I'm not a financial speculator, and I don't play
one on television. So please don't base your decision on whether or not to bet
against the U.S. dollar on my thoughts about the fate of the greenback, which
has fallen to a 20-month low against the euro recently. But for someone like
myself who is interested in the relationship between economics and politics,
especially as they affect global affairs, the current weakness that the U.S.
currency seems to be experiencing hasn't come as a total shock.
Hence while economic analysts have been examining the volatility of the dollar
and searching for explanations by focusing mainly on U.S. economic indicators,
including the restless housing market and the weakening confidence of consumers,
or the structural differences between the U.S. and European economies, it seems
to me there is a need to integrate the discussion into the larger domestic and
global political context. The problems of America's mighty currency need to
be viewed from the perspective of the U.S. capital.
After all, it would be inconceivable to examine one of the most important economic
decisions made by a U.S. president in the 20th century – Richard Nixon's "closing
of the gold window" in August 1971, that is, making the U.S. dollar inconvertible
to gold directly (and basically abolishing the Bretton Woods System) – without
considering the geopolitical environment in which it was made and which exposed
an erosion of U.S. hegemony in the Western alliance.
Specifically, the Vietnam War and the increasing military expenditures to finance
it resulted in an increased dollar outflow and accelerated inflation by the
1970s, leading to rising balance-of-payment and trade deficits. The dollar was
overvalued while the Deutschemark and yen were undervalued, and the attempt
to defend the dollar at a fixed peg was becoming increasingly untenable. Ripping
the dollar loose from gold was designed to boost U.S. exports and cut the country's
In a way, Nixon's decision to delink the dollar to gold followed by his 1972
visit to China reflected the relative decline in U.S. global political and economic
power – brought about by the devastating geopolitical and economic impact of
the Vietnam war – and Washington's adjustment to these changes (the two decisions
together are appropriately known as the Nixon Shocks) in American political
So you recall one failed war (Vietnam), U.S. presidents fighting for their
political survival (Lyndon B. Johnson and Nixon), and a weakening U.S. dollar,
and suddenly it seems that someone has produced a remake of that old horror
movie. Once again there is a failing war (Iraq), a beleaguered U.S. president
(George W. Bush), and erosion in the value of the U.S. dollar. As in the case
of the U.S. quagmire in Southeast Asia (which spread from Vietnam into Laos
and Cambodia), the current military quagmire in the Middle East (which is producing
shock waves also in Iran, Lebanon, and Israel/Palestine) has led to a major
increase in military spending (and not unlike in that period, no effort has
been made to cut domestic spending), resulting in rising budget and trade deficits.
If in the 1960s and early 1970s the Germans and the Japanese were helping finance
the U.S. military intervention in Vietnam, China and other East Asian central
banks are playing a similar role today. Hence the need to reevaluate the dollar
can be seen now like then as a recognition that American geopolitical and economic
power is declining and that some kind of readjustment is necessary. From that
perspective, the erosion in the U.S. currency was inevitable under these conditions
– although the slowdown in the U.S. economy and the attractive economic conditions
in the euro zone may have been the direct trigger for the dumping of U.S. dollars
and the buying of the euros.
Things can get even worse if the rising populist and protectionist wing of
the Democratic Party that has taken over Capitol Hill adopts policies to punish
China for its "unfair" trade practices, which are supposedly responsible
for the giant American trade deficit with the Chinese. The Chinese, who until
now have continued to invest in the U.S. economy, thus preventing an even more
dramatic and painful drop in the value of the U.S. dollar, might then have no
choice but to change course.
One of the main reasons why U.S. Treasury Secretary Henry Paulson and Federal
Reserve chairman Ben Bernanke are traveling to Beijing this month is to work
together with the Chinese to prevent the kind of worst-case scenario that could
result from the political pressure by the Democratic trade warriors on Capitol
Hill. That makes a lot of economic sense, but it doesn't deal with the geopolitical
sources of the problem: the bloody and costly war in Iraq and the potential
for wars with Iran and other parts of the Middle East that are going to drive
U.S. military spending and the deficits into the stratosphere and put even more
pressure on the dollar.
Only a readjustment of the United States to the new global political and economic
realities could relieve that pressure. Who knows? Perhaps the implementation
of the recommendations of the Baker-Hamilton Commission could help not only
stabilize the U.S. position in the Middle East but also have a similar effect
on the U.S. dollar. The Baker Shock?
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