The disappearing dollar(The Economist)

[RedEarth]

The disappearing dollar

Dec 2nd 2004
From The Economist print edition


How long can it remain the world's most important reserve currency?


THE dollar has been the leading international currency for as long as most people can remember. But its dominant role can no longer be taken for granted. If America keeps on spending and borrowing at its present pace, the dollar will eventually lose its mighty status in international finance. And that would hurt: the privilege of being able to print the world's reserve currency, a privilege which is now at risk, allows America to borrow cheaply, and thus to spend much more than it earns, on far better terms than are available to others. Imagine you could write cheques that were accepted as payment but never cashed. That is what it amounts to. If you had been granted that ability, you might take care to hang on to it. America is taking no such care, and may come to regret it.



The cost of neglect
The dollar is not what it used to be. Over the past three years it has fallen by 35% against the euro and by 24% against the yen. But its latest slide is merely a symptom of a worse malaise: the global financial system is under great strain. America has habits that are inappropriate, to say the least, for the guardian of the world's main reserve currency: rampant government borrowing, furious consumer spending and a current-account deficit big enough to have bankrupted any other country some time ago. This makes a dollar devaluation inevitable, not least because it becomes a seemingly attractive option for the leaders of a heavily indebted America. Policymakers now seem to be talking the dollar down. Yet this is a dangerous game. Why would anybody want to invest in a currency that will almost certainly depreciate?


A second disturbing feature of the global financial system is that it has become a giant money press as America's easy-money policy has spilled beyond its borders. Total global liquidity is growing faster in real terms than ever before. Emerging economies that try to fix their currencies against the dollar, notably in Asia, have been forced to amplify the Fed's super-loose monetary policy: when central banks buy dollars to hold down their currencies, they print local money to do so. This gush of global liquidity has not pushed up inflation. Instead it has flowed into share prices and houses around the world, inflating a series of asset-price bubbles.

America's current-account deficit is at the heart of these global concerns. The OECD's latest Economic Outlook predicts that the deficit will rise to $825 billion by 2006 (6.4% of America's GDP) assuming unchanged exchange rates. Optimists argue that foreigners will keep financing the deficit because American assets offer high returns and a haven from risk. In fact, private investors have already turned away from dollar assets: the returns on investments in America have recently been lower than in Europe or Japan (see article). And can a currency that has been sliding against the world's next two biggest currencies for 30 years be regarded as “safe”?

http://economist.com/opinion/PrinterFriendly.cfm?Story_ID=3446249

[XOKCowboy]

1. Looks like it's time...

for more TAX CUTS. Those darn rich people need more incentives obviously.

[KurtNYC]

2. Yes - If the deficit is $8 tril then we need $8 tril in tax cuts

to balance the budget! ;-)

[Coryoth]

3. Government fixes

The real problem with this is that there aren't any easy government fixes, which is why these issues aren't being discussed. Certainly the government could try to reduce the deficit - but both Bush's and Kerry's plans to reduce the deficit were based on the presumption that growth would continue, and in fact increase. Even the Democrats aren't prepared to face the facts and make the cuts.

The bigger problem is personal/household debt. The US is at an all time low for personal savings - and that is a large part of the pressure blowing out the current account deficit. Unless individual citizens take it upon themselves to help reverse that trend things will only get worse. The other problem is the whole concept of such consumer oriented growth - US GDP growth is very consumer focused, and that is why you get all those silly "Shop for America" campaigns after 9/11 and other assorted nonsense. The US has become dependent on consumer spending to grow. The fact that people have already spent themselves into debt (which is why they have no savings) is precisely the problem.

Jedidiah.

[PROGRESSIVE1]

4. Good Article