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Benign Neglect of a Dying Dollar

On Nov. 19, Alan Greenspan informed the world’s central bankers that the U.S. dollar will continue its fall indefinitely.
What an admission. We cannot defend our currency. We cannot protect the value of the savings and income of the American people. We cannot, in the near term, cease becoming a poorer nation.
Within hours of Greenspan’s speech in Berlin, the Dow sank 115 points and $100 billion in equity and bond value was wiped out. Yes, the chickens have started coming home to roost. Even that pied piper of globalization, the Wall Street Journal, has begun to recognize the risks of financial ruin: “Sorry to interrupt the current White House euphoria, but someone ought to mention that the great American middle class didn’t reelect President Bush so he could debase the currency.”
America’s dollar crisis reflects a failure of political will and imagination. What are its causes?

There is, first, the U.S. budget deficit that in the fiscal year ended Sept. 30 came in at $413 billion. That deficit has been largely financed by foreigners, especially Chinese and Japanese, who buy U.S. bonds and T-bills and collect scores of billions of dollars in annual interest payments from American taxpayers.
There is, second, the trade deficit, which should come in this year at $600 billion, with the merchandise trade deficit closer to $700 billion. As we Americans save so little, we borrow abroad to finance our rapacious consumption of foreign goods. And with U.S. companies closing factories here and shedding American workers to re-site their plants in Asia, exports cannot rise fast enough to cover the surging increase in imports.
Greenspan is saying that this trade deficit will not shrink until the dollar sinks so low that U.S. exports become cheap enough to sell abroad and imports so expensive Americans can no longer afford them. But how far must the dollar fall for U.S. workers to become competitive with South Koreans, Mexicans, or mainland Chinese? Is that the America we want? A third cause of the dollar decline is, as the Journal notes, Greenspan himself, “the fact that the Fed has for some time been running a looser monetary policy than either the European or Japanese central banks.” Thus the dollar has sunk to 103 yen and a euro, worth 83 cents early in Bush’s term, is now worth $1.30.
More relevant than the dollar’s euro or yen exchange rate is its price in gold. Early in Bush’s term, gold was selling around $260 an ounce. The day Greenspan spoke, it hit $447, up 72 percent. A rising gold price has long been a harbinger of returning inflation.
And there is supporting data. The core consumer price index rose .2 percent in September, but the producer price index rose a sickening 1.7 percent.
Greenspan’s prescription for rescuing our sinking dollar? It seems to be benign neglect. Let the market determine the value. Only this market is run by Greenspan himself. He is in charge of the money supply and is thus responsible if the dollars earned by his countrymen are able to buy less and less of the world’s goods, upon which we have become dependent due to the trade policies of Bush I & II, Clinton, and Greenspan.
As for our budget and trade deficits, says Greenspan, we would not need to borrow so much abroad if we saved more at home. We should increase public savings by cutting the deficit and private savings by giving folks incentives to save more. Economics 101.
But while cutting taxes on interest income might increase private savings, it would also increase the deficit. And with the leading economic indicators having fallen now for five months, with no end in sight to the Iraq War, and a president who has not vetoed a single bill, how do we erase a $400 billion deficit?
What we are witnessing here is a failure of leadership.
While there appears to be a growing recognition of the gravity of America’s condition—the prospect of endless deficits, a dollar in a death spiral, constant hemorrhaging of manufacturing and high-tech jobs to Asia, growing dependency on imports for the vital necessities of our national life—there seems to be neither the will nor vision in Washington to arrest an inexorable U.S. decline.
The New Economics of JFK and LBJ guttered out in the guns-and-butter budgets of the late 1960s and Nixon’s closing of the gold window in 1971. Free-trade globalism now appears to have also run its course. Robert Zoellick can negotiate all the trade treaties he wants, but they will only accelerate the dollar’s decline. The economic patriotism of yesteryear may be about to get a rehearing.

December 20, 2004 issue

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