Fading US Dollar: Fall of Empire?

Could the fall of the US Dollar presage the fall of the US as The Super-power, the fall of its financial empire? Much of the commentary about the dollar's fall ignores its wider consequences, simply going into the current whys and wherefores--the recurring damage from the sub-prime mortgage melt-down and possibly pointing also to our trade deficit.

But the dollar is much more than just another currency. Since WWII, it has been the reserve currency of the world. There have been other currencies, notably the Swiss Franc, that have been at least as steady, but no economy has offered the kind of opportunities for the holder of its currency as has the US Dollar.

Being the currency of last resort the US dollar has allowed Americans to borrow heedlessly, from everyone, without worrying about the more and more obvious fact: the US imports far more than it exports, and it has been borrowing the difference for a long time. Debt to the rest of the world is now many trillions. China, alone owns a trillion US Dollars.

Not to worry, people say: with the dollar as reserve currency, what can our creditors do? They can't foreclose on the US, declare us bankrupt. Do they think they can take over our land, or our resources? We've used up a good part of both, more than anywhere else. But our military is still the most powerful in the world, so no one's going to take anything from us, unless we let them.

But something dramatic has happened. When the Fed lowered interest rates for domestic reasons because of the sub-prime mess, the whole international currency market changed radically: it was a change in perception. Given the already sinking dollar, if the Fed had acted as if it were aware of international repercussions, it would have raised interest rates, or kept them steady. It didn't because that would have been extremely unpopular not only with Wall Street, but also with Main Street; it would have triggered a recession. It looks more and more probable that the US is heading towards one, anyway, and the US as world trading partner may need to go through one. In any case, the US dollar has sunk fast since that interest rate cut.

As I wrote on Monday, November 26, 2007, the US Dollar was trading for $1.4857 to the Euro. It has traded from $1.4815 to $1.49, i.e. at just under $1.50. In other words, the greenback has fallen almost 50% against an upstart currency which began in 2002 on a par, i.e. equal to the US dollar. The dollar has lost almost half its value relative to the Euro since 2002. It has fallen against most other trading currencies like the Yen, as well.

One of the reasons why the dollar has not yet collapsed, and may not, is the reserves held by other countries: China holds a trillion, as I noted above, and Japan and Saudi Arabia hold huge reserves of US dollars as well. No wonder the Chinese declared they would try to diversify their currency holdings--probably to Euros and British Pounds. Iran and Venezuela and other OPEC members speak of replacing the dollar with Euros as the trading currency for oil. Iran and Venezuela push this for political reasons, of course, but the weakness of the US and of the US dollar has made this talk possible. All oil has been traded in US dollars since WWII.

Not all of this has happened since the Fed lowered interest rates in October, but that event has quickened the process, and created the perception that the US Dollar is no longer "solid," and the US is no longer a responsible steward of the world economy. Considering the size of the US debt abroad, considering the time it has taken to get here--really since the US again became a debtor nation in 1981--the flight from the dollar has been very moderate so far.

The Roman Empire was lucky not to have a competing currency like the Euro. Roman money was radically devalued a number of times, but the greatest devaluation was in the fourth and fifth centuries, when most people had very little money, at all. The coins in wide circulation were silver denarii and the bronze follis, but increasingly the silver coins were copper with only the minutest coatings of silver; the coin looked dull and brown after a few months use. Since currency was only worth the precious metal in it, the denarius had been radically devalued. The wealthy, the only ones to have gold coins at all (the aureii) put all their wealth into gold, land and slaves, and most of their currency gold was melted down for private use--what other use was there, since there was less and less to buy: starving people are not very productive.

But Rome did fall because its currency was worthless; it couldn't pay the barbarian soldiers, and the wealthy refused to buy off the soldiers with their gold, although they easily could have. Chaos followed.

The American empire may not fall, yet. But, if it doesn't regain control of its economy, if it doesn't restrain its need to consume the rest of the world without paying for it, i.e. without producing and exporting enough to do so, then the US will become the Poor Man of the Western World, because the US dollar will no longer be valued. We will have to borrow just like everybody else. Ah, and then?

This could be the supreme irony: the International Monetary Fund, the World Bank, and other international lenders could refuse to lend to the US, not because it is too wealthy, but because it doesn't have its fiscal house in order. So, what to do? If this happens, and the IMF is still controlled by the Chicago School of Economics fundamentalists who have forced the Washington Consensus down the throats of third world countries, then, to buttress the US dollar, the IMF will demand wholesale privatization; it will require the US to open its markets to international competition, including the management of ports and the ownership of airplane manufacturers, toll roads, you name it. That's the policy it has pursued throughout the developing world, creating opportunity for the global elite.

Well, what greater opportunity than buying up the largest economy in the world? Maybe that's why the global elite supported Bush: to help them dismantle the empire--for private profit.

For how the elite did this, see: The Selfish Class