One of the basic mechanisms of operation of the world economy can be abbreviated as “T-shirts for bonds”. It has many versions and levels, and last week we considered its relationship with the global dominance of the dollar. Today, I will follow freely with a specific European perspective, however, it is closely related to the dollar. In short, the triangle of the perimeter of the United States – Germany – Eurozone.
1. T-shirts for bonds (T to T): For example, let us briefly recall that if the United States wants to consume more than it produces, it must import goods from elsewhere. That is, from countries / countries that want to produce more than they consume (there must be more revenue than expenses). The downside and inseparable side of the flow of goods is the flow of savings – another country, like China, has to lend to the United States for their trade deficit.
I wrote here yesterday about framing issues, which is a related topic in this section as well. We can say that China should lend to the United States for consumption of Chinese exports. But we can also say that the United States must accept Chinese savings in order for China to export them (and its export sector to increase its employment). True, of course, both (“T for T” is similar to “T for T”, but each statement has a slightly different feel.
2. Dollar Dominance: Last week, I mentioned Michael Bettis ’dissertation. According to him, the dominance of the dollar in the world economy mainly stems from the fact that for the past 100 years the United States has been ready to side with the “de for d” mechanism most appropriate for the world economy. Or:
First, the United States offered its savings and “T-shirts” (post-war recovery) to other countries, then began to absorb the global pressure of saving again and sold its bonds to T-shirts. Mr Bettis said China had no choice but to balance inequality in any case (we could argue otherwise). For a long time now, Renminbi has not had the opportunity to hold a very important position in the world economy (even if it is digitalized). But on the one hand, let’s go to Europe.
3. Extraordinary Europe: Changes in the global “T to T” mechanism are generally slow, except for “local” changes. For example, some emerging economies are suddenly reluctant to lend to buy the rest of the world from abroad for a variety of reasons. Another exception happened on a large scale after the major financial crisis. In the eurozone, the wheel rotated mainly between Germany and the Netherlands on one side and around the perimeter of the eurozone: the first group shipped its storage and “T-shirts” to the United States as well as China. The second sent its duties and demands (employment) to the first, just as the US sent it to China. There was also a similarity in the fact that the euro area has stable exchange rates, the renminbi against the dollar is not and is not fully flexible.
What happened after 2007? Germany and that too have stopped preparing to send their savings into circulation. In the context of a fixed exchange rate, the perimeter was forced to reduce its demand, thus reducing its current account deficit (no German savings, so no German T-shirts, or the like). Perimeter is discussed somewhere today. And Germans and others. They solved it by sending their savings elsewhere. The following chart shows the evolution of the size of US securities held by Eurozone companies:
4. What is? Economist Patrick Artus argues that if there is greater solidarity in the eurozone and the flow of border capital resumes as it did before the crisis, the eurozone (again) will use its savings at home. It will stop funding US trade and now the fiscal deficit. It will not raise US bond rates and yields because the central bank will cut them. But this whole hypothetical sequence of events will lead to a sharp weakening of the dollar (which will cause a new partial equilibrium).
In the logic of the above, Mr. Artus basically states that the United States cannot respond to (new) global inequalities – they will be hungry for imports and savings from abroad, even if their supply falls sharply (Germany lends to Spain and others, not the United States). If this takes longer, the third point is not only that the dollar will weaken (which will eventually reduce the appetite for imports). But that reluctance / inability to return to the euro area before 2007 will affect the “structure” of the dollar in the world economy. Is this another financial fiction? However, the key elements here are “return” and “reluctance / disability”.