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Trade discussions are also heavily intertwined with the current global monetary system. Being the global reserve currency exacts a toll on the U.S. economy, leading to an erosion of the industrial base. As surpluses accumulate abroad, particularly in China, the U.S. experiences increasing deficits.
The Impact of Fiscal Dominance
Current fiscal policies indicate an unprecedented dominance of government spending over bank lending. The ongoing U.S. fiscal deficit suggests that external pressures to tighten or change monetary policy may hold little weight against the backdrop of regularly scheduled government spending. Recessions in such an environment are more likely to manifest as inflationary pressures rather than traditional economic downturns characterized by rising unemployment.