Over at the NYT. Since one can only jam so much into an oped, allow me to elaborate and embellish a bit.
First, a few relevant links. Along with the Austin piece (behind a paywall), which built what I found to be a pretty airtight model of what’s going on, the China-based economist Michael Pettis has been plumbing these waters at great depth. I found his book on international imbalances to be an awfully strong argument. Joe Gagnon is also a very important thinker in this field; his work, sometimes with Fred Bergsten, is essential for understanding the scope of the problem.
Then, as part of our full employment project, two authors–Dean Baker and Sue Houseman–argued convincingly that it’s going to be a) hard to get to full employment, and b) rebuild our manufacturing sector, if we don’t take on this extremely persistent problem of imbalanced trade.
Next, a political economy point: Someone is going to yell “protectionism” at an argument that suggests intervening in currency markets. To which I say, “Ha!” I’m the free trader here. I think the value of the dollar should be set in markets, not by policy decisions made either here or in Asia, Europe, or anywhere else. To the extent that the argument calls for currency rules, it is in the interest of pushing market outcomes, i.e., not allowing others to manage their currencies–or, in the broader argument, their savings/consumption balances–such that we end up with demand-zapping trade deficits.
Finally, how specifically would one go about dethroning King Dollar? There are four ideas out there on this:
—legislation such as that introduced by Sen. Levin a few years ago that gives the US gov’t the right to treat currency management as a violation of international trading rules, leading to offsetting tariffs.
—taxing foreign holdings of United States Treasuries, raising the price of currency management.
–my favorite: institute reciprocity into the process of currency management: if a country wants to buy our Treasuries, we must be able to buy theirs.
–elevate and support an international reserve currency, like the IMF’s SDR.
I like option three, as my hunch is that its threat effect might go a long way toward ameliorating the problem without excessive intervention.
I realize that it’s a big deal to suggest we dethrone the currency king and I don’t make the case lightly. But read at least some of the literature above extent of global imbalances and the damage they’re doing both here and abroad and you may well agree.