The continuing weakness of the dollar has led to what The Washington Post has called "a growing international chorus" to push aside the greenback as the world's reserve currency. The Post quoted a recent speech by World Bank President Robert Zoellick in which the former U.S. Trade Representative said: "The United States would be mistaken to take for granted the dollar's place as the world's predominant reserve currency." To better understand the dollar's dilemma, I talked with Professor Peter Morici of the University of Maryland, a former chief economist at the U.S. International Trade Commission.
MARIA BARTIROMOShould the dollar be replaced as the world's reserve currency?
PETER MORICIWe don't have an official reserve currency. The reason people hold dollars, first, is habit. The second is that the dollar has historically been well-managed, until now. What is creating fear about the dollar are the huge deficits. So while China complains that the dollar shouldn't be the global reserve currency, it's really part of the problem.
In an op-ed piece for the Baltimore Sun, you said China and other countries have gamed the global currency system to their competitive advantage. How have they done that?
Well, China basically intervenes in currency markets, printing yuan, selling dollars to maintain an undervalued currency. [Fed Chairman] Ben Bernanke has said that [China's] currency system provides the equivalent of an export subsidy. I agree with him, and to my mind it's somewhere between 40% and 50%. The dollar should revalue against the yuan by at least that much. An undervalued currency is a form of protectionism. On top of that, China does a lot of things that make it difficult for companies to export into the country. Take, for example, solar panels. The two big markets for solar panels going forward are China and the U.S. But China requires that 75% of the contents of solar panels sold in China be made domestically. We don't.
You also suggest that the huge trade deficits that resulted in part from these currency games contributed to the Great Recession.
Exactly. The trade deficit requires Americans to spend more than they earn, or there will be inadequate demand for the goods and services they create. Essentially, when the credit bubble burst, [Americans] were no longer able to consume more than they produced, and the U.S. economy and the global economy collapsed.
Should the WTO have some mechanism to combat this sort of anti-free-trade behavior?
Currency manipulation is one of the most virulent forms of protectionism, and the original GATT [General Agreement on Tariffs & Trade] prohibited countries from using currency for competitive advantage. But with the dissolution of the Bretton Woods system in the early 1970s, the IMF [International Monetary Fund] really had no authority to regulate the behavior of countries that use currency to competitive advantage. Several industry groups in the past have suggested that Washington bring a WTO case, but the U.S. Trade Representative has declined to do so. The Bush and Obama Administrations have refused to act on the currency problem in a meaningful way.
How would you characterize the economy?
We're in a very tepid upturn, which is not what we would expect after such a sharp contraction. This quote "Great Recession" was as much a function of structural problems as it was cyclical maladies.
What are the structural problems?
During the last expansion, the dollar became chronically overvalued against the Chinese yuan. And the trade deficit soared. We also neglected our growing energy dependence. At one point we were paying almost $400 billion a year at an annualized rate for oil. At the same time the banks had access to a lot of money and had a compensation system and methods of accounting that gave rise to excessive risk-taking and booking profits that later turned out not to exist. And so until we straighten out the banks and do something about the trade deficit, we're going to continue to have chronic problems.
What should be done about the banks? On the one hand Washington says, "Look, you need to lend more." On the other hand, it says, "We need you to get your capital levels up."
Well, we do need to increase capital requirements, but more than that, we have to look at how the banks compensate people. It wasn't just the big bonuses, it was the fact that the big bonuses were paid against profits that later turned into losses.
Doesn't talent flee and go elsewhere if you're not paying them adequately?
If everybody is operating under the same system, then no.
So treat the banking sector like it's a utility?
Like a regulated public utility. We wouldn't let Con Edison (ED) in New York pay its executives $10 million a year and then let the lights go out.
Are you worried about the Fed's exit strategy?
I'm not particularly worried about removing liquidity from the banks. The problem with U.S. macroeconomic policy is the Fed. The problem is Treasury.
You know, when I ask myself if America is on the ascent, I get depressed.
Oh, I get more than depressed. I think that we are in deep trouble, and we have had two bad Presidents in a row. And now that's becoming a problem.