Tuesday, December 07, 2004

The falling dollar and reality therapy for the empire 

Remember this one? From the senior advisor to Bush?

"We’re an empire now, and when we act, we create our own reality. "
(Ron Suskind in the Times here)

When the sun never set on the British empire, Britain was a creditor nation. The whole world owed them money.

But nobody has ever explained how the US can be an empire as a debtor nation. Presumably, if we're an empire, we need a strong military. And we buy our oil for our tanks, the metal for our armor, the chips for our avionics from other countries. If the dollar collapses, how are we going to continue to do that? Nobody has explained, least of all the Republicans.

Here's a frightening article on the dollar from the UK's Economist (via Josh Marshall here)

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 dollar is not what it used to be. Over the past three years [the dollar] has fallen by 35% against the euro and by 24% against the yen. ... [C]an a currency that has been sliding against the world's next two biggest currencies for 30 years be regard

A fall in the dollar sufficient to close the current-account deficit might destroy its safe-haven status. If the dollar falls by another 30%, as some predict, it would amount to the biggest default in history: not a conventional default on debt service, but default by stealth, wiping trillions off the value of foreigners' dollar assets.

The dollar's loss of reserve-currency status would lead America's creditors to start cashing those cheques—and what an awful lot of cheques there are to cash. As that process gathered pace, the dollar could tumble further and further. American bond yields (long-term interest rates) would soar, quite likely causing a deep recession. Americans who favour a weak dollar should be careful what they wish for. Cutting the budget deficit looks cheap at the price.

Not, of course, that we would ever claw back any of the money we gave the super-rich for the tax cuts they don't need, and which haven't stimulated jobs...

Can Bush believe that the US is "too big to fail?" I certainly hope we don't get the chance to test his theory.

Maybe without an empire we can be a Republic again... But it sounds like the collapse of the dollar is a very heavy price to pay for that. But then, reality therapy is often painful

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The Washington Chestnut
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