The United States has a trade deficit because of something similar to the Dutch Disease. The term “Dutch Disease” was coined by The Economist magazine in 1977 to describe what happened to the Dutch guilder after The Netherlands discovered large deposits of natural gas in its territory in the North Sea in 1959. The Netherlands took payments in the Dutch guilder for the natural gas that it sold. As the demand for their natural gas increased, the demand for Dutch guilders increased, driving the price of the Dutch guilder up. As a result of this price increase, the exports of other Dutch products priced in guilders dropped dramatically.
This problem is also known as the natural resource curse. Several natural resource rich countries in Africa have this problem, as does Russia whose federal budget has a very large component based on its exports of oil and natural gas. Russia is unable to export many other products because the value of the ruble is high relative to other currencies. Consequently, the price of Russian exports are generally not competitive in international markets.
The US faces a similar problem in that the US dollar has become the world’s reserve currency. As world trade expands, the demand for US dollars increases, which drives up the price of US dollars in international exchange markets. Conversely, by making the US dollar stronger, it makes imports into America relatively cheaper, so the US imports more than it exports. The increasing demand for US dollars has created an international trade deficit for the United States. In effect, the strong international demand for US dollars has made the US dollar serve as a sort of a natural resource for the world.
Many countries throughout the world have experienced currency instability from time to time. Zimbabwe, Venezuela and Argentina are just a few recent extreme examples. The time lag between making a deal to purchase a product and paying for that product made such deals dangerous when one or the other currency was unstable. Before August 1971 the gold standard was used with gold serving as an intermediary between currencies.
The relative stability of the US dollar, even after President Nixon stopped using gold at $35 an ounce to back the dollar in August 1971, has allowed the US dollar to serve as the world’s reserve currency since the end of the gold standard. When Argentina wants to buy cars from Brazil, it makes the deal in terms of US dollars. Brazil does not have to worry about the value of the Argentine peso relative to the Brazilian real. Argentina has to come up with the US dollars to pay Brazil, which helps drive the value of the US dollar up in foreign exchange markets.
The increasing demand for US dollars as the world’s reserve currency has made the US dollar like a natural resource that to some extent has suppressed the demand for US exports. The Netherlands problem with the Dutch disease was eventually solved with the creation of the Euro currency in replacing the Dutch guilder.
Federal deficit spending, especially when the Federal Reserve buys US Treasury securities to inject cash into the financial markets under quantitative easing (QE), has helped keep the value of the US dollar in international exchange markets from rising excessively. By using QE to lower interest rates, foreign investors may withdraw funds from US financial markets to seek a higher return elsewhere. However, QE must be done in moderation to avoid excessive inflation, which could cause the value of the US dollar to drop significantly.
Another approach has been to provide financial assistance to poor countries with US dollars tied to the purchase of US exports. An even more direct approach is to use the USAID agency to buy farm products from US farmers and distribute those farm products to poor people in poor countries. In effect, this increases our exports to provide a better balance with our imports. It also helps spread the benefits of the US dollar’s reserve currency status around so the United States can’t be accused of selfishly taking advantage of the US dollar’s special status.
The mix of US exports has changed over time with much more of US exports being in terms of services rather than physical products. For example, international students pay for a college education at many colleges and universities throughout the United States. The falling birth rates in the United States have threatened to drive many small colleges and universities into bankruptcy if there were no international students to take up the slack. International students who pay full tuition are, in effect, subsidizing the college education of American students who might not otherwise be able to pay for college. By educating students from around the world, the United States is exporting an important service that benefits both parties in the transaction.
Norway has faced a “Dutch disease” problem in selling large deposits of oil and natural gas. Norway has used that money to create a government sovereign wealth fund giving its elderly citizens pension payments (instead of allowing a few wealthy oligarchs to get all the money as done in Russia). Norway has the largest sovereign wealth fund in the world. Consequently, Norway has a much lower level of income inequality than the United States. Norway’s Gini coefficient is only 0.28 compared to Russia’s Gini coefficient of 0.41 and the United States Gini coefficient of 0.47.
The problem (or advantage) for the United States is that as world trade expands, the demand for US dollars expands. If the US did nothing, the value of the US dollar would keep rising and start pricing US exports out of the international market. However, as world trade increases the US just creates more US dollars out of “thin air” to keep the value of the US dollar from rising in international currency exchange markets. This means that the US can import more products valued in terms of US dollars than it exports. The reserve currency status of the US dollar has allowed the United States to maintain an overall trade deficit with the rest of the world. In other words, the US is, in effect, “ripping off” the rest of the world in that the US gets their products without giving them an equal value of US products. People in the Unites States are getting something for nothing. The real mystery is why some politicians in the United States don’t understand this.
As long as the US can maintain enough demand for the products of other countries and continues to create more dollars out of “thin air” to keep up with world demand for US dollars, the US dollar can remain as the world’s reserve currency without the US suffering from something like the Dutch disease or the natural resource curse.
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