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Pass GO, Collect $200
#25: On Dollar Nationalism.
First, some housekeeping. I was thrilled with the positive feedback on last week’s post, The Pool. Unfortunately, Gmail was less complimentary and filtered it out of many of your primary inboxes. A quick reminder to Gmail users that if you don’t see TLBS in your inbox on Friday morning, check the “Promotions” folders, and drag it into your main inbox!
In 1935, in the depths of the Great Depression, American game manufacturer Parker Brothers released the first commercial version of Monopoly. The popular board game packs a brutal dog-eat-dog economic message. To win the game, a player seeks to acquire a local monopoly on property, which allows them to charge exorbitant rents and bankrupt their opponents. Since its public debut nearly 90 years ago, the game has maintained its popularity, selling an estimated 275 million sets worldwide.
But Monopoly’s origin predates the Parker Brothers. Thirty-two years earlier, in 1903, Lizzie Magie applied for a patent for The Landlord’s Game, featuring a gameboard that still closely resembles the version sold today.
But Magie’s Landlord’s Game included two sets of rules; a monopolistic version similar to the one we play today, and one with a taxation system that burdens property owners. As an anti-monopolist herself, Magie’s version was not merely a game but a lesson on the wealth impact of monopoly power and the potential for alternative taxation policy to create a more equal outcomes.
For much of the game’s popular commercial run, Magie’s role was forgotten, as were her alternative game play rules and the lessons they taught.
Today, I want to propose a new alternative set of rules to demonstrate a different economic lesson that helps explain global disparities today.
The iconic rule of Monopoly is that when players pass GO, they collect $200.
Players begin the game with $1,500 which can be used to acquire property and pay expenses. Throughout the game, new money is distributed to each of the player as they circle the board. Since the cost of property and development (houses and hotels) are fixed, this constantly increasing money supply provides players ever more ability to develop monopolies and extract larger rents and bankrupt opponents. The $200 bonus represents “free money” to players, but it is distributed “fairly” insofar as each player successfully passes GO.
But what if only certain players received a $200 bonus for passing GO? Rents for all players would continue to rise, but those who receive the $200 payments would be able to acquire and develop properties and pay rising rents, while those who don’t receive the payment would be squeezed out.
Needless to say, the game of Monopoly would be quite lopsided under these rules.
Today, there is a lopsided economic outlook when looking across the globe. Across the major economic zones, the U.S., and the U.S. consumer in particular, seem to be in a position of relative strength relative to the rest of the world. By many measures, U.S. the economy is running very hot. Even with stimulus spending the rearview, demand has remained strong, while the labor market is even hotter. Higher prices are causing serious angst, but have not yet slayed strong aggregate demand.
The Federal Reserve is now attempting to engineer a slowdown to tamp down the economy and inflation. While this has forced other global central banks to follow in raising rates, their primary motivation is primarily to defend their currency. The resulting slowdown in economic activity is a less desirable side effect.
While there are many factors contributing to the disparity, one factor may be that in this most recent trip around the gameboard, the U.S. collected $200 when it passed GO, while the rest of the world did not.
Throughout the COVID pandemic, the U.S. federal government spent $5 trillion in fiscal stimulus. As outlined in previous articles, this $5 trillion was funded by the Federal Reserve’s quantitative easing. In other words, the money distributed by the Treasury did not previously exist. Money supply exploded.
Unlike prior versions of QE, in which cash was pumped into the financial system where it flowed to the most attractive risk-adjusted assets globally, the COVID monetary expansion was effectively gifted to the U.S. economy via fiscal spending. Newly printed dollars were sent to individuals via stimulus checks, parents via child tax care credits, unemployed via enhanced unemployment, businesses via the paycheck protection program (PPP), health care providers by COVID relief funds, and state and local governments in direct transfers.
Stimulus, when funded by monetary expansion, is not a one-time phenomenon temporarily increasing incomes to offset an exogenous shock. Rather it is a permanent increase in dollar supply that continues to circulate today. For example, PPP checks were first gifted to businesses, but flowed to employees, who in turn spent the dollars at other businesses. The state, local, and federal government take a cut at each stage as well1.
The result was a doubling of the total dollars in circulation, but the beneficiaries of this dilution were largely U.S. consumers and entities, while the losers are international entities that hold dollars or fixed income dollar assets like U.S. Treasuries.
Here’s another analogy. If a public company doubles its shares outstanding in a 2:1 stock split, there is no economic impact to its shareholders. Each share losses half of its value but each shareholder has twice as many shares. But what if a company doubles its share counts, but gives all the new shares only to certain investors? Clearly this would have a massive economic impact, shifting value towards those who received the new shares (think Eduardo in The Social Network).
To protect against this risk, equity investors often insist on anti-dilution provisions. But there are no anti-dilution provisions when you buy U.S. Treasuries or hold U.S. dollars from trade imbalances. Since fiat currency can be created at will by the central bank, dollar holders are constantly on risk for currency debasement - dollar dilution.
The trouble of fiat dilution is not only a concern for foreign entities. A U.S. bank account that has held $10,000 since 2019 has also experienced a significant reduction in purchasing power. But in aggregate, U.S. players benefitted disproportionally from the stimulus.
Some of these dollars will flow out of the country (i.e. through trade deficits), but even then, it is a “costless” dollar traded for goods and services with real costs. When a U.S. consumer uses stimulus money to buy a product off Amazon, manufactured in China, he or she is taking free dollars and trading it for someone’s labor and materials2.
While dollar dilution means global inflation, the U.S. economy is in a far better position to withstand higher prices. Since goods and services are auctioned globally to the highest bidder, the U.S. is in a far better position to win those auctions.
Like a Monopoly game where only one player collects money for passing GO, it’s not surprising that such a setup would create lopsided outcomes.
The Dollar Hegemony
When framed in such a manner, it’s easy to think such a situation is unfair. But these are the rules of the game.
Most countries have their own fiscal and monetary authorities with the power to create and gift fiat currency to their populace3. When you hold fiat assets, you assume dilution risk of the central bank in question. But that doesn’t mean that all countries have equal ability to do so.
The U.S. dollar is the world’s reserve currency. Other central banks hold more dollar assets (largely U.S. Treasuries) than any other currency by far and a huge proportion of global trade is denominated in dollars. In certain critical trades such as energy, the dollar has a near monopoly on trade.
This global dollar dependence gives the U.S. a unique ability to leverage its own currency to its advantage4. The more that a country’s currency is held by foreigners, the greater the ability to dilute foreigners in favor of domestic interest.
Since foreign entities can’t stop fiat dilution, their only real recourse is to reduce reliance on the offending country’s currency. But the development of the modern global monetary system, and reserve holdings of global central banks, has been nearly a century in the making, making the status-quo nearly impossible to disrupt in the short-term.
The irony is that the dollar’s reserve status is due in part to the trust foreigners have put in the Fed and Treasury to maintain the dollar’s value. The Argentinian Peso by contrast would be a poor reserve currency given its consistent, rapid devaluation. In part, the dollar has been accumulated by countries around the world because the U.S. has maintained “sound money” with low inflation for many years.
Until recently, the U.S. has managed keep dollar dilution in line with true economic development, allowing the currency to maintain most of its value5. But during COVID, this assumption was upended as the U.S. Treasury gifted its economy $5 trillion and the Fed footed the bill in the midst of declining global output.
But what are the alternatives? Outside of abandoning the democratic-developed finance system and integrating with the authoritarian regimes who have been forcefully tossed from the dollar system (i.e. Russia, Iran, North Korea, etc.), there really are none6. Most of the rest of the world is captive to the dollar and the U.S. policy as a result.
The U.S. possesses unique economic power through its control of the world’s most important currency. At any time, the Fed and Treasury can print and distribute dollars.
Imagine a lever shielded in glass box that read’s “In Case of Emergency Break Glass”.
To preserve this special lever over the long-term, the U.S. must practice monetary restraint and maintain economic growth, but in an emergency it’s one hell of a safety net, global disparities notwithstanding. It brings negative repercussions for the rest of the world holding dollar assets, but those are the rules of the game. In the short term, there is little recourse.
Commodity-rich nations have long been aware of the rules, but at least have a potent counterpunch in controlling the supply of exports. Foreign countries with dollar dependence who are also reliant on critical imports, however, have far less recourse. For such countries, the past two years will be a valuable lesson in the inherent risk of fiat dilution.
If the current global economic uncertainty transforms into a global recession, expect a growing recognition of fiscal and monetary nationalism, particularly that of the United States. Backlash and realignment may help transform the rules of the game in the long run, but today’s die has already been cast. Pass GO, do not collect $200.
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To highlight this point, consider California, which just sent out $1,000 “inflation relief” checks this month due to the record setting budget surplus. But California is not alone. Between record incomes and federal transfer payments, states across the country are sitting on record surpluses. Perhaps surprising in the face of such a large economic shock, but unsurprising when considering the degree of dollar dilution and stimulus.
This dynamic has been a long running complaint of oil-rich countries like Saudi Arabia and Russia who have lamented the ability of countries to print endless fiat currency to trade for limited hard commodities.
The one notable wrinkle among developed economies is the Euro zone in which the fiscal authority (country governments) and monetary authority (the ECB) are mismatched.
Of course, this is a simplistic comparison as well. It isn’t merely foreign currency holdings that matter but also physical trade supply (i.e. energy exports), existing financial structure (i.e. euro-dollar system), and geopolitical rivalry (sanctions and war).
The supply of dollars is usually growing but so too is the value and size of the U.S. economy. To elaborate on the stock share analogy, if a company could constantly issue new shares while keeping earnings per share constant if it is able to grow aggregate earnings at the same pace as its increase in shares.
For more on this, I highly recommend this fantastic twitter thread from fellow Substack writer, Concoda Economics, who you should also subscribe to here if you haven’t.