THE DOWNWARD SPIRAL
In late January, the Senate confirmed John Snow as our new
U.S. Treasury Secretary, the 73rd in the government agency’s two-hundred plus
year history. Snow, like Paul O’Neill and Robert Rubin before him, promised to
follow a strong dollar policy and take steps to help spur on a
Well, I know you’ve just started
your new job, Mr. Snow, but I’ve got some sobering news for you. You and your
pals can keep talking about this alleged "strong dollar policy" until
you’re blue in the face, but it’s not going to make a
lick of difference if you don’t start managing our currency more responsibly.
The dollar is not just in decline; it’s a mess. If
something isn’t done soon, I believe the dollar could
lose its status as the world’s reserve currency and medium of exchange,
something that would lead to a huge decline in the standard of living for
"Oh, Jim," the disbelievers crow. "You’re just being extreme. That would never happen. After all, the dollar has reigned supreme for several decades"
True, but it seems to me that people forget that that supremacy isn’t a gimme. A sound currency, after all, reflects solid economic fundamentals: little to no debt, a trade surplus, a stable balance of payments—the difference between a nation's receipts of foreign currency and its expenditures of foreign currency—and growing international reserves.
That’s not exactly the picture
you get when you look at the
As a result, the U.S. dollar continues to fall against its foreign counterparts, down 18 percent against the euro in 2002 and 10 percent against the yen. That’s not the worst it has been in history, but it’s certainly a substantial slide. With a war, a slow economic recovery and future threats of terrorism looming on the horizon , there’s little reason to believe things are going to improve.
What’s worse, little is being done by
History teaches us that such imprudent monetary and
fiscal behavior has always led to economic disaster. During the early 1920s,
rampant inflation destroyed the value of German currency. German workers had to
be paid twice a day just to survive; it took a
wheelbarrow full of bills just to buy a loaf of bread. In
So why doesn’t our government do
something about our flagging currency? At least over the short-term, the
declining value of the dollar does have its perks. A
declining dollar is certainly good for domestic manufacturers who must compete
with foreign companies. As the dollar drops, their manufacturing costs decline
and it's much easier for these companies to compete.
The global economy is already sluggish, and the falling dollar makes
Remember also: Our manufacturers may be better off, but foreigners then suffer so the world as a whole shows no improvement. That is why similar practices in the 1930s were known as “beggar thy neighbor”.
While this helps
The bigger problem for the American economy is that foreign investors and foreign governments may soon lose their appetite for the declining U.S. dollar. Interest rates, which are now absurdly low, will need to rise to give foreign investors an incentive to invest and hold on to our currency. If not, these foreign governments and investors may look for somewhere else to hold their money. Historically, when investors recognize that a currency is being debased or devalued, they tend to look for sanctuary in currencies that remain stable at the insistence of the population. For years, the Swiss franc was synonymous with monetary stability.
While currencies like the Swiss franc or the Japanese yen
or the Danish krone—all of which I own—are in better shape that the U.S.
dollar, I don’t have a whole lot of confidence in them
either. All of these countries’ governments have adopted the
And what about the Euro? It’s certainly stronger than the U.S. dollar, which is down 18 percent against the euro for 2002. I believe the success or failure of the Euro is one of the most important questions of the twenty-first century, one with profound implications on the global economy. The world needs the Euro, because it needs an alternative to the dollar. There really are only two currencies with enough liquidity to be the world’s currency—the U.S. dollar and the Japanese yen. (The Swiss may have a sound currency, but there just aren’t enough francs out there.) The European Union has everything going for it—an enormous population base, a balance of trade surplus. Most of its nations are creditors, not debtors. If the Euro succeeds, people may actually stop using the dollar as a medium of exchange and as a reserve currency.
That said, I believe that the
euro is a flawed currency. Many of the European Union’s 12 member nations just don’t run a tight ship.
So by default, the issue of the euro is one of the world's most important issues:  If it works, the replacement of the U.S. dollar as the world's currency will surely impact us all.  If it fails, hundreds of billions will be lost.
In the meantime I actually own some euros because it is less flawed than the U.S. dollar.
How long does the dollar have? A year?
A decade? I’m not so sure. As
long as there’s no other currency stepping up to the
plate and EU continues to struggle with the euro, the
But remember: Whenever there has
been an economic crisis like this, a new player has always emerged on the
economic landscape. A century ago, few people would have believed that the
dollar was going to emerge out of the 19th century as the dominant world
currency. There’s always a phoenix that rises from the
ashes. Who will it be for the 21st century? My guess is the Chinese yuan may
eventually have its day in the sun – certainly if the
euro fails. The nation has a recipe for a sound currency—a huge population, an
enormous balance of payments surplus, and a sizeable GDP to match.