Graph: Peak Exorbitant Privilege

In a search for the latest current account numbers of some European countries we stumbled upon an interesting page on Wikipedia. The page contained the cumulative current account balance of practically all countries in the world between 1980 and 2008, using data from the IMF website. We thought this information was worth sharing, especially if we could add the most recent data to it. After collecting the data of the last five years from the IMF website we made a graph of the cumulative current account balance from 1980 till 2013…. We present to you the ‘Exorbitant Privilege’ of the United States in one significant graph!

Peak Exorbitant Privilege: The cumulative current account balance since 1980 (click for full-size graph)

What you see is the cumulative trade balance of 76 different countries since 1980. We have the data of 182 different countries, but to keep this chart comprehensible we have excluded all countries with a total surplus or deficit smaller than $20 trillion. These are the countries that would fill the middle part of the graph shown above.

Peak Exorbitant Privilege

The French Finance Minister Valéry Giscard d’Estaing coined the term ‘exorbitant privilege’ in the sixties to describe the position of the United States and their dollar as world reserve currency. The US is the only country in the world to simply print dollars, while the rest of the world could only obtain those dollars by producing a trade surplus against the United States. Everybody needed dollars for international trade as a result of the Bretton Woods agreement in 1944. What followed was a stockpiling of trade deficits in the US and a stockpiling of dollarreserves in the rest of the world. In 2010 Barry Eichengreen published a book titled ‘Exorbitant Privilege’ and in 2012 FOFOA wrote an excellent piece on the ‘Peak Exorbitant Privilege’.

From dollars back to gold

In the sixties Europe started demanding gold for their surplus dollars, causing a substantial outflow of gold bars from the US Treasury. From the peak to the bottom in 1971 the United States lost almost two-thirds of their official gold reserve. The exorbitant privilege of the dollar seemed untenable, but when president Nixon closed the gold windows in 1971 there was no viable alternative for the mighty US dollar (yet). The rest of the world had no other option than to accept being paid in a currency which could no longer be redeemed for gold.

The United States kept their exorbitant privilege and started producing a trade deficit the world has never seen before. Between 1980 and 2013 the US collected a cumulative trade deficit of $9.600 trillion, almost ten times as much as the number two (Spain) and more than ten times as much as the number three (United Kingdom). The graph above clearly shows which countries have lived above their means since 1980 and which countries have lived below their means. The Chinese and the Japanese were the most productive with cumulative trade surpluses of about $4.500 and $3.100 trillion respectively. It should be no surprise that these two countries have the largest holdings of US Treasuries.

It should be no surprise as well that China – with their large surplus of dollars – is importing gold hand over fist, just like some European countries did in the sixties… You see the similarities?