But regardless of what happens with trade balance, it will also make borrowing money much more expensive, which is not great for the US since our debt to GDP ratio is over 100%.
It also removes another non-military weapon from our toolkit.
* The US is able to get very cheap loans, which enables the US to throw around money when necessary to do things that are important (emergency projects, economic stabilization, etc).
* The US has an extraordinary power to influence global politics due to their ability to control trade and banking systems.
* The US dollar is stable in part because of its status as a trade currency. And a stable currency is extremely important for citizens of a country.
> Because it enables us to run unsustainable deficits?
No, it it actually the primary reason that enables the US to run huge deficits sustainably. The currency is important enough to the world that giving a loan to the US is safer than giving one to another country whose currency is not as important.
I’d also love a sane domestic politics that acknowledges that borrowing money from foreigners every year because we can’t square our spending with our taxing is a bad thing.
The crazy thing is, most of the money that the US borrows from is from their own citizens... not foreigners.
I don't know why everyone presumes that US debt is mostly or entirely owed to other countries. It isn't.
does any other country do it this way?
Some other countries have simply tried to print their way out of deficits, usually it doesn't end well. Zimbabwe is my favorite example. https://en.wikipedia.org/wiki/Hyperinflation_in_Zimbabwe
Those with existing assets (including retired folks in the US) theoretically "lose" in this situation.
You can split the US and see inequality arise from printing: (1) US federal govt vs non-govt entities (2) US citizens with assets vs US citizens without assets, (4) people who received money first vs people who last bits of the "trickle down".
In various cases, certain people "win" and others "lose"
Japan runs huge structural deficits and most is held by its own citizens.
Being a reserve currency increases currency stability.
Being stable makes the cost of all loans, including domestic loans, cheaper.
Being stable also increases the use of a currency for reserve purposes.
https://en.m.wikipedia.org/wiki/Triffin_dilemma
Basically this is why times have been great for industries like finance and tech in the US, but sucked for manufacturing. In turn leading to wealth inequality and, dare we say the class struggle that seem to have reached a boiling point.
I can hold my breath for a few seconds, but not for a 10 minutes. it is like that.
and that is only the federal deficit. local governments are also running massive deficits.
That's why you get a ridiculous situation where even the center-left party is promising not to raise taxes on people making under $400k/year. In reality, such a tax plan wouldn't even meaningfully raise taxes on people making $1 million a year. You can't solve the deficit by raising taxes if you're unwilling to tax 99.5% of the population.
I do think that, at least, removing the income cap on social security would be helpful.
Honestly though, the only thing that'll stop the current US approach to fiscal policy is the bond markets.
Taxes are only one side of this problem. The other side is expenses. Empires are expensive.
In the bigger picture - the reserve currency dynamic has allowed many things to grow detached from reality, and those things are in dire need of reform (eg the everything bubble). But that the destroy-America-first platform can include condemning the whole dynamic is itself just another symptom of that detachment and entitlement. Talk about wanting to kill the goose that lays golden eggs because you don't understand it, and don't want to spend any effort trying to understand it.
It seems like you don’t even disagree about the problem, you just think we should chip away at the symptoms instead of getting at root causes.
Free ice cream is bad! Bobby is going to not learn how to work for a living, and he’s going to get diabetes on top of that.
If letting our industrial base wither is a problem, then spend some of the resources we get for merely exporting our currency on explicitly building it back up. Those IOU's can be traded for machine tools just as easily as disposable "fast fashion".
If the all-asset bubble is a problem, then stop letting the Federal Reserve drop interest rates to the point that wild or highly-leveraged speculation makes sense.
If the churn of cheap non-repairable throwaway crap is a problem, then ban it and/or mandate repairability outright.
If the proliferation of do-nothing middle managers in government/academic/industry is a problem, then figure out how to increase accountability, actual meritocracy, and general nimbleness. Turning the financial and authoritarian screws mostly hurts people who are focused on doing their jobs rather than focused on keeping them.
Humans are not wild animals. Free ice cream is an unequivocally good thing - it can always not be eaten. If little Bobby is eating unhealthy amounts of ice cream, then his parents should stop him from doing that independent of financial constraints.
If little Bobby is not developing a work ethic, then teach him to work hard directly and teach him how to save his money for larger goals. Certainly don't think that teaching him to live hand to mouth for ice cream treats is doing him some kind of service.
These are all problems of abundance. The destructionist movement seems to be based on wanting to revert to some idyllic version of the past with a struggle we understood. Whereas we really need to be solving the new problems we face.
As it stands, the destructionist approach is going to leave us without financial wealth or industrial wealth. Tariffs and allowing increased corporate externalities are basically the economic equivalent of "thoughts and prayers" .
Losing reserve status will be damaging to some parts of the american economy and create a boom in others.
Take a look at what current tariffs are across the world. The US isn't necessarily bullying as equalizing.
Which parts will benefit from higher inflation?
The only reason the US has been spared from >20% inflation after engaging in what would be called "money printing" by American press when practiced by a 3rd world country is that there are deep pools of unused reserves slowing the overall velocity. Americans don't know how good they have it.
All domestic producers which produce products that cost less than imported competitors.
I agree with you. The question to be answered is what kind of economy do americans want to have going forward. It's great to be in America at present, but what happens if global relations continue to deteriorate and fracture?
Who will afford to buy their expensive products? Cheap imports are what is making minimum wage-earners circumstances bearable. Full-on reshoring is untenable without reforging the entire economy for higher salaries at the bottom. The whole system has feedback loops (higher wages -> higher product prices) which will cause pain for a long, long time before things stabilize. I don't think Americans have the stomach for it now, moreso with the threadbare social safety nets being shredded. Any politician or political group pushing for this will not survive long enough to see it through. The task is impossible for leaders incapable of considering second order effects, and beyond.
Fewer and fewer people. Yes, a shrinking of the consumer economy. It will work, just not like it has in the past. As I see it, you are absolutely correct in your assessment. Absent a proactive approach, the alternative (which I think we will live to see) will be watching the system break.
Perhaps a lame duck president rebalancing tariffs can slow the slide, but I think the end result will be the same.
What would it take for America to have more of a German-style economy than the current American one? Who would that hurt and who would that help?
I think China is the one to watch. They have double the energy output of the US and are basically the production capital of the world for the foreseeable future unless something changes.
Second, how does VAT protect domestic production? VAT applies to both imported and domestically manufactured goods equally. VAT is really ultimately just a sales tax, just collected in a somewhat different way, and you pay the same sales tax regardless of where the good was produced.
You did send me down a research rabbit hole trying to better understand VAT. It's complex so I picked a car as a test product. As a comparison, I found that to import a car from Germany into the US it costs 2.5% of the cars value. North Carolina charges an additional 3% state tax on it for a grand total of 5.5%.
To import the same German car into France the cost is (cough) 20%.
To import an American car into France the same 20% is paid plus a 10% import fee for a total of 30%. I'm sure I'm glazing over many, many smaller charges/exemptions in these examples.
To answer your question about protection using the numbers above, companies outside the eu that want to compete at an equal price with an equivalent German car would need to do so with a product that is at least 10% cheaper.
No, the cost to import is 0%. The 20% VAT you are talking about here applies equally, regardless of whether the car is imported, or (cough) French. Again, VAT is just a kind of sales tax, and you pay sales tax for all goods, imported and domestic.
To import an American car into France the same 20% is paid plus a 10% import fee for a total of 30%.
No. Importing an American car to EU is 10%, regardless of which country you import it to, and then it's 0% to move it between EU countries. As I repeatedly said, you pay 20% VAT on any car, imported or not. Often, you actually pay additional registration taxes on top of that. For example, to import a car to Poland, on top of 10% EU customs duty and 23% Polish VAT, on a car with engine over 2000cc, you'll pay additional 18.6% excise tax upon registration. So, a $25k Chevrolet Malibu imported from US will cost $38k to buy in Poland.
To answer your question about protection using the numbers above, companies outside the eu that want to compete at an equal price with an equivalent German car would need to do so with a product that is at least 10% cheaper.
Yes, EU does apply protectionist tariffs, but my point is that they are not German tariffs, they're EU-wide. Germany might benefit from these more than countries without car industries, but most large EU countries have substantial car industry. For example, Poland exports $40B of vehicles and vehicle parts each year.
The primary effect of losing reserve currency status would be on the government's ability to borrow money. That's going to be a problem since US government debt to GDP ratio is >100%. We have no fiscal discipline now and neither party shows interest in making cuts or raising taxes. DOGE hasn't changed anything yet unfortunately, as daily government outflows are still roughly inline with where they were under Biden. Even if DOGE cut all discretionary spending (obviously impossible), we'd still have a budget deficit and massive existing debt burden.
If we lose reserve currency status, my guess is we'll go full Argentina with hyper inflation as the government prints money to pay debt and fund the government.
The upside is the debt decreases in value as the currency inflates. So there's that.
It's a bit like coming up with a realistic scheme for a computer with no RAM, only hard drive and CPU caches.
As a result, any attempt to switch away from the dollar would be… cataclysmic.
But even on a purely economic level… does the Eurozone even have a larger economy than China?
I can see countries moving away from USD, but I don’t see them coalescing around a single alternative.