Dollar Crisis?

By Daniel O'Connor of Integral Ventures, LLC

The Economist has published a number of recent articles on the US dollar, including The Disappearing Dollar, in which it preaches to the growing choir of dollar bears:

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.

Topping The Economist's list of America's bad dollar habits:

• rampant government borrowing;
• furious consumer spending;
• a current-account deficit big enough to have bankrupted any other country some time ago; and
• the Federal Reserve's easy-money policy, which has fueled record rates of growth in global liquidity and asset-price bubbles in stocks and houses [and, I would add, US Treasury bonds].

Bringing the bear case to a close, The Economist concludes:

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.

Of course, the final sentence seems to imply that by simply cutting the federal government budget deficit Americans could resolve the dollar's problems and preclude much of the pain to be expected from its devaluation.  As difficult as a balanced federal budget might be to accomplish in this dark age of political economics, it would be easy by comparison to the changes that will be necessary to actually preclude the dollar crisis that seems to be mounting.

© 2005 by Daniel J. O'Connor.  All Rights Reserved.