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The Unloved Dollar StandardFrom Bretton Woods to the Rise of China$
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Ronald I. McKinnon

Print publication date: 2012

Print ISBN-13: 9780199937004

Published to Oxford Scholarship Online: January 2013

DOI: 10.1093/acprof:oso/9780199937004.001.0001

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The U.S. Saving Deficiency, Current-Account Deficits, and Deindustrialization

The U.S. Saving Deficiency, Current-Account Deficits, and Deindustrialization

Hard versus Soft Landings

(p.85) Chapter 6 The U.S. Saving Deficiency, Current-Account Deficits, and Deindustrialization
The Unloved Dollar Standard

Ronald I. McKinnon

Oxford University Press

Because of the dollar's unique status as “international money,” the United States has borrowed seemingly without restraint from the rest of the world—mainly Germany and Japan in the 1980s, and then from a variety of emerging markets led by China in the new millennium. This induced an endogenous fall in domestic saving in the United States—both private and governmental—which is now compounded by the Fed's zero-interest-rate policy. The U.S. federal government finds it just too easy to avoid raising taxes or cutting expenditures because it can sell Treasury bonds to foreign central banks at ultralow interest rates. Both sides are trapped. Foreign central banks accumulate dollar reserves at a derisory interest rate to prevent their currencies from appreciating precipitately in the face of hot money inflows. America's unhealthy dependence on foreign borrowing aggravates its ongoing deindustrialization. High-saving countries in East Asia are not only the natural creditors of the United States but are also highly industrialized. Thus they run trade surpluses in manufactures as the real counterpart of the transfer of finance to the United States, which accentuates the decline in U.S. manufacturing.

Keywords:   international money, soft borrowing constraint, endogenous saving, financial transfer, manufacturing trade deficit, deindustrialization

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