The world economy is not a tribute system

In 2002, Argentina committed the ultimate sin: they defaulted – and got away with it. Subsequent U.S. military adventures were clearly meant to terrify and overawe, but they do not appear to have been very successful

The thought occurs that if you want to do something military in order to terrify anyone else away from following Argentina’s lead, you should probably be doing it to Argentina rather than to Iraq, a country on the other side of the world that had not actually defaulted on its debt or threatened to do so.

Though that doesn’t actually make less sense than the stated reason for fighting Iraq, which was “we are fighting a campaign against a terrorist organisation based in Afghanistan, backed by Gulf Arabs, led by a Saudi exile and whose ASUs are predominantly either Saudi, Egyptian or Yemeni. Naturally, Iraq is the central front”.

His argument about debt and reserve currencies is insane. People don’t default because they need foreign investment. And actually some places default quite frequently anyhow. And nobody else has a reserve currency because the US has a stable currency (for a very long time) and is the biggest economy in the world. The Euro looked like it could be a challenger, but only an idiot would think that now. Until the Euro gets its political issues worked out, there’s no chance you’re going to buy Euros as the safest possible investment.

@paul – That Apple computer stuff is silly – he clearly mistook Apple for Next, Steve Jobs’s second computer company, which he started on his own with investment from the (then) Republican Ross Perot, who started his career at IBM. It’s a minor error.

The true triumph of stealth technology has been in the conduct of political affairs. The masking of motives is a perfected art, and the instruments of propaganda and manipulation of public opinion are highly refined. Add to this a public willing to be deceived and elites who have betrayed their trust, and anything goes. Nobody is guilty of anything, because there is always a plausible reason to point to someone else.

The relevant concept is societal decadence. When the whole body is diseased, there is no point in searching for a faulty organ. American academics, journalists, businessmen, and politicians have all failed conspicuously in their public duties. The result is endless war and economic decay.

“Society runs on interlocking favors, which are not specific so that for every jot I give to x, I expect a corresponding tittle from her, but are generalized so that I do not expect exact equivalence, either from x or from someone else. None of this makes it into the econ textbooks.”

This isn’t my area of expertise, and it may just be because it has been in trouble so much recently, but the first semi-advanced country I thought of where this is still a major factor is Greece! Which if true might speak to the question of whether or not such an arrangement is efficient.

“None of this explains why debt has become moralized so that, in effect, it carries many of the disadvantages of obligation that favors do without the compensations of reciprocity – but it does mean that these forms don’t just persist because of state power.”

This isn’t a question I’ve thought about at all before this, but the way you framed it makes the amswer seem intuitive. New systems draw on older systems. We like how money *reduces* the strict tribal/moral component of interlocking obligations, but we fear that a completely ammoral approach to it is dangerous in some way (though the particular thing we fear is probably different depending on your point of view).

My 11 is directed to Straightwood.

What does this set of pronouncements have to do with the issues at hand?

The issue at hand is the search for a few imaginary needles of bad policy in a haystack of stinking corruption. The notion that everything is basically OK, except for one or two pernicious policies is bogus. There is no stable framework within which we can conduct an orderly search for bad policy. The entire system is corrupt. The comical side of this corruption can be viewed in the Republican primary farce. The more dignified side can be seen in the media outlets, think tanks, and academics funded by crooked corporations and cranky billionaires. The problem isn’t that Larry Summers and Robert Rubin don’t have the right answers. The problem is that Larry Summers and Robert Rubin are twisted pillars of a corrupt establishment.

Like Soviet-era psychiatrists, academic commentators have normalized the dysfunction of the current environment and shifted the burden of difficulty to the puzzling failure of localized theories to explain widespread problems.

“Look with all your eyes, look.”
― Jules Verne

(To paraphrase the OP, so that someone can point out if I’ve picked it up incorrectly)

Graeber in his anthropological work identifies systems of reciprocity instead of exchange as such. Things are not given not in expectation of direct or even equal compensation but for intangible benefits associated with social cohesion.

(Comment)

Such behaviour defies the economic assumption of rationality and must result from cognitive biases. Rationality amounts to an assumption that all cognitive biases are just errors. Behavioural economics addresses cognitive biases directly but still interprets them simply as mistakes (expert criticism welcome here).

What are called cognitive biases in humans are called behavioural biases in animals, and biology provides further examples of such supposed irrationality. Richard Dawkins (etc.) examined a string of such biases[1], however what was discovered was that the animals’ supposedly wasteful behaviour resulted from evolutionarily stable strategies. The economically anomalous behaviour turned out to be optimised rather than erroneous.

Economics is a science without many applications once these facts are taken into account; the radically simplifying assumption of rationality is the only thing permitting useful progress. Yet what is plain is that rather than being a solid if basic approximation, the assumption is instead fundamentally and provably incorrect in multiple ways.

Obviously rationality is at the core of all economic thinking, and economic thinking and economic models are how our political leaders interpret the world. Since the possibility does not exist of analysing the human world with the same rigour the simple circumstances of physics or chemistry permit in those disciplines, such models are substituted instead. Many of the most critical and pervasive elements of our world are interpreted using these metaphors.

This might be tolerable if deviations from rationality were random or incidental, or if they were solely the result of perceptual anomalies, but in many cases it is obvious that this is not the case. Rationality is therefore systematically misleading in addition to being politically loaded.

Libertarian and neoliberal thought are the political incarnations of economic rationality. Unsurprisingly, descriptions of the world founded on an inherently political idea are themselves inherently political.

If someone were to study institutions, say, solely through public choice theory then it would be unsurprising if he or she were to arrive at a particular and cynical interpretation of employees’ behaviour. Likewise, when the economic world is interpreted by the very serious people solely through the lens of rationality, as embedded unobtrusively within so many models, it is unsurprising that the result is politically and morally skewed. Far from being hypotheses testable against reality, they have become the core framework about which political reality itself is constructed in the minds of the people who matter.

But no substitutes exist for these models at the present time, and the very serious people will be loath to give them up even though their merit may be less than nothing.

[1. Often borrowing terminology if not methods straight from economics, e.g. here. The concorde fallacy is not so fallacious for Sphex Ichneumoneus.]

Society runs on interlocking favors, which are not specific so that for every jot I give to x, I expect a corresponding tittle from her, but are generalized so that I do not expect exact equivalence, either from x or from someone else. None of this makes it into the econ textbooks.

Assuming this to be true, its still easy to see how one can substitute barter into this and get the same barter-replaced-by-money origin story. The central difficulty with the social arrangement outlined above is that if I expect (read “want”) a rather different set of mutual obligations between myself and “x” than “x” does, it can potentially be very difficult to negotiate it. Suppose I want to never participate in any duties except for contemplation of the cosmos and absolving people of evil? How do I negotiate this with “x” and the rest of my community? One can imagine some arrangements, which may or not actually have existed. But I think its also clear that the presence of money as a means of exchange makes this particular bargain very much easier to arrange. I can opt out of many of the pre-existing interlocking set of favors as long as I do something that generates enough tradable value (“money”) that I can get whatever I deem essential. The partial breakdown of the social contract in this way allows an expansion of the sorts of activities that become part of its own future.

I’m pretty sure Watson is backdating a claim about the Raj, usually attributed to “an old havildar” or similar.

So first, I completely agree with you that the last chapter in Debt id deeply disappointing for the sorts of reasons you mention (in fact, I found the last 3-4 four chapters to be fairly weak, at least relative to what went before), and I totally agree that the postulated causes of the Iraq war are bogus to the point of being borderline kooky.

That said, I thought that there was a more general point that Graeber wanted to argue for—one that, at least to me is not obviously false. This general thesis I thought was along these lines: According to their defenders, capitalism and the free market (I realize these are not necessarily the same, but to their defenders they are often internally related) are just by themselves a sort of irresistible force. Through the benefits they provide, or through some other mechanism still internal to economics, they necessarily (or almost always) win out over non-capitalist or non-market based societies. And I thought part of Graeber’s point was that the triumph of market capitalism over non-market based societies always, often, or maybe just sometimes requires the threat or reality of actual—decidedly non-economic—force. Now this might still be false, but at least to me, it’s not obviously so. At least if we take the “sometimes” option above. Mike Davis makes a similar argument in Late Victorian Holocausts, e.g. And at least some of his (Davis’) arguments to the effect that market mechanisms were often forcibly imposed on predominantly non-market based societies are I think far from obviously false.

Adding — (1) I crash-skimmed the book while my students took their algebra exam, so the above may prove to be poorly founded after a close reading, and (2) the above sounds quite a lot harsher than I’d intended.

As for getting the reason for the Iraq War wrong, that seems a rather trivial objection, since I think no one has presented a coherent account of the reason(s) for that war: sheer ideological delirium on the part of the Busheviks seems as good an explanation as any. And, yes, the U.S. is not a tributary empire in the manner of ancient Rome, so any such analogy is anachronistic. But if the counter-claim is being made that U.S. military might and its pursuit of “full spectrum dominance” has nothing to do with the global promotion of Wall St. hi-fi and MNC commercial activity, even if explicit “gunboat diplomacy” is no longer quite acceptable as a means of ensuring extractions, then the OP is even more broadly erroneous than the nitpicking on Graeber’s errors suggests.

jch@28:

But if the counter-claim is being made that U.S. military might and its pursuit of “full spectrum dominance” has nothing to do with the global promotion of Wall St. hi-fi and MNC commercial activity, even if explicit “gunboat diplomacy” is no longer quite acceptable as a means of ensuring extractions, then the OP is even more broadly erroneous than the nitpicking on Graeber’s errors suggests.

Exactly. This is what I was trying to say at 24, but this is much a much clearer statement.

@28

The second military not-war of Iraq was launched by a rather panicked USA coaching staff in order to destroy the shadow-enemy’s nucleoterrorist gas troopers massing on Freedomerica’s sandward flank.

This was not a good reason. It is not a reason that “makes a goddamned bit of sense.” But it is the historically accurate reason, according to all contemporaneous and subsequent evidence.

A coherent reason for bloodying Iraq, you see, is categorically an inaccurate reason. While painfully obvious to many, this will be a very difficult truth to swallow indeed, for the sort of person who wants to understand history and geopolitics as the mechanical result of a vast, dark clockwork, the workings of which can be seen and comprehended by the elect few who have fully absorbed the True Conceptual Framework.

And that, rather than merely “getting the reason wrong,” is the problem with Graeber’s explanation of the stupid, stupid, horrible war.

Colin @19: The Iraq-euro thing was a widely-disseminated conspiracy theory in leftish circles some years back

In what sense was/is it a “conspiracy theory”? Or is that just a way of saying “foolish,” “unsupported,” etc?

geo – I think for the purposes of any reasonable analysis, yes. The ever increasing interdependence of economies, especially the advanced industrial economies, offer all sorts of ways to exercise pressure that do not depend on military power. Take Greece as an example. It is unlikely in the extreme that military power will be used by the US or for that matter by Germany against Greece to make it implement economic changes that the Greek government and Greek people do not like. Yet because they are dependent on inflows and outflows of resources, on access to financial networks, and in particular on the ability to refinance their debt, they can be subjected to formidable forms of coercion, with the underlying threat being the cessation of these relationships. Of course, you can still say that force underlies this in the final analysis – but this is quite different from arguing that the threat of force is the immediate cause, as Graeber does.

I guess what I mean to say is that if Graeber can allow Cort̩s Рa god walking the Earth in his greatest and most hideous successes Рto be a puppet of runaway financial machinery then surely there are other puppets at high levels.

Henry: I’ve only darted into the book at a few points, but I gather that Graeber’s larger point is that if the global military balance were to change, and in particular were American to lose its military supremacy, then the status and perceived priority of a great many international economic obligations would alter, and in that sense, it’s not quite true that they are “not conditioned by the military might of powerful states such as the US.” This seems to be something different from the “anodyne” (as you rightly put it) claim that all markets presuppose someone to enforce contracts. But I confess I haven’t read enough of the book to know whether he makes anything of that larger argument.

That’s poppycock, Mark. Nowhere in those gazillion memos and interviews does anyone say “We’re going in to make sure we have a stranglehold over oil supplies in case China gets stroppy” or “We’re going in to turn the damn country into an investor’s paradise, with some special goodies for Dick’s oil buddies” or “We’re going in because we have this colossally expensive military machine and we have to do something impressive with it every once in a while to keep the rubes forking over taxes to pay for it” or even “We’re going in to calm Israel down, since they have all those goddamn nukes and a big Samson complex.” But that doesn’t prove that none of those purposes played a part in causing the invasion, or that anyone who suggests they did is a “conspiracy theorist.”

43: agreed. PNAC was telling Clinton to occupy Iraq in 1998, and the argument they gave (in their publicly released letter!) was that “if we continue along the present course, the safety of American troops in the region, of our friends and allies like Israel and the moderate Arab states, and a significant portion of the world’s supply of oil will all be put at hazard”.
So that’s your reasons 1 and 4.
As for reason 3, I don’t think that would apply. The US public has generally been quite willing to keep paying for the military, even bits of it that don’t get used.
This is the flaw in people saying “oh, well, the Military-Industrial Complex wants wars”. It doesn’t. It wants military procurement spending. And sometimes that goes up in time of war, but sometimes it doesn’t; a lot of very expensive, very shiny military projects were cancelled or cut back as a result of the wars in Afghanistan and Iraq, because the military needed to spend money on the less shiny and less profitable business of actually fighting a war.
If there had not been a 9/11, the US Army would still have Crusader and Comanche.

Supposedly Doug Feith’s response to 9/11 was to urge the bombing of the tri-border region in South America. Maybe that was a plot to scare Argentina.

See the 9/11 Commission Report, n.75 to ch. 10.

Re John C Halasz
I for one never suggested that Graeber was a kook, conspiracy theorist etc. I made one specific comment re his Iraq/euro connection. I rather resent your insulting reference to a bog-standard liberal commentariat. You are happy to indulge in (bog-standard?) Hegelian or whatever it is jargon about abstract vs determinate negation but then you turn around and name-call and impugn people’s motives. You do not have the slightest — not the slightest — idea what my politics are and I would thank you not to arrogantly presume that you do.

if he’s got one fact wrong, he can’t be trusted on any facts, since everybody “knows” that facts determine all general conceptions, rather than the latter serving to organize the former

Of course theoretical frameworks (‘general conceptions’) organize facts. Duh. Who has said that “if he’s got one fact wrong, he can’t be trusted on any facts”? I certainly didn’t. As for “everybody ‘knows’ that facts determine all general conceptions,” these “everybodys” exist mainly in your imagination and maybe in the history of a certain branch of empiricism, which is totally irrelevant to the discussion afaict.

Henry@33:

Thanks for the response. Pretty much completely in agreement. I guess when I first read this:

On the one hand, this identifies something real. There is a narrow consensus, which sharply defines the things that can or cannot be spoken of by Serious People. Coercion is of course, an important element of how the system survives.

I saw “coercion” right after a mention of what’s acceptable in discourse and I didn’t think you had in mind the threat or use of actual means of violence. In any case, the last paragraph (in 33) strikes me as entirely right.

Also, thanks to CT generally for doing this. I found Graeber’s book fascinating but also a little bewildering at points, and this has been helpful.

Henry @47:

One last go-round, then I leave off.

I actually agree that getting the diagnosis right is important, for the sake of the prognosis and the course of treatment, assuming that there is a cure and that the patient isn’t terminal. But, of course, that is metaphorical. And, at least on the evidence of your post, it seems that Graeber might have a somewhat short-circuited understanding the the current dynamics of “international political economy”. Yes, it’s not just a simple matter of U.S. dollar hegemony, backed by military might, (though earlier on, with the likes of White, Kennan, and Nitze, such thinking was not far off the mark). It’s much more a matter of a $ recycling hegemony and it’s not a matter of “tribute”, but rather of the extraction of financialized rents. (As Paul Volcker, the official in charge when Nixon scuttled Bretton Woods, remarked at the time, “we’re just going to outrun them”.) But then since those are basically unproductive, it’s not amiss to suggest that coercive means are require to ensure their extraction, (whether it’s a mafia thug or a vast armada). Calling that “tribute” is metaphorical, not literal, even if Graeber has done previously good spade-work in excavating past tributary empires, (in which case, he might be accused of reifying his own metaphor or of committing a “genetic fallacy”). And, indeed, puzzling out the exact relations between globalized finance and the maintenance of a vast international military network might not be obvious and might not benefit from simplistic reductions. Perhaps it doesn’t actually operate in U.S. national interests, but rather in multi-national ones. Or perhaps the U.S. is a declining hegemon and its policies are increasingly incoherent and dysfunctional. (In which case George W. Bush gets to play the parodic role of the Hegelian anti-hero). But even if Graeber gets some facts wrong or postulate to simplistic and direct connections, it’s by no means stretching credulity to think that the extensive system of globalized finance is backed by an international system of coercive force, which is essential to keep the system running, if only latently. To think otherwise would be credulous.

Capitalism didn’t invent primitive accumulation. Plunder and the brutal exploitation of labor are ages-old. What was new was its capacity to recirculate such extracted surpluses into their ever-expanded reproduction and the relative efficiency of the forms of organization by which it did so. And it would be a wonderous thing, indeed, if the “spirit” of capitalism had long since sublimated such coercive forms of organization. Even if it is nonsense to claim that capitalism is a totalitarian system, such a performative paradox does serve to bring out the elements of totalizing domination by which it operates, especially in the light of claims that markets are the bastion of human liberty and the veritable Eden of the rights of man.

So you cite this piece of Graeber’s rhetoric:

“In fact, it could well be said that the last thirty years have seen the construction of a vast bureaucratic apparatus for the creation and maintenance of hopelessness, a giant machine designed, first and foremost, to destroy any sense of possible alternative futures. at its root is a veritable obsession on the part of the rulers of the world – in response to the upheavals of the 1960s and 1970s – with ensuring that social movements cannot be seen to grow, flourish or propose alternatives; that those who challenge existing power arrangements can never, under any circumstances, be perceived to win. To do so requires creating a vast apparatus of armies, prisons, police, various forms of private security firms and police and military intelligence apparatus, and propaganda engines of every conceivable variety, most of which do not attack alternatives directly so much as create a pervasive climate of fear, jingoistic conformity, and simple despair that renders any thought of changing the world seem an idle fantasy.”

And then you comment:

“Coercion is of course, an important element of how the system survives. But the language here suggests a seamlessness, and a level of shared intention and planning on the part of the “rulers of the world” who have “constructed” and “designed” this system that seems to me implausible. Many of the most important features of modern capitalism have less to do with conscious coordination than with unconscious synchrony.”

Of course, it is already a philosophical/social “scientific” mistake to appeal to “consciousness” and thereby to some central intentionality. But it’s equally a mistake to oppose “conscious coordination” to “unconscious synchrony”, since coordinated intentions and planning are extensive throughout the system and central to its “design” and operation, (including by academic policy pros). There is no such thing as a capitalist-in-general, (except in the representative agent of DSGE models, in which Mr. Market plays the role of a Gosplan superhero), but there is an underlying reproduction scheme, which will make its “imperatives” felt. All you’ve done is substitute your ideological predilections for Graeber’s, and, in this instance, I find Graeber’s more plausible. (I could add other instances from the OP, but this one will do).

I have no objection to fact-checking and to pointing out factual errors. And if there are too many factual errors in a work or the organization and selection of facts exhibit a large angle of distortion, that, indeed, is a vitiating criticism of a work. But Graeber has deliberately written a “big picture” book, 5000 years of debt, and necessarily must proceed by offering synoptic accounts and conceptions. Single factual errors are not a knockdown argument or even much of a counter-argument at all. (And, of course, he’s an anthropologist professionally, which dictates his manner of approach and the “literature” he’s most familiar with). That he’s got one fact wrong doesn’t imply that all his facts and notes are suspect. And hoisting him on his own petard, with his claim to scholarly rigor, because of single errors strikes me as an operation of denial, to maintain more “modest” disciplinary boundaries and conventions. (It rather, er, DeLongish). And claiming that you can only “judge” specific issues in your area of expertise neglects the fact that you have had to judge all sorts of things in reading the book, whether you are “qualified” or not to do so. Certainly Graeber can and should be check on his factual and broader claims by scholars in various disciplines, but that’s not an ideologically neutral operation.

So am I arguing in “good faith”? I’m specifically commenting on, questioning, criticizing the manner of approach you took in your post/review: not just what you argue, but how you go about it. You can assume some sort of pure theoretical intentionality, in which you are merely expositing clearly the order of concepts and the facts and evidence that support them. That’s bog-standard for an academic. But it also relies on idealizations and blindspots, among which the “purity” and mastery of one’s own intentions, (else self-righteous umbrage is taken). But I would hold to a basic praxiological thesis: all forms of theory bear a reflexive relation to underlying social practices and the practical “interests”, projects, intentions that emerge therefrom, (which is very much the point of having theories at all). So I think I can claim some warrant for reading your claims about Graeber’s claims at cross-grain, in terms of the counter-claims that you’re implying without really fully arguing.

The prevailing doxa among CT principals is a liberalistic, notionally social-democratic compromise with “market-based” capitalism. (And the battle heroically against the fact that neo-liberalism has largely liquidated such an historical compromise). The median commenter is similarly inclined, and a poster can reasonably expect a fair amount of re-enforcement from commenters, who often snarkily will belabor the status quo obvious. (Yes, I looking at you “LFC”). There are, of course, deviant commenters to the left and to the right, often the usual suspects. But I don’t think it’s punching below the belt to note that posters often “play” to expectations from commenters. And if that impolite, so be it.

One last nitpick of my own:

“For Polanyi, the villain is long distance trading relations, while for Graeber it is the state ”

Is that really the case that Polanyi makes, that the problems with market relations are rooted in long-distance trade? (It’s been a long time since I read the book and you apparently teach it regularly). IIRC Polanyi’s book was partly an extended polemic against Austrian school economics and makes, as a key contention, the claim that market relations are not simply a “spontaneous order”, but with their underlying basis in the 3 “fictitious commodities”, land, labor and capital, require a good deal of political and juridical intervention to be artificially imposed or extended.

“this may be, of course, because I think that Graeber’s overall argument about the relationship between military force, seignorage, debt and tribute is flat out wrong, at least in the modern era”

Henry, you make this assertion multiple times although you do not provide an alternative interpretation or any sources that disprove Graeber’s claim. The “flight to safety” into US bonds in the post 2008 world would seem to strongly bolster Graeber’s argument. The Krugman’s speculation piece that you point to in the comments does not seem to me to provide much evidence, and is even somewhat contradicted by Krugman’s current comments. Krugman writes:

” It just isn’t true that America’s ability to import more than it exports is unique. Since 1980 the U.S. current- account deficit (which includes services and investment income as well as goods) has averaged 1.5% of GDP. That’s about the same as Britain’s average, less than Canada’s 2.2%, and nothing like Australia’s 4.2%. These countries paid for their excess imports the same way we did: by selling foreigners stocks, bonds, real estate, and so on”

The question that presents itself here is why do foreigners choose to invest their holdings–which are very often dollar denominated, particularly from resource rich regimes–in the Anglo countries in the first place? Foreign investors perceive investment in these countries as safe, i.e. heir investment will hold their value. In all four countries Krugman cites their safety is assured by their strong position within the US military umbrella. If the whole system collapses then the men with the guns will still be able to pay their bills. It helps that oil, and most other commodities are paid in dollars. The US dollar is the internationally accepted liquid store of value. That value is backed by our military dominance, heavily subsided by foreign investment in the form of the world’s lowest interest rates.
Now here I would disagree with Graeber’s interpretation that this is an imperial tribute system, rather I would argue that this is a result of continued American military hegemony protecting and enforcing the rules of our international economic system. As our military might shrinks vis a vis the rest of the world, so too will the seignoriage advantages accrued to the reserve currency (e.g. the history of the English Pound). However acceptance of the rules of our international system will also decline. Strong entities (both nation states and likely independent firms) will be able to renegotiate–or even ignore–the rules as they see fit. For the US this will mean a diminished perception of safety, and therefore much higher interest rates. Graeber’s basic point that the man with the gun backs the whole system up seems quite valid to me. But then I tend to subscribe to Occam’s razor, as you do not offer any alternative explanation I’ll stick with the simplest and most logical one.

Additionally Krugman today points to countries that have maintained control over their currencies (Iceland vs. Ireland or Estonia; Britain) as being in a much better position to regulate their economy then those without this power. This is because they not only have monetary power but also control the terms of their debt. They can simply choose to devalue or inflate their way out of debt. The US, as the safest liquid store of value, can not only do that, but do it largely without inflation in times of international crisis.

P.S. I largely agree with Halsaz above, although I would agree with your take on Polayni. I do note that Polayni wrote “the new national unit and the new national currency were inseparable. It was currency which provided national and international systems with their mechanics and introduced those features which resulted in the abruptness of their break”.
I will confess that I sometimes worry that this historical assessment may prove to be a prescient one. So I hope that you can point to some evidence that might allay this concern.

jch:
it’s by no means stretching credulity to think that the extensive system of globalized finance is backed by an international system of coercive force, which is essential to keep the system running, if only latently

Suppose the US were to cut its defense budget by two-thirds, cancel all new weapons systems, junk all its aircraft carriers, close virtually all its overseas military bases, withdraw all of its troops from Europe, Japan, S Korea, stop all ops associated with what used to be called the ‘war on terror’, immediately withdraw from Afghanistan, etc. What would happen to “the extensive system of globalized finance”?

Yes, it’s not just a simple matter of U.S. dollar hegemony, backed by military might (though earlier on, with the likes of White, Kennan, and Nitze, such thinking was not far off the mark).

Putting aside White and Nitze for the moment, what evidence is there that Kennan cared about, or even thought about, ‘US dollar hegemony’?

commenters, who often snarkily will belabor the status quo obvious. (Yes, I looking at you “LFC”).

That’s not how I view my comments, obviously. If my aim was to defend a “notionally social-democratic compromise with ‘market-based’ capitalism,” I can assure you I wouldn’t be doing it by commenting on CT. (That said, I think such a ‘compromise’, however inadequate it is, would be better than what exists now.)

“They simply join forces politically as it suits their respective agendas. ”

It is fascinating which times those on the left suddenly decide to believe in the invisible hand. ;)

JCH @ 56:

The prevailing doxa among CT principals is a liberalistic, notionally social-democratic compromise with “market-based” capitalism. (And the battle heroically against the fact that neo-liberalism has largely liquidated such an historical compromise).

Not an entirely fair judgment, perhaps, but I also fear that the good Social Democrats here and elsewhere really don’t understand how thoroughly recent history has undone them, or why at this point anyone of good will would question not only their their political acumen, but even the very ground of their analyses.

Tony Judt might roll over in his grave at the idea that a new wave of radicals is about lose its patience with the arbiters of stable progress, but I honestly don’t see at this point how Brad Delong, Paul Krugman, John Quiggin, et al, can really expect to stuff all the evil genies back in their bottles. Insulting Graeber is no doubt gratifying, but in the context of our present crisis, it looks to me like just one more finger in a collapsing dike.

“when Graeber describes me as an ‘angry illiterate,’”

Did he? Where was that?

LFC @ 60:

In one of his famous memos, Kennan noted that the U.S. accounted for 50% of global output with just 5% of global population, and remarked something to the effect that, while we can’t expect other countries to agree to that, we aim to keep it that way. Any economist would recognize that comment as illiterate, (since it was a temporary status and ignores the issue of relative growth rates and mutual benefit), but still, it speaks to a mindset…

As for tribute – if we are to speak of tribute, perhaps we should speak of Saudi Arabia. Here I think Graeber misses possible shots. Surely the oil system is, to a great extent, inflected by the tribute system. According to Edward Morse and James Richard (2002, Foreign Affairs), “Saudi Aramco, the state oil company, earns about $1 a barrel less on sales to the United States than on sales to the countries of Europe and East Asia. That discount translates into a subsidy to U.S. consumers of $620 billion per year.” If this isn’t tribute, I don’t know what is.

Somebody made a factor-of-1000 arithmetic error. In December 2002 the US imported 56 million barrels of oil from Saudi Arabia. Assuming a $1 per barrel subsidy is correct that is $672 million annually, a bit more than $2 per American consumer per year.

George – I think that you can make an excellent case that the threat of military intervention plays a substantial role in structuring oil markets. The US made it clear during the early 1970s that e.g. oil embargoes would be treated as threats to national security. Here, you have evidence both of threats being made, and of countries genuinely fearing intervention by the US. But there is _no_ evidence that I am aware of (or that Graeber seems willing to produce, at least as of yet) that bears upon the possible benefits of seignorage. If there were a colorable case, I would expect, at the least, evidence that the US had made implicit threats against countries that threatened to disrupt seignorage, or evidence from statements by target countries that they thought that intervention in support of seignorage was a live issue (whether expression of submission, blustering arguments that they would never give in or whatever). I don’t see that. In other words, not only do we not have evidence of the systematic kind that political scientists would like to see, we don’t have any circumstantial evidence that I know of either. It used to be, up to the beginning of the twentieth century, that powerful countries _did_ intervene militarily in weaker ones to force them to pay national debts. But this changed – my colleague, Marty Finnemore talks about this in chapter two of her book, _The Purpose of Intervention_ talks about the processes through which this happened. Again, this is not to say that coercion and debt have magically become disentangled from each other. They have not, as Greece demonstrates. But there are important differences between a world where defaulting nations are invaded, and one where they are not (albeit subjected to other nasty forms of ‘market discipline’ and compulsion.

In principle, Graeber should have an easy case if he can get past one explanatory hurdle: explain why the US would invade Iraq over converting to the use of the euro when it didn’t bother to invade France or any other European country over converting to the euro.

Of course getting past that hurdle might be difficult in practice.

“…things have changed since the end of the Cold War (though, significantly, the size of the US military hasn’t)”

(actually, it has.)

And then there’s the problem of causation. If American economic dominance is in significant part the product of American military dominance, then after the collapse of the American military’s only serious competition, American economic dominance must surely increase, or at least firm up; instead, it’s been steadily waning, and not in the absence of further military adventure, either.

You seem to have visited all these facts without touching the most obvious conclusion, no?

I would agree that historically, military dominance has been made possible by economic dominance. The other way round, I don’t think works quite as well; in fact, I believe there are at least a few cases where bloated armies have bankrupted nations.

While the two do admittedly get rather tangled up, I suspect that attributing America’s economic hegemony to its military might is putting the cart before the horse somewhat.

That’s a nice quote from George Bush, Henri, but how did that work out for him?

That seems to me to fall rather short of “What we say goes,” but apparently it does provide you with all the evidence you need. Carry on.

“What other evidence do you require?”

Quite. Carry on.

You know, *geo*, it’s a pity my comment’s stuck in moderation hell.

Word.

Matt at 79 – you are right. I imagine that you are right about how million was converted to billion in the article. But still, what is this, a tip? The Saudis just find Americans irresistably cute? I call it tribute. But just as the Romans also paid tribute to border tribes, so does the U.S. – the billions given to Pakistan during the Bush years were obviously tribute. Tributary nations – for instance, Egypt under the Roman Republic – also attempted to bribe and influence Roman rule, making the tributary relationship a bit more complicated than unilateral subordination. In fact, the way the first Gulf War was paid for was very Roman – costs were shouldered by American allies in the Middle East to an amazing extent, actually hurting their economies. It was very much like the alliances formed between Rome and the minor kingdoms in Asia minor which eventually forced those kingdoms into bankruptcy, all for ‘protection” from King Mithridates.

Roger at 94 — I’m not sure what I should call the $620 million in discounts to the US from a dollar-per-barrel differential on Saudi oil. It’s so small a sum in terms of national economies, and spread so thinly over a high-volume commodity, that it doesn’t seem to be a smoking gun for anything in particular.

The horses were symbolic? You don’t know as much about tribute as you think if you believe that. What were the horses used for?

roger @94
But just as the Romans also paid tribute to border tribes, so does the U.S. – the billions given to Pakistan during the [G.W.] Bush years were obviously tribute.

The U.S. is still giving Pakistan billions, except that some military aid has been suspended recently and the Kerry-Lugar-Berman legislation shifted a bit of the total aid package in a civilian direction. But not a huge change, I think, from the Bush years in this respect. The question is whether this is usefully thought of as tribute and I think the answer is probably no. The U.S. is giving aid and getting certain things in return (though it increasingly appears to be a bad bargain for the U.S. given the Pakistanis’ sheltering of Haqqani network etc etc), but U.S. aid often works that way. Why call every package of military aid or official development assistance or whatever ‘tribute’ — it doesn’t get you anywhere analytically. (And btw, al Qaeda are not “renegade Saudi paramilitaries” but that’s another issue.)

HV @101:

When I wrote “the U.S. is still giving Pakistan billions” I was using the word “Pakistan” as a convenient — though not strictly accurate — shorthand for “the Pakistani government and military.” I assumed that was obvious. In the sense that most of the aid is not benefiting the mass of Pakistanis (at least not directly), I take the point. It’s not really analogous to aiding the contras in Nicaragua, however, for fairly obvious reasons which I don’t think I need to go into.

“But still, what is this, a tip? The Saudis just find Americans irresistably cute?”

Over a long period of time, hasn’t US energy/oil policy seemingly been oriented towards keeping the Saudis as wealthy as possible? Maybe it is just a tip, really. A small discount for one’s best and most foolish customer is not unusual, nor necessarily bad business practice.

A small discount for one’s best and most foolish customer is not unusual, nor necessarily bad business practice.

Surely everyone knows by now that most Saudi oil doesn’t go to the US? The US gets most of its oil from Canada, Mexico and its own fields. In fact, it gets about as much oil from Saudi as it does from Venezuela; you’ll notice a distinct lack of love in the US-Venezuela relationship.

107: that doesn’t actually undermine my point as much as you seem to think. The US military is not a taxi; it’s not automatically available to any customer with the means to pay. Even if you end up paying the cost of the intervention yourself, it’s still valuable to have the kind of relationship that means you know it’s going to happen.

Ajay, no, the Arab kingdoms – Kuwait, Saudi Arabia and Qatar – contributed 71 billion dollars towards the cost of the first Gulf War. Germany and Japan contributed the other third of the cost.
The result of this cost was large.

“The fiscal impacts of Desert Storm upon the well-being of Saudi Arabia were as monumental as their geopolitical counterparts. Its costs in military operations, operations reimbursements, and regional aid commitments are estimated at $64 billion, in an economy whose 1991 GDP was just over $100 billion. To put those sums into perspective, had the United States acquired an equivalent war debt relative to its GDP, the total would approach $5 trillion, an amount equal to America’s current aggregate national debt acquired over decades.”
http://fmso.leavenworth.army.mil/documents/saudi/saudi.htm

Officially, the cost borne by the arab states was only 2/3 of the military cost, but Rachel Bronson in her history of American Saudi relation counts 60 billion.

roger @ 94:
But just as the Romans also paid tribute to border tribes, so does the U.S. – the billions given to Pakistan during the Bush years were obviously tribute.

To amplify what LFC @ 100 said: Well, no, unless you want to redefine tribute as “any monetary transfer whatsoever.” The key characteristic of tribute (as opposed to subsidies, bribes, or “gifts”) is that it is an acknowledgment that the tribute-payer is subordinate to, and respectful of, the recipient. Saying that the US giving money to Pakistan was “tribute” amounts to claiming that the US was formally acknowledging Pakistan as its superior, which I don’t really think was the case. (Similarly for the Romans — or the British in India — and “border tribes”.)

Peter, see this NYT story about the amount of money that the U.S. spent on Desert Storm:
http://www.nytimes.com/1991/08/16/business/economic-scene-the-broad-impact-of-the-gulf-war.html

“Total pledges from coalition partners to the United States came to $54 billion. Thus far, the amount received has been $46.6 billion, of which $41.8 billion was in cash and $5.4 billion in kind, especially fuel. The Office of Management and Budget expects that by the end of this year, cash contributions will reach $48.2 billion, bringing the combined cash-and-kind grants to the $54 billion pledged.

The Congressional Budget Office estimates that United States incremental costs for Operations Desert Shield and Desert Storm came to $15 billion. Hence, with cash receipts expected to total $48 billion this year, it says the United States will have received $33 billion more than the incremental costs of the war this year.

However, Richard G. Darman, director of O.M.B., has testified that the total costs to the United States of stopping Iraq were $61 billion, implying that American outlays exceeded foreign contributions by at least $7 billion. But the Darman figure includes transfers from already budgeted military outlays to the gulf operations plus estimated future costs of replacing equipment lost in the war.”

As for your distinction between tribute and bribe or gift, obviously, this depends on the situation of the speaker. I call it a bribe, while the bribed person calls it a tribute. In the case of Pakistan, the entire invasion of Afghanistan, up to and including the miracle escape of Osama bin Laden and the Taliban leadership (and, in the airlift from Kunduz, the escape of the ISI people that the Americans well knew were fighting with the Taliban, ordered as a “courtesy” to Musharref), was full of odd moments of deference. Contrary to your notion that a bribe and tribute are poles apart, I take it that a bribe allows you to do something, while tribute allows you to not suffer something – and in the case of Pakistan, I’d claim that the billions were given for both reasons – on the one hand, we got Pakistan to keep the Taliban and Al Qaeda on “reservations” so to speak, so that the American leadership could use them as a threat when needed, but at the same time, the U.S. was paying not to suffer certain things, like a war between Pakistan and India, and enough peace in Afghanistan to establish a puppet government.

The situation with the U.S. is summed up in this passage from Gibbon, concerning Gallus payment of tribute to the German tribes:

“In the age of the Scipios, the most opulent kings of the earth, who courted the protection of the victorious commonwealth, were gratified with such trifling presents as could only derive a value from the hand that bestowed them; an ivory chair, a coarse garment of purple, an inconsiderable piece of plate, or a quantity of copper coin. After the wealth of nations had centred in Rome, the emperors displayed their greatness, and even their policy, by the regular exercise of a steady and moderate liberality towards the allies of the state. They relieved the poverty of the barbarians, honoured their merit, and recompensed their fidelity. These voluntary marks of bounty were understood to flow not from the fears, but merely from the generosity or the gratitude of the Romans and whilst presents and subsidies were liberally distributed among friends and suppliants, they were sternly refused to such as claimed them as a debt. But this stipulation of an annual payment to a victorious enemy appeared without disguise in the light of an ignominious tribute; the minds of the Romans were not yet accustomed to accept such unequal laws from a tribe of barbarians; and the prince [Gallus] who by a necessary concession had probably saved his country, became the object of the general contempt and aversion. The death of Hostilianus, though it happened in the midst of a raging pestilence, was interpreted as the personal crime of Gallus; and even the defeat of the late emperor was ascribed by the voice of suspicion to the perfidious counsels of his hated successor. The tranquillity which the empire enjoyed during the first year of his administration served rather to inflame than to appease the public discontent; and, as soon as the apprehensions of war were removed, the infamy of the peace was more deeply and more sensibly felt.

I haven’t checked the comments yet, and I need to reread the blog entry. But I am in a rush. Yet it seems that there has been no discussion of David E. Spiro (Robert Gilpin’s student) and Carla Norloff. Works by both these authors provide some support for the idea that military force has been a crucial factor in the dollar’s role as a reserve currency and the associated benefits of seigniorage Spiro tries to show that the US State ‘exchanged’ security services for Saudi pledges to purchase T-bills in the 1970s; Norloff argues that military power played a crucial role in the ascendance of the dollar.
Henry, have you read these books? Would love to hear your opinion

Or a substantial risk of a major crisis

“So is it the case that, say, half the world’s oil trade could have switched to the Euro without causing a major crisis in the US?”

Yes. Because the way prices work, we already have to deal with the fact that the euro and dollar compete with each other for buying oil.

Sorry- should read:
Before I read Graeber’s twitter feed, I thought of him as an interesting and well-intentioned guy who’d written a book I disagreed with. But unless he’s having a bad day on Twitter, he seems to be a genuinely nasty, and hysterical, character.

Pretty much his first moves with anyone who disagrees with him are to assume bad faith and demand an apology for the insults (non-existent, I would say) to which he has been subjected. His current hate figure appears to be Doug Henwood, who is not exactly a running dog of the plutocrats.

Someone must know enough about this stuff to give a clear answer, backed either by credentials or a logos (or preferably both) here – I at any rate would like very much to know whether this lazy-algorithm refutation can be applied, or whether the theory merits further consideration.

So can anyone give a convincing confirmation that half, say, of the world’s oil trade could have switched to the Euro without giving rise to the substantial risk of a major crisis in the US?

It doesn’t really matter directly what currency oil is priced in. But it does have an indirect effect to do with national FX reserves.

–Why do central banks have FX reserves?
–So they can spend them to prop up their home currency when it starts to fall.

–Why are a lot of these reserves in US dollars?
–Because if your currency falls against the US dollar, you’ll need to spend US dollars to prop it up again.

–But why is it particularly important to prop up your currency against the dollar, rather than, say, the naira?
–Because you probably have a lot of outgoings in dollars. All your imports from the US will be paid for in dollars. All your oil imports as well. And a lot of your debt repayments. If your currency falls against the dollar, all of these things will become more expensive. You probably don’t import quite so much that has to be paid for in naira, so you don’t have to worry so much about the naira climbing against your currency.
All this means that you’ll keep a lot of US dollars in your reserve. If oil starts being sold in euros, countries may rebalance their reserves away from the dollar and towards the euro, because it’ll become more important to protect their currency against a fall vs. the euro than it was before. Of course, if they still have lots of dollar debts and lots of other dollar imports, they’ll still need to keep a lot of dollar reserves – it’s not like they’ll desert the dollar completely.

–I see. So if countries started holding less dollars and more euros in their FX reserves, that would be really bad for the US?
–Good question. Opinion is divided on that. McKinsey reckons it’s pretty much a wash – http://www.mckinsey.com/Insights/MGI/In_the_news/Dollar_as_reserve_currency- the US benefits from seignorage on printing dollars for foreigners, and it’s nice to have everyone wanting to buy your T-bills, but then again having a high dollar means that US exports are more expensive to foreigners.

Sorry – I see ajay has given a similar but better answer.
FWIW I would agree with the McKinsey analysis.

if you’re a banana republic with marxist rebels in the mountains, then yes, you’d probably want to have some reserves; not necessarily in dollars, but in some stable currency, or valuable commodity.

“You” in your example, though, is the government. You’re presumably thinking “if you suddenly stop being able to collect taxes because the rebels are shooting your tax collectors, or you need to buy more BAe Hawks and cattle prods, and no one is willing to lend you any money, then you might need a contingency fund”? – and you’re right.

But what I’m talking about is central bank FX reserves, which are different, and used for managing the exchange rate. You’re right of course that in theory the dollar is just as likely to rise as fall against your currency. And either way could be bad – the dollar rises and suddenly all your dollar imports become unaffordable, as I mentioned; the dollar falls and suddenly you can’t export to the US because they can’t afford to buy your stuff.

But if your currency is rising against the dollar, your central bank can cure that very easily – it just prints more of your currency and uses it to buy dollars. (It can print as much of your currency as it likes – it’s a central bank!) It’s only if your currency is falling against the dollar that the central bank is in trouble, because of course it can’t print dollars at will. It needs to have a stockpile of dollars that it can use.

This still doesn’t explain the magical power of the dollars in particular. You could, as well, stuff your vaults with Yens, for example. Or gold, for that matter. Anything of stable value.

Well, can you see that if your currency is falling against the dollar, the best and most direct way to reverse that is to go out and spend your dollars on buying lots of your currency?
If you go out there and buy up lots of your currency using yen instead, then your currency will rise against yen but it might still keep falling against the dollar – could be that all you achieve is to make the yen fall against the dollar too. Just because a currency is going up against one other currency, doesn’t mean it’s going up against them all.
Same holds for gold, for that matter.

Also, “stable in value” only has meaning when you have an answer to the question “value in what terms?” The dollar is entirely stable in value compared to other dollars. The yen and especially gold are not stable at all compared to dollars. Gold’s gone from $300 to $1800 over the last ten years or so. The yen’s gone up almost 50% in the last five.

Whoops, sorry about the link.

The Saudi US debt holdings may be related to the fact that the riyal is pegged to the dollar. Which makes sense for a country which is so dependent on a dollar-denominated export. If Saudi switched to selling oil for euros, it would presumably switch to a euro peg. I am really out of my depth here and so will appeal for help…

Ajay. If your goal in life is to keep your currency strong vs the dollar, then yes, you need dollars. Still, if in 2002 you knew the future, you’d certainly be better off stockpiling gold, to exchange it for dollars, if/when you need them.

In any case, you probably don’t care about dollars that much; what you really want is to be able to buy oil and other stuff from abroad. As we already established, oil, while priced in dollars, can be purchased with any currency. Same is true, I’m sure, for all the other stuff. So, at any given time it would be logical for you to analyze world politics/economics, and stockpile whatever currency/commodity is likely to perform best. No? It seems logical.

The dollar has been losing value against most other currencies and commodities for about 10 years now. In the last few years trillions of new dollars have been printed. I find it hard to believe that your reasoning alone explains the practice of accumulating dollar-denominated paper in foreign central banks.

I don’t suggest that central banks should act as currency speculators. What I do suggest is that it’s hard to explain, along your lines, dollar’s magical powers. In fact, giving high preference to the dollar does sound like an attempt to beat the market.

“In fact, giving high preference to the dollar does sound like an attempt to beat the market.”

On the contrary, for various reasons (my best guess is the fact it is one of the very few large modern currencies to have lasted as long as it has gives huge weight) giving a high preference to the dollar is exactly what the market does, so anything else is an attempt to beat the market.

You can argue that the market ought not give high preference to the dollar, but you can’t simultaneously argue that doing so is trying to beat the market.

I thought it was generally agreed above that Graeber’s apparent account in terms of $ hegemony and militarily enforced “tribute” wasn’t literally correct. He’d gotten the melody wrong, even if not the overtones. The U.S. is/has been running a $ recycling operation, borrowing long and cheap from foreigners the $ it’s already exported, while its MNCs and hi-fi outfits invest at much higher returns abroad, especially by arbitraging the perennial discrepancy in ppp terms between developed and “developing” economies’ FX values. It’s by no means a far stretch from there to recognizing the U.S. military hegemony is partly motivated by the need to maintain the security of foreign investments and access to markets and resources abroad, ( even if the military-industrial complex might be also a “special interest” with a “logic” of its own with its perennial threat inflation of actual, potential or imaginary enemies, and even if the exercise of U.S. military power might be adventitious, erratic, self-stultifying or counter-productive), without claiming that military means are the sole implement for exercizing economic hegemony and enforcing debt-collection. Where Farrell goes “wrong” in his criticism of Graeber is in his apparent refusal to acknowledge that U.S. military might does generate a general atmosphere of “terror” for any regime that might think to actively challenge or oppose such an international economic order, (called the “Washington consensus” for good reason), and thus does indirectly relate to the ways in which debt contracts are enforced, and in his missing the point of Graeber’s calling kited $ “worthless”, since, indeed, their continued minting and kiting does imply U.S. $ devaluation eventually. And unless foreign $ holders agree to by U.S. exports, the only eventual use of their $ would be to buy U.S. “assets”, land, mines, companies, banks, etc. , which is precisely the outcome to be averted by further doubling down on the basic scheme.

It’s by no means a far stretch from there to recognizing the U.S. military hegemony is partly motivated by the need to maintain the security of foreign investments and access to markets and resources abroad

But there’s no need to take any kind of stretch to get to that proposition, is there?

On the question of why – if they really do have any option in technical financial terms – the Arabians choose to recycle their petrodollars buying US debt: somewhere in that story is how the US rescued Kuwait from Saddam; and it may be worth recalling that the cock-up theory of how the US ‘accidentally’ gave S the green light for invasion rests solely on the implausibility of US perfidy (a rather flimsy foundation, I should say).

So, oil is priced in dollars, fine, but if I want to pay euros for it, I’m sure I can pay the equivalent in euros, no? And if I am forced to convert it to dollars, no one prevents Saudi Aramco to immediately convert them back to euros.

Yes. So the impact of changing the numeraire depends on the composition of oil-exporters’ imports. If Oilyland exports one good, oil, and receives dollars, obviously it does something with them. Let’s say it imports two goods, F-16s and Mercs, one of which is sold in dollar and one in euro terms. Obviously, it has to swap dollars for euros in order to cover the bill from Daimler-Benz. How much of its dollar income gets sold into the market for foreign exchange therefore depends on the import mix.

If we change this, so Oilyland receives euros, the net buy or sell of dollars resulting from this would be determined by the import mix. If it imported more F-16s than Mercs, it would have to be a bigger net seller of euros/buyer of dollars and the change would increase the demand for dollars. If it imported more Mercs, vice versa. (It’s probably worth noting that one of the biggest dollar-zone commodities is food, and Saudi Arabia imports masses of it. On the other hand, they’re hardly known for abstaining from euro- or yen-denominated manufactured goods or services.)

This is why the whole issue of “recycling” is important. The trade surplus on oil is very big compared to these countries’ economies, so they couldn’t practically spend it all on imports. That is to say, they export capital, or in a sense, they import foreign investments.

The original use of the word “petrodollar” referred not to the US paying for oil, but to oil exporters holding big dollar balances outside the US (i.e. like “eurodollars” a few years before that, the accumulated dollar surpluses of West European exporters held in London).

What I do suggest is that it’s hard to explain, along your lines, dollar’s magical powers.

It doesn’t have magical powers. If I am the central bank of a country that doesn’t have much in the way of dollar-denominated imports, then I don’t really give a damn about what happens to the dollar. But most countries aren’t in this position. The dollar is a really widely used currency for international trade – in particular for oil – so you generally do need to worry about keeping your currency stable against the dollar. The dollar’s magical power is simply that lots of stuff is bought and sold in dollars.

It takes 1 millisecond and has a close to zero transaction cost to convert your dollars into euros or yens or francs. Why do they choose to hold dollar balances; to buy, overwhelmingly, US T-bills; that’s the question.

This is true at the small scale – the scale that all of us operate at – but not at the kind of scale that central banks operate at. We’re talking about tens or hundreds of billions of dollars here. That’s a significant share of total daily FX trading volume. You can’t make that kind of move without transaction costs and (more importantly) without moving the markets substantially.

Don’t forget, the problem this is all aimed at solving is “the dollar is too high against my currency”. You want to have a pile of dollars and use them to buy your own currency, in order to bring your currency up and the dollar down.
If your first step to solving this is to go into the market with your hoard of non-dollar currencies and try to convert them into dollars, you’re just going to drive the dollar higher!
Alex also makes the good point that this is more complicated and involves things like the balance between dollar imports and dollar exports, a point which I didn’t mention.

Why do they buy T-bills rather than other dollar-denominated assets? Because T-bills are the safest dollar asset available.

Whatever the reason it isn’t / wasn’t fear of US military attack.

his apparent refusal to acknowledge that U.S. military might does generate a general atmosphere of “terror” for any regime that might think to actively challenge or oppose such an international economic order, (called the “Washington consensus” for good reason), and thus does indirectly relate to the ways in which debt contracts are enforced

The problem here is that it’s difficult to point to a recent case where a government has threatened to default on its debts and been met with US military action. Ecuador defaulted a few years ago, but not a single Marine has landed. Greece is defaulting right now and the Sixth Fleet is idle. Invasion wasn’t even part of the conversation in either case. Meanwhile, the US military potters around threatening and invading countries that either don’t really have significant debts to the US or weren’t threatening to default on them, like Iraq and Afghanistan and Grenada and Iran and Panama.

Now, things used to be different – invading people in order to force them to pay their debts was a popular pastime back in the 19th century. But it doesn’t really happen nowadays – debt is a means, rather than an end, in foreign policy, as Anthony Eden could tell you.

The oil sheiks, I think they do buy other assets, invest in businesses. To the tune of a trillion bucks, just for the Saudis, IIRC. And that gives them a stake in the government enterprise as well.

OK, I think that when you say “Saudis” you are conflating the Saudi central bank, the Saudi government and its SWFs, and the Saudi people. Same confusion as earlier (#137). The Saudi central bank isn’t putting $1 trillion into business investments.

Meh, I don’t think Saudi central bank is that much firewalled from Saudi oligarchs. Or, for that matter, any central bank from its national oligarchs.

Meh, I don’t think Saudi central bank is that much firewalled from Saudi oligarchs. Or, for that matter, any central bank from its national oligarchs.

If you mean firewalled in terms of influence, sure. But stopping runaway movements in exchange rates is pretty much what those oligarchs want the central bank to do. It’s what central banks are for and it’s why they need dollar reserves. If the oligarchs want to invest in US bonds, either because they think it’s a good risk/return proposal or because they want to demonstrate submissiveness to the Mighty Hegemon or whatever, they do it through central banks.

Damn, they got ajay! Between two comments, too.

Well, not so fast Henri. I think one could make some very good points about how US military power turns into economic power in a tribute kind of way. I just think that CB FX reserves aren’t a good example of that – they’re an example of economic dominance affecting other countries’ behaviour (possibly) to the benefit of the dominant power.

…oh, actually, I take it back: those are not dollar-denominated reserves, just reserves. Damn, the doubts remain…

ajay@162: I think one could make some very good points about how US military power turns into economic power in a tribute kind of way.

Would you make them, for the benefit of those of us who are always looking for things to blame America for?

…but of course Belgium and the Netherlands can’t leverage their currency, so this must be something else.