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  • Jul 14, 2014
  • Updated: 12:24am
My Take
PUBLISHED : Monday, 14 October, 2013, 12:00am
UPDATED : Monday, 14 October, 2013, 9:45pm

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


Alex Lo is a senior writer at the South China Morning Post. He writes editorials and the daily “My Take” column on page 2. He also edits the weekly science and technology page in Sunday Morning Post.

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?


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This article is now closed to comments

How about the author stick to subjects related to Hong Kong, which offer a better opportunity to actually write a more informed column.
Alex Lo writes "but you can be sure the Republican elders and their Wall Street plutocrat supporters understand these things perfectly." The facts are different. In the last election of the top 10 highest income zip codes (postal codes) 9 went for Obama. In 2008 Obama raised twice as much Wall Street money than the Republican nominee McCain.
But this overstates Wall Street's role. In recent years much Democrat money and most of their organization volunteers come from public sector unions. Obama and the Democrats wanting to increase the size and scope of the federal government benefits these same public sector unions. The tea party is a push back against this.
reader (3)
5. Finally that is one other topic you might wish to write on, but I know you won't: China's domestic financial repression, which is every bit as egregious as the US exploitation of its reserve status. With more than Rmb100 trillion of deposits earning 2-3% below "fair" cost of interest, the Beijing government exacts trillions in exorbitant privilege not from foreigners but from its own subjects. This allows the government to spend money on all sorts of splendid projects, but it obviously comes at a welfare cost to savers. To China's great reformist credit, they do recognize this dilemma and are moving gradually towards financial liberalization; in fact they must take this step before properly opening their capital account. Once they do that the RMB can be the global reserve currency and poof!, Washington's exorbitant privilege will disappear. Then Beijing will have it.
reader (2)
3. Not only does US reserve currency extend beyond cash, of course. Your column suggests that US funding rates (on Treasurys) are "artificially" suppressed by foreign demand. Which I suppose is true. But I have a solution for all those Asian and Middle Eastern central banks who hoard dollars while complaining about the US abuse of the currency system: stop buying US dollars, and buy.... well, other stuff. As you have pointed out before, perhaps China should be buying "real assets" like African copper mines, Persian and Russian oil wells, and Brazilian farmland.
4. Speaking of China, let's hope that this latest fiscal cliff episode speeds the RMB towards true reserve currency status. This, as we readers are constantly reminded by HSBC contributors in your op-ed pages, is only a matter of a few years off. It will mean that capital can flow unfettered into and out of China and the RMB exchange rate will be determined not solely by the PBoC but by the markets. In other words China may lose some of its own power of terms-of-trade setting, which is a kind of "exorbitant privilege" (in the form of export competitiveness) enjoyed by a mercantilist state.
Fascinating comments on this topic. I was aware that the quote have been attributed to "VGE", but did not know of the connection to Aron. I would like to offer five thoughts:
1. You say "thanks to their [Tea Party] debt ceiling threats, US sovereign government debt, long assumed to be risk free...is no longer so." I am less of a Tea Party fan than even you are, but I do credit them with focusing attention on the fundamental entitlement and solvency problems in the US fiscal accounts. Could it be that the Tea Party wants American bonds to remain free of risk -- for the long-term? Critics also accuse Germany of "reckless austerity and brinksmanship" when forcing Europeans to ponder the eventual consequences of endlessly bailing out PIGS economies and expanding welfare spending.
2. Actually, every central bank issuer of currency enjoys exorbitant privilege to some extent: they issue zero-coupon perpetual notes (also known as "cash"). They do so in their own domestic economies. The difference with the US is that greenbacks are so eagerly sought by foreigners that US cash circulates globally. I was just in the D.R.Congo last week and folks there don't use their local wads of francs. The Congo central bank would love to exploit an exorbitant privilege, but the local's ain't buying it.
usd being global reserve, imagine it's managed by a world bank
and the bank's lending committee, not the us congress
has to approve the us request to raise its debt ceiling
What would this committee of global bankers do?
fix / raise / reduce the limit
ask for collaterals
raise / reduce interest
Piecemeal resolutions make no long term sense
The call for de-Americanization is a sound long term solution
When another currency is deemed more reliable than the U.S. dollar, then that currency will become the new global reserve currency. Until then, the dollar will reign supreme.
BTW, there is no serious chance of a U.S. default due to failure to lift the debt ceiling. It will be raised. The current drama is nothing more than the usual orgy of preening attention-seeking politicians angling to get themselves in front of the TV cameras. It's boring and sickening at the same time.
I gather that through this article it is the willingness for US government and its people to carry sovereign debt that allows US to enjoy "exorbitant privilege" over other countries, debtor or not. Since most of the time and places, US government didn’t have to use force on those willing debtors, there must be something else that motivate others to grand privilege to US. We know what it is all along – it is the trust in US for its more dependable political system. It is still too early to conclude the political system is all broken. The on-going debate on debt-ceiling is not unusual even though taking action by shutting down the government is.
Until when the Washington Mall is filled with marches again like last time with King’s human rights protest, we should then all begin to worry for US. The current US is just turning their cars in at the garage for a needed oil change. Once it is done, the cars would be on the roads again running. At least this is what I think and what many debtor countries hope it is. But I am not sure of the Tea Party if it is crazy.


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