Happy Independence Day! Independence Day is actually one of my favorite science fiction B movies. It gave me one of my best laugh lines for speeches: “You remember the movie Independence Day—it started with aliens destroying Washington, DC. Later on, though, it turned out they were hostile.”
Summer weather inevitably comes with a good mood, which is only reinforced with a long weekend at the beach pending. So, I thought I would do a holiday-appropriate installment of Wonderful Wednesday, around the fact that the U.S. really is financially independent—and that is a major strength we don’t appreciate as much as we should.
What do I mean when I say the U.S. is financially independent? Don’t we owe trillions to other countries? Doesn’t the dollar float up and down? How can we be independent? And, even if we are, so what?
When I say the U.S. is independent, I mean that the U.S.—more than any other country—determines its own economic and financial future. There is no other power that can force us to do things we don’t want to do. It is an enormous blessing, giving us flexibility to manage our economy, as well as the strength to influence other economies, that no other country has.
Let’s start with the dollar: the global reserve currency. Everyone wants to own dollars, but they come from only one place: here. We have a product that everyone wants and needs and that we can manufacture at zero cost. Yes, other countries hold trillions in U.S. debt. The reason? They must in order to manage all the dollars they also must hold for things they sell to us. The U.S. can sell abroad without significant foreign currency reserves because we can price things in dollars. Holding foreign reserves is a cost—and a vulnerability—that we avoid entirely.
As noted above, we can create as many dollars as we want, at zero cost. So paying down the debt is easy—just print money. That solution would create other problems, of course, but the debt would be paid. And before I start getting hate mail, I would point out that Japan has been doing just this, due to its control of the yen, and it is working (so far at least).
The debt is a problem, true, but it is more a political problem than an economic one. The fact that the U.S. controls its own currency means that we can’t be forced, like Greece, to make policy changes by outside entities in order to pay down debt. We control that process.
The strength of the U.S. position is not just in our own independence but also in the leverage that independence gives us with other countries. China, for example, does not want to hold dollars and U.S. Treasuries, but it has to since it has to sell to us. Ditto Russia, as the oil market is transacted in dollars, another source of strength and control for the U.S. And, when you look at the economic sanctions on Iran, which are now crippling that country’s economy, U.S. financial power is clearly not just a passive instrument.
One of the periodic memes out there is that the U.S. dollar will lose its reserve currency status. That is worth worrying about, for the reasons above, but won’t happen for at least a decade and probably much more. Note that I wrote about this issue five years ago, and it still rings as true now as it did then. In the meantime, the U.S. benefits enormously from the dollar and its consequent financial independence—and that is a wonderful thing to think about on the Wednesday before Independence Day.
Enjoy the holiday!