Losing War, A Failed President, A Weak Dollar: America Has Been
by Leon Hadar
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 US 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 US currency seems to be experiencing hasn't come as a total
economic analysts have been examining the volatility of the dollar
and searching for explanations by focusing mainly on US economic
indicators, including the restless housing market and the weakening
confidence of consumers, or the structural differences between the
US 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 US capital.
it would be inconceivable to examine one of the most important economic
decisions made by a US president in the 20th century – Richard Nixon's
"closing of the gold window" in August 1971, that is,
making the US 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
US hegemony in the Western alliance.
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 Deutsche mark 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 US exports and cut the country's worsening deficits.
In a way, Nixon's
decision to delink the dollar to gold followed by his 1972 visit
to China reflected the relative decline in US global political and
economic power – brought about by the devastating geopolitical and
geo-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 history.
So you recall
about one failed war (Vietnam), US presidents fighting for their
political survival (Lyndon B Johnson and Nixon) and a weakening
US 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 US president (George W Bush) and erosion in the value
of the US dollar. Like in the case of the US quagmire in Southeast
Asia (which spread from Vietnam into Laos and Cambodia), the current
military quagmire in the Middle East (which is producing shockwaves
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) which resulted in rising budget
and trade deficits.
If in the 1960s
and early 1970s the Germans and the Japanese were helping finance
the US 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 geo-economic power is declining and
that some kind of readjustment is necessary. From that perspective,
the erosion in the US currency was inevitable under these conditions
– although the slowdown in the US economy and the attractive economic
conditions in the euro zone may have been the direct trigger for
the dumping of US dollars and the buying of the euros.
get even worse if the rising populist and protectionist wing of
the Democratic Party that had taken over Capitol Hill adopts policies
to punish China for its "unfair" trade practices that
are supposedly responsible for the giant American trade deficit
with the Chinese. The Chinese, who until now have continued to invest
in the US economy and as a result prevent an even more dramatic
and painful drop in the value of the US dollar, might then have
no choice but to change course.
One of the
main reasons why US 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 that 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
US military spending and the deficits into the stratosphere and
put even more pressure on the dollar.
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 US position in the
Middle East but would also have a similar effect on the US dollar.
The Baker Shock?
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
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