Krugman’s blog, 12/1/15

There were three posts yesterday.  The first was “Small News On The Yuan:”

So the IMF has included the renminbi in the SDR, adding a world of hurt to newspaper reports; now everyone will have to deal with China’s awkward currency nomenclature. (As I understand it, you should use renminbi and yuan more or less as you use sterling and the pound; the RMB is the term for Chinese money in general, the yuan a denomination of its notes.) It’s a symbolic event — the first developing country to achieve that status. And if you ask me, it was a bit rushed: China is big, but it still has capital controls, so that its currency really isn’t freely negotiable the way the other currencies in the basket are.

But how much difference does this make for the real economy? Almost none.

That’s not what you usually hear. Today’s commentary by the usually excellent Neil Irwin compares the rise of the RMB to the gradual replacement of sterling by the dollar “as the predominant currency for global trade and finance.” He goes on to say that

This development was a crucial piece of the nation’s rise to superpower status.

Actually, no, it wasn’t. America became a superpower because its economy was huge — by 1913 it was already about as big as the combined economies of Western Europe, and it was even more dominant after World War II. The international role of the dollar was at best a minor footnote to this story.

Ask yourself, what special privileges does being a reserve currency bring? People who don’t actually work in international monetary economics tend to make claims about America having a unique ability to run trade deficits, or to borrow in its own currency, or to extract large amounts of resources from other countries due to “exorbitant privilege,” but none of that is true. At most, the dollar’s special role might mean slightly lower borrowing costs — although there’s little evidence of that — and a de facto zero-interest loan from people holding currency — pieces of green paper with portraits of dead presidents — outside the country.

And it’s far from clear that China will get even these minor payoffs: putting the currency in the SDR should have very little bearing on the willingness of individuals to hold yuan in cash, or even to buy RMB-denominated bonds.

Maury Obstfeld had a nice survey of the SDR a few years back, which put things in perspective. Essentially, the SDR at present provides a limited credit line to countries that want to borrow reserves of actual currencies from other countries. He goes on:

The basket valuation of the SDR is motivated by denominational convenience, and can be argued to be quite incidental (and inessential) to the main purposes.

In other words, this not much more than a minor change in accounting, with trivial economic implications.

Yesterday’s second post was “Challenging the Oligarchy:”

I review Robert Reich’s new book in the New York Review of Books. Things have changed a lot since 1991.

The last post yesterday was “Avars, Arabs, and History:”

The historian David Potter had a great letter published in the Financial Times, correcting the really bad history of the Dutch president, who suggested that migrants brought about the fall of Rome. (Bad history is all the rage these days.) Potter:

The “barbarians” who were “responsible” for the “fall” of the western Roman empire in the fifth century AD were not a wave of desperate migrants. They were a collection of disgruntled employees.

Yep — in fact, many of the groups who ended up invading the Roman Empire were originally clients, hired, subsidized, or bribed (hard to tell these apart) to serve the empire at a time when its own military capacity was waning. And this isn’t just a story about the western empire, or about Rome.

I’m currently reading In God’s Path: The Arab Conquests and the Creation of an Islamic Empire by Robert G. Hoyland; I read Tom Holland’s In the Shadow of the Sword a while back. Both books portray the rise of Islam as something very different from the image I and I suspect many other people had.

We are not, it turns out, talking about Bedouin, inspired by faith, suddenly swooping out of the desert on unsuspecting lands. The soldiers and generals who conquered Persia and much of the Byzantine Empire were, most likely, mainly drawn from long-established client states on the Persian and Byzantine borders — men who learned the art of war and much else from the people who hired them. They turned first into raiders, drawn by the empires’ weakness, then into conquerors when that weakness — exacerbated by an exhausting, destructive war between Persia and Byzantium — proved so great that resistance to their raids collapsed. In other words, the Arab conquests were quite a lot like the Visigoth conquests in the west, at least at first.

And as Hoyland points out, the Arabs weren’t the only peripheral powers making big inroads at the time. The Avars, for example, swept up to the walls of Constantinople a few years before the Arab conquest; various Turkic groups wreaked havoc on Persia.

What was different about the Arabs was the way they achieved political and religious unity. But while that was a momentous achievement with huge consequences, it was probably a much messier and slower process than we tend to imagine, mainly taking place after the initial conquests, not before. The picture of a great holy war is probably a story invented centuries after the fact.

So how much light does any of this shed on current events? Little if any.



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