*The End of Influence*

The subtitle is What Happens When Other Countries Have the Money and the authors are Stephen S. Cohen and Brad DeLong.  Here is an excerpt:

The Asian export-led growth model must — over time — transform itself to domestic consumption and prosperity models.  The American borrow-and-import model will also have to shift — again, this takes considerable time — to a model of consumption-at-the-level-you-produce.  And the need to keep the confidence of those who have the money that their money is well placed in the United States serves as a constraint on U.S.  policy in a way that it has never been before.

In the last three paragraphs of the book the authors describe the various stimulus attempts as something that will "buy time," but will not be sufficient to alter this basic trajectory.


Both the Asian export model and American borrow/import model generate powerful interest groups. It's not just shadowy lobbying in DC; I suspect that Americans really liked their cheap credit and Wal*Mart goods over the past decade. And Asia has its crony capitalists and state-linked conglomerates (even if fewer in number post-1997).

So changing the situation without traumatic devaluations may be tricky. Pushing for changes in Asia may be easier; the American import model pleases the average American (most of the time), which makes it hard to shift. But maintaining export models requires Asian politicians to keep savaging domestic wages and hiking import prices, which aggravates the average Asian worker.

This said, in the longer run, if Asians really do just like to save more for cultural reasons, we'll keep seeing every successive generation of Americans borrowing from Asian savers. So borrow/import may stick around for a while.

To the extent the Asian export model has been supported by governments which deliberately devalue their currency to support exports, the chicken will come home to roost as it has in Japan. LDP did all it could to support exports at the cost to savers; now, as other manufacturing shifts to still lower cost jurisdictions, you do not want to be a 45 year old Japanese with a family and ultimately facing retirement and further wage compression.

Now you are talkin' Bill. I probably wouldn't like many of your solutions but what you seem to be describing is Bubble Americana.

I haven't a clue and I wouldn't know currencies from tiddly winks, but we know what is important about trade is division of labor and comparative advantage. By analosy, when I look at a chart of Johnson and Johnson stock it is obvious they are better than average, but over the short term their stock performance is dominated by the market[1]. So, over the short term perhaps trade is also dominated by non-enduring factors and these serve to fool the long-term oriented.

JNJ vs S&P.

The other countries don't have the money. The only thing on God's green earth you can do with dollars is spend them in the US economy, or invest them in the US economy.

Other countries have only US securities as the alternative to buying US exports.

Dollars are tickets in line to say what the US economy does next, presumably something for you. They aren't wealth.

Unless this is an exercise in wishful thinking on DeLong's part ("a constraint on America's dangerous power to screw up the world, which will force it to be a multiateral entity in the form of my mind's image"), or a desire to cash in on the long string of "The end of" books about the United States, I cannot comprehend how a mind like his could make this argument, much less make it into a book. It's one thing to argue an inexorable rebalancing of power, it's another thing entirely to argue the absolute draining of it, and to do so through such a one-sided perspective of a complex and multi-sided issue.

The other countries don't have the money. The only thing on God's green earth you can do with dollars is spend them in the US economy, or invest them in the US economy... They aren't wealth.

I believe foreign holdings of U.S. assets far outstrip any reasonable amount that could be used to purchase exports from the U.S. in the future. Since a lot of these assets are held by central banks or sovereign wealth funds, this explanation isn't very satisfying. Dollars are already an international currency of sorts: if you are a Chinese business looking to import from Thailand or Vietnam, you may well wind up settling the bill in U.S. dollars. One of the many reasons for this is that many businesses take on dollar-denominated debt themselves since the rates are lower than borrowing in local currency. Many non-U.S. businesses have a need for USD cash flows to meet USD obligations.

Dollars circulate around Asia and other parts of the world as a secondary medium of exchange: in other words, as a currency. So dollars do represent wealth. Plus they are a hedge against currency-specific risk although the currency-specific risk associated with USD appears to grow with each passing year. For just about any other currency (minus GBP, EUR, CHF and JPY), you would be right that the only reason to hold it is to purchase imports. But the five reserve currencies are special and have many uses outside the country of origin.

Comments for this post are closed