Why is this columnist tempted this week to weigh in on an issue that seems, at first blush, remote from his job description as a political commentator and take a look at the implications behind the sharp drop in the value of the dollar?
In short, because money, whichever way you cut it or mint it, is power, because our economic and political lives are two subsystems of the same system, because we live in a globalized world of free trade, and because the decline in the currency of a major trading nation can affect the standard of living of people in other trading nations.
When examined closely, the interplay of money and power in history shows clearly, like a photograph developing in a chemical bath. The fate of the dollar, then, the monetary lingua franca of the world today, impacts on us all. In democratic polities, like the US, politicians, including officials in the Finance Ministry, are enjoined against interfering in the affairs of their central banks, whose autonomy is supposed to be so total that they take orders only from independent policy boards.
Perhaps no other central bank in the world today is more exempt from outside control, and remains scrupulously nonpolitical, than the Federal Reserve, presided over by Alan Greenspan. Example: When Lawrence Lindsay, a former Fed official, once appeared to claim in an interview with the Financial Times that Greenspan “endorsed” President Bush’s economic plan, he was compelled the next day to back-pedal, and even add that “It’s not for Chairman Greenspan to endorse one tax plan or another tax plan, or endorse one candidate or another.”
And Greenspan himself was at one time furiously berated for testifying on the Hill in favor of normal trade relations with China. Reason? Trade policy is devised by politicians in Congress, monetary policy by finance specialists in the Fed.
So where art thou today, mighty greenback? Look at it this way: At the beginning of 2002, your 86 cents, say as an American tourist overseas, would buy you one euro. Last week, you would have had to fork out $1.32 — a drop of 35 percent in value. The dollar has also dropped against a basket of other important currencies, particularly the British pound, which you would have needed close to two dollars to buy last week, the Japanese yen, which has gained 8 percent against the greenback since early October, South Korea’s won, which has risen by almost 10 percent, and the Singapore and Taiwanese dollars, which today are at their highest for six and three years respectively.
So, is that a harbinger of the weakening of the American economy and thus of the United States’ projection of its power profile around the world?
Heck, no. The megapower status of the American economy is scary. According to figures released by the Federal Reserve, in the two quarters of every fiscal year in the 1990s, the increase (repeat, the mere increase) in the net worth of American households was approximately equal to the total annual income of the roughly 3 billion people of China, India, Russia and Brazil. More Americans own stock in the market than any other people in the world, and they consider economic growth and personal prosperity an entitlement. And damn those Asian central banks that might switch some or all of their reserves out of dollars.
Americans, who love to buy on credit and live beyond their means, have always been inveterate consumers, but in recent years they have started consuming more than the US could produce, and buying from mostly Asian countries, countries that are happy to see these Americans indebted to them, to the tune of $1.8 billion a day — provided that that these thrifty countries then turned around and invested their savings in the US.
So far, so good, since everyone is happy here. With all that foreign money floating around, Americans are able to keep long-interest rates low, which is great for domestic growth, since money is cheap to borrow. And Asians, in countries like China, Taiwan and South Korea, see in their massive exports to the US a way to bring their people economic well-being, and to accumulate hoards of dollars in their central banks, most of it invested in US government bonds.
So Americans, given to shop till they drop, save little, consume much and are as happy as a bug in a rug to wear their imported clothes, eat their imported foods and plug in their imported gadgets, while Asians are content to spend little, save much and have plenty of jobs to go to that lift them out of poverty. But now with the sliding greenback, who wants to hoard dollars in his mattress or invest it in US Treasury bonds?
“The gap between US exports and imports, and the amount of US borrowing is getting uncomfortably high,” reported the Wall Street Journal last week. And according to recent estimates by the Organization of Economic Cooperation and Development, Americans are expected to borrow $670 billion this coming year from the rest of the world, which is twice as large as economists consider sustainable for the US economy. Back in the mid-1970s, Americans owned more assets overseas than foreigners owned in the US. But since then, that has reversed, with the selling of US assets to foreigners — assets such as stocks, factories, businesses and real estate. The net difference, in favor of foreign investors, is 25 percent of GDP, that is, the nation’s total economic output. The figure is expected to double to 50 percent of GDP in a decade, with the end result that Americans will effectively have to keep aside a portion of their income each year to pay interest and dividend to these foreigners.
Sure, sure, the old thesis we learned in Economics 101 comes to mind: A gradual drop (as opposed to a precipitous one, which hasn’t happened in this case) of the value of the dollar makes US exports cheaper to buy overseas, and imports dear for Americans, generating foreign reserves and finally reversing the cycle of the dollar’s decline.
Life, including economic life, is, after all, all about cycles. But there are a couple of hurdles here: First, the Asian governments’ refusal to let their currencies rise against the dollar. This is particularly true of a country like China, which is important not just because of its huge land mass and population — the US brings in 13 percent of its imports from that nation, a nation that has become a threat and an opportunity to American companies as it competes with them and offers a market for their goods — but also because other Asian countries also refuse to let loose their currencies until China, their giant competitor, lets loose its own yuan so that it can rise against the dollar.
And, secondly, there’s the problem of the federal government’s big deficit spending over the past few years, which is linked to the dollar’s decline. In the end, dollars shmollars. Economics, I say, is linked inextricably to politics in an intimate, systemic way. Because there was something rotten in American politics over the last four years, there was something equally rotten in American capitalism, for surely if a giant corporation like Enron turned out to have been built on some kind of Ponzi scam, what would you expect? Corporate malfeasance doesn’t grow in a vacuum.
The neocons, who run Bush’s administration, have not only savaged American foreign policy, but the American people’s work ethic as well. These ruthless ideologues, wrapping themselves in the flag, will ride high over the next four years, imbuing Americans with pride in their country’s adventurism abroad. But, hey, we all know what pride goeth before.
