US external accounts: Growth in imbalances and hegemony of the dollar.
After 1971, the free convertibility of the dollar and the monetary order based on floating exchange rates allowed the US to let the balance of payments deficit slip away without having to fear for the value of their currency. The negative balance of payments balance was offset by the balance of capital movements or financial balance.
On the chart [i], the outflows of Dollars or Foreign Income (A) account for US purchases of foreign goods and services plus interest payments on financial investments, corporate profits, dividends on shares repatriated by their foreign holders and transfers without consideration.
Conversely, dollar inflows or Foreign Outlay (B) account for US merchandise and service sales plus the return on US-owned assets abroad in the form of corporate profit, interest financial investments, and dividend shares.
These dollar inflows and outflows can simply be explained by considering the different balances that make up the balance of payments. The balance of trade is very deficient, the balance of the balance of services offsetting the balance of trade very inadequately, the balance of capital income (Interest, Profits, and Dividends or IPD) – regularly to the advantage of the US- could play a more positive role, but this balance is canceled by transfers without public counterparts (contribution to international organizations, military or civil aid to foreign countries) and private (pension payments) [iii].
The result is a massive deficit in the balance of payments (C), which has continued to widen during the decade preceding the crisis; the cumulative deficit of the balance of payments is $ 5106 billion between 1998 and 2007. So it is a quintilliard of $ that left the US during this period, a volume of $ enough to produce a global inflation of the greenback and a massive depreciation of the American currency in floating exchange rate.
The US has been able to compensate for this hemorrhage of money by a very simple way: they have conferred on their financial system the role of dollar pump. During the years 98-2007, the balance of the capital movements was of 4894 billion dollars to the advantage of the USA.
Net capital inflows or net financial investment served as a financial hedge of the balance of payments deficit.
Expression of the difference between gross acquisitions of US financial assets by foreigners and gross acquisitions of foreign assets by Americans, the balance of the US financial balance (D) has been likely year after year to offset the deficit of the balance of payments.
For example, an outflow of US $ 1 quintillion from the balance of payments gate was canceled by an influx of financial capital of roughly the same volume.
The general balance of $ (E) I / O reflects the efficiency of the US financial market: in the long run, the balances – sometimes negative and sometimes positive – offset each other so that during the decade of 1998-2007, the USA did not have left the US a tiny $ 252 billion. The external accounts have therefore remained balanced.
We will not insist on the fact that since the beginning of the crisis we have witnessed a deterioration in the general balance of the $ IO. This balance, negative four years out of five since 2007, explains the weakening of the dollar. This balance would have been catastrophic if the Treasury had not issued in bulk treasury bills purchased by foreigners. Without these massive issues, the dollar would have collapsed on all foreign exchange markets where currencies vary freely. We have illustrated this point on Chart 1 by examining the general balance of $ (E) outflows after purchases of Treasury bills by foreign investors (F). In this case, there would have been $ 2085 Md of $ $ that would have left the US between 2008 and 2011, enough to create an inflation of $ precipitating an uncontrollable devaluation of the American currency.
During the 98-2007 decade, the balance of financial flows (D) offset the balance of payments imbalance (C). Since 2007, he still plays this role with the reinforcement of the Treasury. The loss of competitiveness of the US economy – illustrated by the balance of payments – has therefore been accompanied by the necessary development of the financial market – illustrated by the growth of Net Financial Investment (D). The lax interest rate policy of the FED was made possible only by the balance of external accounts it helped to shape by stimulating the growth of the real economy and the financial market. It is, therefore, a growth in the external accounts imbalances boosted by bearish interest rates that have preserved the US currency.
The result of this process was a massive accumulation of financial assets – including direct investment – in the United States. These assets amounted to $ 15875bn held by foreigners against $ 8542bn of American-held foreign debt in 2007; they were still only $ 5672bn for US assets held by foreigners. 1998 and $ 2788 billion held by Americans abroad [iv].
We have the main elements to sketch the reasons for the inevitable questioning of the dollar’s hegemony since 1945. It remains to consider why the dollar as a monetary base of the exchanges (B-1 °) and off-shore credit in the dollar (B-2 °) is no longer able to maintain this function.