Declining Dollar Reflects U.S. Policy Failure
by Leon Hadar
wisdom in Washington is that President George W. Bush hasn't been
rewarded politically for a mostly booming U.S. economy. Indeed, his
approval rating in the public opinion polls is now somewhere in
the low 20s, despite the fact that the indicators reflecting the
resilience of the U.S. economy – inflation (low), interest rates (relatively
low), consumer spending (relatively high), unemployment (relatively
low) – should have helped transform the current White House occupant
into a popular president.
explain that paradox by suggesting that Mr. Bush's policy failures
in Iraq, his dealing with Hurricane Katrina, a series of scandals
involving officials and Republican lawmakers, and recent rising
energy costs have counteracted any positive effect that the booming
economy should have had on his standing in polls. But pollsters
also point out that notwithstanding the good economic news, most
Americans are uneasy about their long-term prosperity as a nation.
In a way, the
anxiety among Americans reflects concerns over the continuing effects
of globalization on the American economy and society – the slow
erosion in the U.S. manufacturing base as a result of technological
changes and competition from emerging economies; the dramatic demographic
changes that have been produced by rising illegal (and legal) immigration;
and the financial and human costs involved in maintaining the preeminent
U.S. global military position.
There is, however,
another indicator that may explain why Americans seem so irritable
these days. That has to do with the value of the U.S. dollar falling
28 per cent against other currencies between 2002 and 2004. It then
bounced back slightly, only to fall again against the euro and the
yen in recent weeks. Representative Ron Paul, a Republican, who
is the leading "goldbug" on Capitol Hill, traces today's
financial problems back to the removal of gold backing from global
currencies. He argues that the real measure of just how far the
U.S. dollar has fallen can be found in the price of gold, which has
reached a 25-year high of more than U.S.$700 per ounce.
much more accurate to measure the dollar against a stable store
of value like gold, rather than against other fiat currencies,"
Mr. Paul writes in LewRockwell.com, a web site affiliated with the
him, the declining U.S. dollar as measured by the rising value of
gold will continue "until the American people demand an end
to deficit spending by Congress and unrestrained creation of new
dollars by the Federal Reserve and Treasury department."
Or to put it
differently, "voting" for gold is a vote of no confidence
in the ability of the Administration and Congress to control the
budget and trade deficit, the Fed's ability to control the money
supply, and by extension, the ability of Washington to pursue its
hegemonic policy in the Middle East and elsewhere.
recognize that the federal government's huge debt and deficit spending
will continue to grow as the costs of U.S. military intervention abroad
will rise and make the American economy more dependent on foreign
governments and central bankers.
2005, America's current account deficit with the rest of the world
exceeded U.S.$800 billion or about 6.5 per cent of GDP. As any economist
will tell you, at some point Americans will have to start repaying
what they borrowed abroad or they would face a world that refuses
to lend them more money. Such a repayment of debt would have to
be linked up to a big drop in the value of the U.S. dollar.
former director of the International Monetary Fund (IMF) told John
Maggs of the Washington-based National Journal that the value
of the U.S. dollar would have to drop by 25 per cent to have any impact
on the U.S. current account deficit. In turn, a lower U.S. dollar will
force higher interest rates, which will slow economic growth.
It's not inconceivable
that foreign investors will decide at some point that the risk of
investing their capital in the U.S. outweighs the benefits and will
shift their investments to other currencies. According to Mr. Mussa,
the worst-case scenario would be a "dollar crash" which
could take place if speculators bet that the U.S. dollar will continue
to fall and devaluation begins to feed on itself, threatening China
and other economies that tie their currencies to the U.S. dollar.
Paul believes that the world financial markets are already starting
to bet against the U.S. dollar. "Our creditors, particularly
Asian central banks, are losing their appetite for U.S. Treasuries,"
he writes. The long-term significance will sink in when Americans
understand that the steady erosion of the value of the U.S. dollar
means they will all be poorer in the future.
Hadar [send him mail] is
Washington correspondent for the Business
Times of Singapore and the author of Sandstorm:
Policy Failure in the Middle East (Palgrave Macmillan). Visit
© 2006 Singapore Press Holdings Ltd. All rights reserved. Reprinted
with permission of the author.