and would experience mass inflation as an import dependent nation. It would also lose its clout and with it lose a lot of the brand name value that enriches the country even though we don't produce most of what we get the branding value add for virtually free.

It is understandable that we should seek a change when we are the losers, however, the US is the mass winner in global trade and any other country would easily switch places with us, even China. Let us hope we don't give others the opportunity to switch places. The grass looks greener on the other side, but no grass is as green as the US economically speaking.

Gary Anderson 2 years ago Author's comment

That is well said, Moon. Losing clout and brand is something that most Americans do not appreciate. Perhaps the government has not adequately schooled our citizens to understand our place in the world. That place is not an excuse for abuses, nor is it an excuse for bad behavior abroad. We should appreciate that when Japanese and China's visitors go to Disney World or Las Vegas, that they like America. We should be welcoming hosts.