1/8 Andrés Velasco argues that the US benefits from the exorbitant privilege of USD dominance but while he acknowledges concerns that a strong dollar makes American industry uncompetitive, he dismisses this concern as irrelevant. https://www.project-syndicate....
2/8 Instead, he gives the standard two reasons why the US benefits. First he notes that foreigners hold US dollars as a form of savings. The Federal Reserve, he claims, estimates that foreigners hold more than $1 trillion, or 45% of the total currency in circulation.
3/8 "This, he notes, "is a source of cheap funding for the US." It certainly is, even if the savings amounts to less that one-tenth of one percent of US GDP. But it is not true to say that this benefit exists because of the exorbitant privilege.
4/8 As of the end of 2019, for example, the ECB estimated that between 30% and 50% of euro banknotes in circulation were held outside the euro area. This equated to approximately €400 billion to €650 billion.
5/8 Europe, in other words, benefits almost as much from seigniorage as the US, without the cost of an overvalued currency and a weaker industrial base. The idea that this benefit, as small as it is, is part of some US dollar exorbitant privilege makes no sense.
6/8 Velasco also claims that the exorbitant privilege allows the US to borrow as much as it wants at much lower costs than otherwise. This would be a little less of a questionable claim if other large economies without exorbitant privilege weren't able to do...
7/8 the same, but in fact what is true of the US is true of all large, stable economies. Neither the EU, China, or Japan has trouble borrowing in its own currency, and in fact the latter two have both higher debt levels and lower borrowing costs.
8/8 The problem is that Velasco (and, to be fair, most economists) don't understand that the impact of foreign inflows into a country on its domestic interest rates depends on whether or not the main constraint on domestic investment is scarce domestic savings.