A few days ago I had a discussion with Andrew regarding whether money is a commodity. I tended to think of it as an intermediary which made trade possible. It is far more efficient to trade in dollars than it is to determine what the price of oil should be in corn, iron ore, oranges or rubber. Therefore, as a store of intermediary value, the trade between trades, money is not really a commodity–i.e., it is not the goal of trade but the vehicle or means to achieving the goal. So I trade my labor for dollars, and then, my dollars for goods, and so forth.
While reading, “It’s the Money, Stupid: Papering over our economic problems” by Jeffrey Bell and Sean Fieler, it dawned on me something that had puzzled me for many years. I wondered how the United States has been able to maintain 30-year trade deficit with other countries. Bell and Fiehler argue that a paper money system, rather than being able to better smooth out downturns in the debt-based business cycle, has become debt itself:
… there is no viable way to maintain the Fed’s current role as guarantor of short-term financial stability and still reform the paper money system so as to remove its tendency toward the unsustainable accumulation of debt. For the paper money system that the Fed manages not only encourages debt, the system is debt.
The self-perpetuating feature that has kept this perverse system alive is the dollar’s position as the world’s reserve currency. Before the dollar assumed this role between the two world wars, gold—something of independent value and no particular country’s liability—was used to settle international payments between central banks and composed their primary reserve asset. But with the dollar performing those functions, its oversupply has often been absorbed abroad. So Bernanke and his predecessors in the paper-dollar era have been able to print a lot of new dollars, over time inevitably driving down the global value of the dollar, without necessarily generating domestic inflation. That is the enabler of, among other things, relatively painless federal budget deficits. For a red-ink-hemorrhaging Greece or California, the specter of default is always on or near the table. For Bernanke and Congress, colossal deficits are just another day at the office.
Clearly, then, the US is able to maintain the trade deficit because the dollar itself has become sought after international intermediary of trade, not only between US citizens within the borders of the United States, but between citizens of diverse countries trading commodities in dollars on international markets. The dollar has thus been a useful product. Furthermore, many countries have vast reserves of US currency and some private citizens living in countries such Russia and Argentina, hold vast sums of US dollars. So I have finally to suggest that Andrew was right and that we can see money as a sought after commodity in and of itself. It is a commodity that facilitates trade and makes it possible to quantify, albeit in relative terms, the market prices of diverse currencies and commodities, as well as thousands of products. The dollar has therefore made the trade deficit possible because the Federal Reserve has had the unique advantage of creating new money as the world’s needs grew. Countries like China and Japan have trade surpluses with the United States and have built up huge dollar reserves which they can now use to buy supplies or invest. The dollar itself has been the chief export, and so therefore, there has never been a real “trade deficit”, but rather, a willingness of trading partners to accept the greenback itself in exchange for the goods that they were peddling. The US has obviously been the winner in this trade since the cost of creating dollars is minimal, especially as compared to the real goods that have been traded from abroad.
Clearly, this is a unique and privileged position that the US dollar enjoys. It is however not carved in stone that the international community will always trade in dollars. The Federal Reserve is squandering this status, because it is determined to keep the US afloat by creating trillions of dollars more. But like any commodity of which there is an oversupply, the value of the dollar will plummet, and then its usefulness as an intermediary of trade will disappear. At that point the privileged status of the dollar as the chief export of the United States will be lost and there will no longer be a “trade deficit”. When that happens, goods from other countries will be difficult to obtain, and hyperinflation in the United States will be the inevitable result.