The Breakdown - Is Being the ‘Saudi Arabia of Money’ Good for America?

Episode Date: September 13, 2020

On this week’s Long Reads Sunday, NLW looks at recent statistics suggesting that, based on a comprehensive set of measures of well-being, U.S. citizens are worse off than they were a decade ago.  One potential explanation is the U.S.’ “USD Dutch Disease” - a peculiar set of consequences resulting from the role of the U.S. dollar in the world.  This week’s reading is “How to Diagnose Your Own Dutch Disease” from the Financial Times.

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big-picture power shifts remaking our world. The breakdown is sponsored by crypto.com, BitStamp, and nexo.io, and produced and distributed by CoinDess. What's going on, guys? It is Sunday, September 12th, and that means it's time for Long Reads Sunday. On Wednesday of this week, the New York Times, Nicholas Christoph, wrote an editorial called, We're number 28, and dropping. A measure of social progress finds that the quality of life has dropped in America over the last decade, even as it has risen almost everywhere else. Basically, the measure that Christoph is referencing is something called the Social Progress Index,

which finds that out of 163 countries that were assessed worldwide, the United States, Brazil, and Hungary are the only ones in which people are worse off than when the index began in 2011. What's more, the declines in Brazil and Hungary were smaller than Americas. Now, before you reject this index, it is basically inspired by the research of a number of Nobel-winning economists and collects 50 metrics of well-being, from nutrition to safety, to freedom, to the environment, to health education, and more. Interestingly, a lot of the problem areas are where we have a really good something, but not good access to that something. So for example, the United States ranks number one in the quality of universities in the world, but only number 91 in access to quality

basic education. When it comes to medical technology, we are obviously number one as well, but number 97 in access to quality healthcare. When I see these numbers, I can't help but think about the newsroom or the first scene from the newsroom, which was an Aaron Sorkin's series, which followed West Wing and which featured Jeff Daniels as a frustrated news anchor who's lost his faith in America. This very dramatic first scene is one in which, at a college conversation, the character played by Jeff Daniels snaps and tells a student that America isn't the greatest nation in the world anymore. Go look up just that scene on YouTube if you haven't seen it, but anyways, that's what I was thinking of when I was reading this. But what I want to return to

is actually an analysis of this. Luke Groman tweeted out, this is a predictable result of, quote, USDA Dutch disease, whereby the U.S. since 1971 became the Saudi Arabia of money. He then pointed out where that phrase, USD Dutch disease, came from. And it's a 2019 piece from Alphaville in the Financial Times called How to Diagnose Your Own Dutch Disease. I think it was a really interesting reference and a really great article, so even though it's more than a year old, I wanted to read how to diagnose your own Dutch disease for you today. This was written by Brendan Greeley in the Financial Times Alphaville on March 13th, 2019. Imagine you are the finance minister of a small developing country that has just discovered an ore belt rich in Cobalt, a metal that

is more than doubled in price over the last five years. You, a capable technocrat, are familiar with Dutch disease, you know that the sudden discovery of reserves of a high-value commodity can cause sclerosis in other industries, particularly manufacturing, as happened in the Netherlands after the discovery of natural gas in the late 1950s. Now, imagine you are the Secretary of the Treasury of the United States of America, for cobalt-rich or substitute dollars or dollar-denominated assets, or perhaps just treasuries. You still need to worry about Dutch disease. We just never talk about it that way, because the whole framework of booming commodity sector analysis is a condescension we reserve for developing countries. But anyone can get Dutch disease. The U.S. is showing symptoms.

And so Alphaville offers a pamphlet, you know, in the interest of public health. How to check for Dutch disease. Know what you're looking for. There's rich history here of both academic research and practical recommendations. Saxon Warner found an inverse correlation between resource abundance and economic growth. Gilfusson at all found an inverse correlation between a country's economic growth and the size of its primary sector. Most models of Dutch disease focus on exchange rates. Demand for a country's primary commodity makes its currency relatively more valuable, depressing exports of manufactured goods. But Krugman suggests that once a country neglects its manufacturing sector, it may have a hard time rebuilding it. More recent work focuses on institutions

in inequality. Melum looked at countries that get more than 10% of GDP from resource exports, and showed that Dutch disease is more likely to afflict countries with corruption and weak rule of law. And Robinson suggested that politicians tend to over-extract resources, they discount the future too much, and that a commodity boom raises both the value of being in power for politicians and the means to influence elections. Consider your risk factors. The United States certainly has a rich vein of a highly valued commodity. America creates about a quarter of global GDP, but well over half of the currency reserves of the world central banks is socked away in dollars. The dollar is by far the dominant currency for international credit.

Dollars are so important as an invoice currency for global trade that shifts in the value of the dollar are an effective predictor for international trade volumes. So many currencies are either explicitly pegged to the dollar or tied to it through trade, that 50 to 60% of global GDP swings with the dollar, making it part of a dollar zone. The dollar is universally a store of value, a medium of exchange, and a unit of account, all the things we consider money. It is arguably the only currency that is all three of these things. The United States Treasury is not the only place to get dollars. The United States isn't even the only place to get dollars.

Foreign institutions create dollar-denominated assets, for example. But it is the best place to get dollars. The U.S. dropped the dollars pegged to gold in the 1970s, then began borrowing in the 1980s, then discovered that other central banks wanted American debt because it was a safe. safe asset denominated in dollars, and they considered it to be money. Just as the Netherlands struck natural gas, the U.S. struck dollars, it found a gusher. The U.S. is not the only producer of dollars. It's possible to create dollar-denominated assets outside the U.S. for example. There's a difference between what the U.S. reports is owned by foreign central

banks and what the central banks report. That difference is a synthetic dollar called the Eurodollar. But America is the dominant producer of dollars. In oil, they'd call it the swing producer. Basically, around 1980, the United States discovered that it was the Saudi Arabia of money. Bordeaux and Macaulay's paper offers the best summary we've read of current arguments over the dollar. They pick at two questions. What causes the demand for dollars? And is the dollar system sustainable?

These are worthy and interesting questions, and Alphaville can do no better than Bordeaux and Macaulay to address them. We are, however, interested in a different question. Is being the Saudi Arabia of money good for America? What's going on, guys? I'm excited to share that one of this month's breakdown sponsors is crypto.com. Crypto.com offers one of the most cost-efficient ways to purchase crypto out there, as they've just waived the 3.5% credit card fee for all crypto purchases. What's more?

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Get started at nexo.io. Examine yourself. So let's go back to the original research on Dutch disease. We have a basic model of an economy where the export of a single commodity raises the exchange rate, discouraging the export of manufactured goods. If the commodity is the dollar, then demand for the dollar raises the value of the dollar at This isn't too hard to wrap our heads around, and since 1980 the dollar has appreciated, even as the U.S. has declined as a share of global GDP.

We'd expect to see inflation in non-tradable services like medical care and college tuition, but not in tradable goods like T-shirts and TV sets, and we'd expect a decline in the value added to GDP for manufacturing. None of these are dispositive, and Alphaville is sadly not an econometrition, but they have all happened. It gets more interesting when we look at the more recent research on Dutch disease around institutions in inequality. The federal government alone controls the most important dollar-producing load, treasuries. Foreign central banks treat U.S. federal debt obligations like money. It's liquid, holds its value, and is denominated in dollars. When people in capital markets say they're going to

cash, they don't actually buy dollar bills, they buy treasuries. So if the U.S. has Dutch disease, from reading Robinson, we'd expect the value from the the creation of new federal debt to be distributed as patronage to a small group of people with access to power. We'd expect the federal government to overproduce debt without considering long-term value or sustainability of production, and we'd expect the right to produce debt to raise the value of being in power. This is a fair description of the Tax Cuts and Jobs Act of 2017. Treasuries aren't the only dollar-denominated safe assets. Real estate is two. We'd expect an appreciation in real estate prices and foreign hyperinvestment in exactly the kinds of real

estate that best serve as a safe asset. Luxury apartments and business towers in large cities. A park avenue address is a safe asset too. Or we could go back and use the framework of Malum to ask about the quality of institutions. After four decades of production of federal debt and dollar-denominated assets, mortgages, say, bundled into tradable securities, what does the country have to show for it? Were the proceeds distributed equally? Did the country invest in education, or shore up retirement plans for a demographic bump, make infrastructure investments, and if those things didn't happen, and they didn't, is the United States among those countries with institutions not fit for the task of handling a commodity boom? Get help.

Norway was a poor country with institutions good enough to handle the discovery of oil, and now it's a rich country fully aware of Dutch disease and working to avoid the worst of it. There are many case studies from Holden at the University of Oslo, and the Norwegians are eager to help, for example, through the Oil for Development Program, run by the Norwegian Agency for Development Coordination. Dutch disease is a well-known, well-studied problem. There are ways to avoid it, although they are not easy. Consider alternative treatments. One of the clarifying consequences of a discussion around modern monetary theory is that it looks at federal appropriations as a tool to be consciously created and deliberately used.

Until now, the United States has merely borrowed and appropriated while idly wondering, sometimes, whether it's all sustainable, avoiding the discussion of what best to do with the windfall. So instead, the country pretends it can't create debt, creates it anyways, and distributes the proceeds terribly. Alphaville welcomes any innovation that would stop the pretending, but is not convinced that U.S. institutions would handle MMT appropriations with any more discretion than they did the proceeds from debt creation. Seriously, though, get help.

Call Oslo. It's time. Now, I usually don't do an analysis at the end of my long-read Sunday, but I just wanted to point out a couple quick things. First, I think that question is being the Saudi Arabia of money good for America is a central Overton window shift that we're finally asking right now. You've heard it on my episodes with Luke Groman, who inspired this one, and Lynn Alden. I think it's really important that we're finally asking that. Second, I've said before, even though it doesn't appeal to me and it has a huge number of issues, that part of why MMT makes sense as a response to this environment is that it at least is not avoiding these tough conversations and is offering a vision for the future, a theory that is tangible. In fact,

that's why I think MMT and Bitcoin are these interesting sort of yin and yang twin forces that are both doing that, but in very, very different ways. Finally, I think this is a great, great piece, but I really think Alphaville would do a lot better to stop referring to themselves as Alphaville, because it was weird and it was weird to read. Still though, appreciate the great article, and I appreciate you guys listening. Until tomorrow, be safe and take care of each other. Peace.