This week’s EconTalk is Barry Eichengreen talking about the dollar–its role as a reserve currency, the advantages of that role for the US, and whether another currency might take over that role.
For me, the most interesting part of the conversation was a discussion of China’s alleged currency manipulation to keep their exports high. Eichengreen argued that this is bad for the US as a whole–that is, it is bad that China is willing to sell us cheap stuff. I have never understood this argument in good or bad times. But Eichengreen made the argument clearly–there is a “fixed lump” of aggregate demand and by keeping the prices of Chinese products low, US aggregate demand goes to China rather than the US. I don’t know what it means to say that there is a fixed lump of aggregate demand. But that’s the argument. I pointed out that Keynes also embraced protectionism during the Great Depression. I am glad I am not a Keynesian. Besides the fact that I do not understand how a nation can thrive by producing things at a higher cost, the political incentives of such a view are not so healthy.