My Take

No 'exorbitant privilege' for the tea party in US debt ceiling debate

PUBLISHED : Monday, 14 October, 2013, 12:00am
UPDATED : Monday, 14 October, 2013, 9:45pm

While reading up on the US debt ceiling debate, I came across several non-American economists who mentioned the "exorbitant privilege" - the alleged benefits the US enjoys for having the greenback as the global reserve currency. The "tea party" extremists may not know it, but you can be sure the Republican elders and their Wall Street plutocrat supporters understand these things perfectly. That is why the debt ceiling fight is as much a war between Democrats and Republicans as an internal struggle among Republicans.

Like most people, I thought Charles de Gaulle came up with this phrase, usually meant as anti-American criticism. Others thought it was from his economic adviser Jacques Rueff. So it came as a pleasant surprise to learn it was actually first mentioned by my intellectual hero Raymond Aron, the late sociologist and philosopher, in a mid-1960s newspaper column commenting on an analysis by future French president Valery Giscard d'Estaing on the features of this "privilege". Neither man was anti-American.

The phrase refers to the special reserve status of the US dollar that enables US citizens to pay low interest on their liabilities to foreigners while earning comparatively high returns (in yields and capital gains) on their foreign assets.

A recent study by a European Central Bank economist compares the differences - which amount to whole percentage points - Americans enjoy over Japanese, Swiss and euro-zone residents who also have their own reserve currencies.

More broadly, the privilege means Washington gets the best deal of any government in being able to borrow in its own currency and at low interest, say to service deficits or its war machine. For the US, default is impossible, at least not an involuntary one. It is a cornerstone of US post-war hegemony. Have Americans abused their privilege? Yes, under practically every president from Nixon onwards. This has been a major source of anti-Americanism.

Tea-party fanatics are willing to fight health care reform by undermining this vast privilege. Thanks to their debt ceiling threats, US sovereign debt, long assumed to be risk free and used to price the risk premiums of all kinds of investment, is no longer so.

Is that not absolutely crazy?