Now is the time to begin worrying about the dollar
Now is the time to begin worrying about the dollar
Decades of deficit spending and growing trade deficits, coupled with massive new spending during the current financial crisis are bring out the worst in old enemies and recent friends.
Smelling Yankee imperialist blood, the weasel Hugo Chavez proposed to Arab and South American leaders recently that the dollar be replaced by a “petro-currency” based on the price of oil. Whatever anyone may want to say about the strength of the dollar, replacing it with a currency that would be as volatile as oil — which broke the $100 per barrel mark in January 2008 and is now selling at less than $50 — has flaws that should be apparent even to the loopy Venezuelan president. His own economy has been crippled more by the drop in oil prices than the U.S. economy has by the finance and banking meltdown.
But, Chavez has his audience, and couldn’t even try to sell his petrodollar idea if Americans hadn’t been borrowing and spending like drunken sailors.
There are others
Chavez isn’t the only agitator. Iran has proposed replacing the dollar as the international standard, at least in part, with the euro or some other currency, such as the Japanese yen. There’s nothing to stop Iran from doing business in euros right now, although the cool reception to the idea indicates the mullahs would be on their own, at least for a while.
Russia has made periodic calls for replacing the dollar as the world’s reserve currency, and the Kremlin’s chief economist recently proposed a modest return to the gold standard by including gold in the basket of currencies that make up the Special Drawing Rights of the International Monetary Fund. A gold standard is much more attractive to countries that have a lot of it, which Russia does (much as an oil standard appeals to Venezuela). But most countries don’t have those natural resources and would be less enthusiastic.
It’s more difficult to brush off concerns, though, when Russia combines with China in making calls for a reserve currency to replace the dollar. China made the most serious proposal about an alternative — not a replacement — for the dollar in world trade. China has suggested reworking the SDRs, which, as it happens, are valued in dollars, as a way of settling international accounts. The SDRs are complex instruments and turning them into anything like a world currency would be enormously complicated.
Besides, China with its vast trade with the United States and huge holdings in dollars is perhaps second only to the U.S. Federal Reserve in its concern for the health of the dollar.
Looking ahead
But the strength or weakness of a dominant currency evolves not over months, but over decades. The dollar established its supremacy in the wake of World War II, which puts the age of the Supreme Dollar up there with the older baby boomers.
It’s going to be difficult to undo the excesses that began about the time the Supreme Dollar reached middle age. The extraordinary expenditures of 2008 and 2009 make the job all that more difficult.
But the fact that China is obviously looking hard at the future of the dollar means the United States had better do likewise at the earliest opportunity.
Even as the Federal Reserve is printing money at an astounding rate, economists in government and out must start talking about how to stem the inflation that inevitably follows such profligacy.
Neither Venezuela, Iran, Russia or China is going to change the standing of the dollar in the short term, but China, especially, can be assumed to be taking a longer view.