Unemployment and the Failure of US Trade Policy, Part II
The US Dollar has a strange, dual nature: It is the default currency of international trade and finance. It is also the money which ordinary Americans use to buy groceries.
This means that whenever there is some kind of instability in the international financial system, it more-or-less immediately causes changes in the income and job prospects of ordinary Americans. Sometimes, these changes are good, and sometimes, these changes are bad. Right now, they are bad.
The immediate problem sounds kind of strange. Various countries have a “Dollar Shortage”. Your reaction is probably something like “So what? I have a dollar shortage.”
In the context of international finance, a dollar shortage describes the situation in which a country has plenty of local money, but does not have enough US dollars. Since global corporations are usually not interested in accepting Peruvian Soles, Argentine Pesos, or other “soft currency”, most countries have two banking systems, one of which runs on US dollars. Today, the most noticeable countries who have a dollar shortage are oil exporters, like Nigeria:
The immediate problem for Nigeria is that oil prices have fallen dramatically, and that international oil sales are conducted in US dollars. The Nigerian banking system has lots of local currency (the Naira), which means that Nigerians can buy things like beer and fresh vegetables, which they can pay for in local money. However, if somebody wants to buy an iPhone or a pair of Nikes, they are out of luck. If a corporation wants to buy a jet airplane or a truck or a backhoe, they are out of luck.
This means that the Nigerians are not going to buy anything from the US, which is bad news for US unemployment numbers.
Even worse is the ripple effect. Countries like Egypt, who import something like half of their food, do not export oil. They need to get dollars from somewhere else, like Saudi Arabia. Unfortunately, Saudi Arabia has a dollar shortage, because of falling oil prices.
Today, American farmers are having trouble with food sales to Egypt. At least, they are having trouble with the part about “getting paid”.
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There are various ways of thinking about this. One issue is that countries who are running a two-currency banking system are much more vulnerable to financial instability: Having a two-currency system doubles your changes of inflation, a bank run, a liquidity trap, or similar problems.
Another issue is that when a country uses US dollars for major parts of its economy, and where the US government has no role in making bank policy, you are going to wind up with a situation where at least some countries decide to adopt a “Wild West Banking Environment”, which is pretty much as exciting as it sounds.
In 2008, there was a rather severe dollar shortage in Europe, in which various German banks had borrowed US dollars and were possibly going to default. What this really meant was that they had plenty of Euros, but that the price of dollars had spiked up and they were going to lose so much money on overnight loans that it might put the bank out of business.
In the event, the Federal Reserve provided several hundred Billion dollars in “swap lines”, where the Fed and the European Central Bank exchanged large amounts of US dollars for Euros. The ECB then loaned these dollars to European banks, which removed the immediate crisis.
The disruption from the 2008 dollar shortage, of course, was one of the direct causes of increased unemployment in the United States that year.
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From a policy point of view, the issue is that the US has allowed/encouraged most of the world’s trade to be conducted in US dollars, without taking responsibility for managing global liquidity or financial stability. This means that we not only have an unnecessary high level of instability in the (US dollar) global financial markets, but that this instability directly couples to the US domestic economy, where it causes disruption in the labor market.
Many of the problems in the labor market today are the result of a policy of non-regulation of offshore dollars. Figuring out how to implement reasonable regulations is going to be very hard, but the current situation is not working.