[Marxism] Money for nothin': some ideas about seigniorial capitalism as a background to a lowering dollar

Jurriaan Bendien bendien at tomaatnet.nl
Thu Feb 19 17:50:23 MST 2004


I was thinking again about the implications of a lowering dollar for various
types of US "seigniorage", and I found this item:

About 560 billion dollars in cash circulates through the world at present.
About 70 percent of this cash is used beyond American borders [note:
according to FRB, M1 currency volume = now $665.9 billion,
http://www.federalreserve.gov/releases/h6/hist/h6hist9.txt - JB]. The USA
believes that Russia comes second (after the USA itself) from the point of
view of quantity of dollar cash circulation. About 363 million counterfeit
dollars were confiscated worldwide from 1929-1995. Only one-third of this
sum was withdrawn from circulation in the States. The counterfeit dollar
boom occurred in 1993, when 120 million counterfeit dollars were seized
outside the USA. Russian banks received of counterfeit dollar numbers in
1993, for it was believed at that time that there was no other way to detect
them. Kevin Rodgers, a special agent with the American Treasury's secret
service, visited Russia in 2000. "I was surprised to know that counterfeit
money is not an issue for Russian authorities. They have a well-developed
system for find and withdrawing counterfeit dollars from circulation in
Russia," Kevin Rodgers stated. The agent was could not have been more wrong.
According to data from the Russian Federation Central Bank, Russian citizens
have up to 25 billion dollars, and one-third of them are probably forged. US
dollars make 97.5 percent of all counterfeit currencies in the world. The
Russian Interior Ministry said that 42,352 counterfeit dollar notes had been
withdrawn in Russia in 2002 - four million dollars, that is. There were
23,000 forgeries registered in 2002, but only 2,700 of them were exposed,
since about 60 percent of counterfeit notes had been withdrawn from banks.

Source: http://goldismoney.info/forums/printthread.php?t=1465

According to the US government accounting office, of the $380 billion in
U.S. currency circulated in fiscal year 1994, $208.7 million was
counterfeit, which represented less than one one-thousandth of U.S. currency
in circulation at that time.
Frank Shostak, a von Mises fan, writes "Within the free market, there cannot
be currency depreciation as such. Since in a true free-market economy money
is gold, there cannot be an independent entity such as a "dollar." (...) if
a country tries to take advantage and depreciate its currency by means of a
relatively looser monetary stance this runs the risk that other countries
will do the same. Consequently, the emergence of competitive devaluations is
the surest way of destroying the market economy and plunging the world into
a period of crisis." http://www.mises.org/fullstory.asp?control=1345

Benjamin Cohen writes: "Three economic benefits are generally expected to
accrue to the United States from dollarisation: an increase of seigniorage,
a decrease of transactions costs, and an improved environment for foreign
trade and investment. Though none of these gains need be trivial, the
magnitudes involved can be easily exaggerated. In reality, none is apt to be
of more than marginal significance to an economy as large as that of the
U.S. Dollarisation, when undertaken unilaterally, means that a government
must give up interest-bearing dollar reserves in order to acquire the
greenback notes needed to replace local cash in circulation. The interest
payments thus foregone represent a net saving for the United States - a
material gain that comes at the direct expense of the dollarising country.
(...) If money demand in dollarising countries is subject to sudden or
frequent shifts, net flows would be generated that might increase the
short-term volatility of U.S. monetary aggregates. Such liquidity shocks
could make it tougher for the Fed to maintain a steady course over time. But
here too it is easy to exaggerate. In fact, a large share of the outstanding
stock of U.S. banknotes - conservatively estimated at some 55-70 per cent of
the total - is already in circulation outside the borders of the United
States, with little or no evident impact on policy. The Fed recognizes the
phenomenon of informal dollarisation and, as part of its daily open-market
operations targeting the federal-funds rate, already factors overseas
circulation into its behaviour. In any event the additional sums involved,
even if many governments were to elect to dollarise, are unlikely to be
great enough to make much practical difference in America's still relatively
closed economy. More remote is the possibility that at some point one or
more dollarised countries might suddenly decide to reintroduce currencies of
their own - de-dollarisation -- precipitating a mass dumping of greenbacks
in global exchange markets. The result for the dollar might be a serious
depreciation, generating increased inflationary pressures in the United
States.

http://www.polsci.ucsb.edu/faculty/cohen/recent/dollarization.html

Assistant Secretary of Treasury for International Affairs Edwin Truman said
in 2000: "Exchange rate adjustment is a potential shock absorber and also
allows greater scope for national monetary autonomy. However, that potential
must be balanced against the added macroeconomic policy discipline and
credibility associated with rejecting all scope for discretionary monetary
policy and adopting the currency and monetary policy of another country with
such credibility."

http://www.usembassy.it/file2000_02/alia/a0020822.htm

If exchange rate adjustment can no longer be a "shock absorber", who then
absorbs the shock ? Basically, those economic actors among the population
who are in the weakest economic position already.

As regards Japan, Takehiro Sato writes about seigniorage: "The Bank of Japan
does not distribute banknotes for free, but rather issues them for a
consideration, that is paid for with the reserves held by commercial banks
in the Bank of Japan's current account. When banks need cash, they draw on
their current accounts at the Bank of Japan. Once this paper leaves the Bank
of Japan branch, it is defined as money by the Bank of Japan and counted as
such within economic statistics. Both current account reserves and banknotes
are liabilities on the Bank of Japan's balance sheet, however. Thus the
withdrawal of current account reserves by commercial banks merely results in
the swapping of one liability (reserves) for another (banknotes), but has no
impact on the Bank of Japan's income statement. Furthermore, the Bank of
Japan provides these current account reserves to the commercial banks in
exchange for liquid securities such as JGBs and short-term government
securities transferred to the Bank of Japan as collateral for repo
operations by commercial banks. In other words, although these banknotes are
initially paid for with deposit reserves, ultimately they are paid for with
JGBs and TBs eligible as collateral on the Bank of Japan's balance sheet.
This means that both the creditworthiness and value of banknotes are backed
by the assets of the Bank of Japan, and it is this backing that enables the
banknotes to function as currency in circulation. This is the cornerstone of
currency management under the modern central banking system. A key point
here is that the issuance of banknotes is a form of lending of the means of
settlement into circulation on the market, and in that sense no profits are
produced by printing money. The costs, such as the repo rate, paid by the
commercial banks to the Bank of Japan when conducting operations equate to
the leasing charges on this "loan," but these are not profits deriving from
the issuance of currency. Furthermore, demand for banknotes is not something
that can be actively determined by the Bank of Japan. Banknote demand is
passively determined in response to cash withdrawals by commercial banks,
and the Bank of Japan can do nothing more than make adjustments to the
volume of these withdrawals. In fact, one critical duty of the Currency
Issue Department of the Bank of Japan is to forecast demand for banknotes on
an annual as well as daily basis.

http://www.morganstanley.com/GEFdata/digests/20020815-thu.html#anchor2

For Kohler's ideas on euroisation in Eastern Europe, see:
http://www.imf.org/external/pubs/ft/survey/2004/021604.pdf

In 2002, Henry C K Liu wrote:

There is an economics-textbook myth that foreign-exchange rates are
determined by supply and demand based on market fundamentals. Economics
tends to dismiss socio-political factors that shape market fundamentals that
affect supply and demand. The current international finance architecture is
based on the US dollar as the dominant reserve currency, which now accounts
for 68 percent of global currency reserves, up from 51 percent a decade ago.
Yet in 2000, the US share of global exports (US$781.1 billion out of a world
total of $6.2 trillion) was only 12.3 percent and its share of global
imports ($1.257 trillion out of a world total of $6.65 trillion) was 18.9
percent. World merchandise exports per capita amounted to $1,094 in 2000,
while 30 percent of the world's population lived on less than $1 a day,
about one-third of per capita export value. (...)

World trade is now a game in which the US produces dollars and the rest of
the world produces things that dollars can buy. The world's interlinked
economies no longer trade to capture a comparative advantage; they compete
in exports to capture needed dollars to service dollar-denominated foreign
debts and to accumulate dollar reserves to sustain the exchange value of
their domestic currencies. To prevent speculative and manipulative attacks
on their currencies, the world's central banks must acquire and hold dollar
reserves in corresponding amounts to their currencies in circulation. The
higher the market pressure to devalue a particular currency, the more dollar
reserves its central bank must hold. This creates a built-in support for a
strong dollar that in turn forces the world's central banks to acquire and
hold more dollar reserves, making it stronger. This phenomenon is known as
dollar hegemony, which is created by the geopolitically constructed
peculiarity that critical commodities, most notably oil, are denominated in
dollars. Everyone accepts dollars because dollars can buy oil. The recycling
of petro-dollars is the price the US has extracted from oil-producing
countries for US tolerance of the oil-exporting cartel since 1973.

By definition, dollar reserves must be invested in US assets, creating a
capital-accounts surplus for the US economy. (...)  The Quantity Theory of
Money is clearly at work. US assets are not growing at a pace on par with
the growth of the quantity of dollars. (...) The US capital-account surplus
in turn finances the US trade deficit. Moreover, any asset, regardless of
location, that is denominated in dollars is a US asset in essence. When oil
is denominated in dollars through US state action and the dollar is a fiat
currency, the US essentially owns the world's oil for free. And the more the
US prints greenbacks, the higher the price of US assets will rise. (...) The
world economy, through technological progress and non-regulated markets, has
entered a stage of overcapacity in which the management of aggregate demand
is the obvious solution. Yet we have a situation in which the people
producing the goods cannot afford to buy them and the people receiving the
profit from goods production cannot consume more of these goods. The size of
the US market, large as it is, is insufficient to absorb the continuous
growth of the world's new productive power. For the world economy to grow,
the whole population of the world needs to be allowed to participate with
its fair share of consumption. Yet economic and monetary policy makers
continue to view full employment and rising fair wages as the direct cause
of inflation, which is deemed a threat to sound money. (...) It is hard to
see how sound money can ever lead to full employment when unemployment is
necessary to maintain sound money. Within limits and within reason,
unemployment hurts people and inflation hurts money. And if money exists to
serve people, then the choice becomes obvious. Without global full
employment, the theory of comparative advantage in world trade is merely
Say's Law internationalized. No single economy can profit for long at the
expense of the rest of an interdependent world. There is an urgent need to
restructure the global finance architecture to return to exchange rates
based on purchasing-power parity, and to reorient the world trading system
toward true comparative advantage based on global full employment with
rising wages and living standards. The key starting point is to focus on the
hegemony of the dollar.

Source: http://www.freerepublic.com/focus/fr/663618/posts

For a spectacular graph on the relationship between consumption and
employment in the "advanced economies", as a sort of simplified statistical
index of the economic value of imperialism (unadjusted for productivity
differentials), see: http://www.morganstanley.com/GEFdata/digests/x2.pdf

According to the IMF, "While unambiguous signs of stronger growth are still
lacking, corporations - particularly in the United States - have made good
progress in their financial consolidation efforts and are in a better
financial position to increase investment spending"
http://www.imf.org/external/pubs/ft/GFSR/2003/02/pdf/chp1.pdf

So what is "good" progress ? According to the Fed, "overall [US] industrial
output in January [2004] was 2.4 percent above its January 2003 level.
Manufacturing output rose 0.3 percent, and mining output increased 0.1
percent; with unusually cold weather in January, the output of utilities
rose 5.2 percent. The rate of capacity utilization for total industry
increased from 75.6 percent in December to 76.2 percent in January."
Furthermore: "After having contracted at an average annual rate of 13-1/2
percent during 2001 and 2002, real expenditures for nonresidential
construction slipped just 1-1/4 percent, on balance, during 2003. Spending
on office buildings and manufacturing structures, which had dropped sharply
over the preceding two years, fell again in 2003. The high office vacancy
rates in many areas and low rates of factory utilization implied little need
for new construction in these sectors even as economic activity firmed.
Investment in communications infrastructure, where a glut of long-haul
fiber-optic cable had developed earlier, also continued to shrink. In
contrast, outlays for retail facilities, such as department stores and
shopping malls, turned up last year, and the retrenchment in construction of
new hotels and motels ended."

Source:
http://federalreserve.gov/boarddocs/hh/2004/february/ReportSection2.htm

A good article by Michel Chussodovsky linking this to the Iraq war project
and the anxieties about terrorist uppityness:
http://www.coli.uni-sb.de/~pietsch/stop-war/PineSGI4101030312190225013394877
-100000.html

Useful reference on the big business of debt:
http://www.imf.org/external/pubs/ft/wp/2004/wp0413.pdf

Jurriaan







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