The dollar maintains its reserve currency status because it is the least worst of the major four currencies – the US dollar, the British pound, the Japanese yen, and the euro. All four of these currencies are now suffering the effects of a stimulative, expansive, and QE-oriented monetary policy.We must now add the Swiss franc as a major currency, since Switzerland and its central bank are embarked on a policy course of fixing the exchange rate between the franc and the euro at 1.2 to 1. Hence the Swiss National Bank becomes an extension of the European Central Bank, and therefore its monetary policy is necessarily linked to that of the eurozone…When you add up these currencies and the others that are linked to them, you conclude that about 80% of the world’s capital markets are tied to one of them. All of the major four are in QE of one sort or another. All four are maintaining a shorter-term interest rate near zero, which explains the reduction of volatility in the shorter-term rate structure. If all currencies yield about the same and are likely to continue doing so for a while, it becomes hard to distinguish a relative value among them; hence, volatility falls.The other currencies of the world may have value-adding characteristics. We see that in places like Canada, Sweden, and New Zealand. But the capital-market size of those currencies, or even of a basket of them, is not sufficient to replace the dollar as the major reserve currency. Thus the dollar wins as the least worst of the big guys.Fear of dollar debasement is, however, well-founded. The United States continues to run federal budget deficits at high percentages of GDP. The US central bank has a policy of QE and has committed itself to an extension of the period during which it will preserve this expansive policy. That timeframe is now estimated to be at least three years. The central bank has specifically said it wants more inflation. The real interest rates in US-dollar-denominated Treasury debt are negative. This is a recipe for a weaker dollar. The only reason that the dollar is not much weaker is that the other major central banks are engaged in similar policies.
First, they serve as lenders of last resort, which in practice means bailouts for the big financial firms. Second, they coordinate the inflation of the money supply by establishing a uniform rate at which the banks inflate, thereby making the fractional-reserve banking system less unstable and more consistently profitable than it would be without a central bank (which, by the way, is why the banks themselves always clamor for a central bank). Finally, they allow governments, via inflation, to finance their operations far more cheaply and surreptitiously than they otherwise could.
Protectionism, often refuted and seemingly abandoned, has returned, and with a vengeance. The Japanese, who bounced back from grievous losses in World War II to astound the world by producing innovative, high-quality products at low prices, are serving as the convenient butt of protectionist propaganda. Memories of wartime myths prove a heady brew, as protectionists warn about this new "Japanese imperialism," even "worse than Pearl Harbor." This "imperialism" turns out to consist of selling Americans wonderful TV sets, autos, microchips, etc., at prices more than competitive with American firms.Is this "flood" of Japanese products really a menace, to be combated by the U.S. government? Or is the new Japan a godsend to American consumers? In taking our stand on this issue, we should recognize that all government action means coercion, so that calling upon the U.S. government to intervene means urging it to use force and violence to restrain peaceful trade. One trusts that the protectionists are not willing to pursue their logic of force to the ultimate in the form of another Hiroshima and Nagasaki.
People favor discrimination and privileges because they do not realize that they themselves are consumers and as such must foot the bill. In the case of protectionism, for example, they believe that only the foreigners against whom the import duties discriminate are hurt. It is true the foreigners are hurt, but not they alone: the consumers who must pay higher prices suffer with them.
While the size of the credit expansion that private banks and bankers are able to engineer on an unhampered market is strictly limited, the governments aim at the greatest possible amount of credit expansion. Credit expansion is the governments' foremost tool in their struggle against the market economy. In their hands it is the magic wand designed to conjure away the scarcity of capital goods, to lower the rate of interest or to abolish it altogether, to finance lavish government spending, to expropriate the capitalists, to contrive everlasting booms, and to make everybody prosperous.