Fall of the Dollar and Global Politics

[RainDog]

this one is worth reading, even though it got lost in GD, so I'm reposting it in the readers forum... :)

if I remember correctly, since this article was written, Bush did away with the steel tariff, as Baker was in Franch negotiating an agreement to have them forgive Iraqi debt.

http://www.monthlyreview.org/1203duboff.htm

Volume 55, Number 7

U.S. Hegemony: Continuing Decline, Enduring Danger

by Richard B. Du Boff
Professor Emeritus of Economics, Bryn Mawr College.

(good intro and lots of data before this..)
...In global finance, the United States is not only less dominant, but vulnerable. The weak link is the dollar, whose status as the world’s key currency has been eroding since the 1970s, irregularly and with periodic revivals. Between 1981 and 1995, the share of private world savings held in European currencies increased from 13 percent to 37 percent, while the dollar’s share fell from 67 to 40 percent. Forty-four percent of new bonds have been issued in euros since the new currency was introduced in 1999, closing in on the 48 percent issued in dollars. Half the foreign exchange reserves held by the world’s central banks were composed of dollars in 1990 compared to 76 percent in 1976; the proportion rose back to 68 percent in 2001 because of the phasing out of ecus (reserves issued to European banks by the European Monetary Institute) to make way for the euro.2 For the first time since the Second World War there is another source of universally acceptable payment and liquidity in the world economy—at a moment when the U.S. balance of international payments is chalking up record deficits.

Since 1971, when the United States had a deficit in its trade in goods (merchandise) for the first time in seventy-eight years, exports have exceeded imports only in 1973 and 1975. A nation can run deficits in its trade in goods and still be in overall balance in its dealings with foreign countries. Deficits in trade in goods can be offset by having a positive balance in sales of services abroad (financial, insurance, telecommunications, advertising and other business services) and/or income from overseas investments (profits, dividends, interest, royalties, and the like). But the U.S. merchandise deficit has become too big to be paid for by services sold to foreigners plus remittances on investments. The U.S. current account (the sum of the balances in trade in goods and services plus net income from overseas investment), almost constantly in surplus from 1895 to 1977, is now deteriorating sharply; the merchandise deficit has become too big to be paid for by services sold to foreigners. And since 1990, the positive balance on investment income has been shriveling as foreign investment in the United States has grown faster than U.S. investment abroad. In 2002, the balance turned negative: for the first time the United States is paying foreigners more investment income from their holdings here than it receives from its own investments abroad.

Like most gaps between income and expenses, the current account deficit is covered by borrowing. In 2002, the United States borrowed $503 billion from abroad, a record 4.8 percent of GDP. When foreigners receive dollars from transactions with U.S. residents (individuals, companies, governments), they can use them to buy American assets (U.S. Treasury bonds, corporate bonds and stocks, companies, and real estate). This is how the United States turned into a debtor nation in 1986; foreign-owned assets in the United States are now worth $2.5 trillion more than U.S.-owned assets abroad. By mid-2003, foreigners owned 41 percent of U.S. Treasury marketable debt, 24 percent of all U.S. corporate bonds, and 13 percent of corporate stock. U.S. companies are continuing to invest abroad, but unlike the British Empire in the decades before the First World War, the United States is unable to finance those investments from its current account. By contrast, Great Britain’s current account was in surplus, averaging 3 to 4 percent of GDP every year from 1850 to 1913, when income from services and foreign investment was larger than its merchandise trade deficits.3

So far the global investor class has seemed willing to finance America’s external deficits, but it may not be forever. The deficits are exerting a downward drag on the dollar, arousing suspicion that the United States favors a cheaper dollar to help pay off its ballooning trade deficit. As the dollar declines in value, the return to foreign investors on dollar-denominated assets falls. German investments in choice office properties in New York, San Francisco, and elsewhere were cut back sharply in 2003. While the buildings were becoming cheaper in euros, rents were shrinking when converted from dollars back home. “We can get the same return in Britain and the Nordic countries, so why go to the United States, where the currency risk is greater?” asked the chief investment officer of a Munich-based property fund.4 Until recently all Organization of Petroleum Exporting Countries (OPEC) sold their oil for dollars only; Iraq switched to the euro in 2000 (presumably terminated with extreme prejudice in March 2003), and Iran has considered a conversion since 1999. In a speech in Spain in April 2002, the head of OPEC’s Market Analysis Department, Javad Yarjani, saw little chance of change “in the near future... in the long run the euro is not at such a disadvantage versus the dollar. The Euro-zone has a bigger share of global trade than the US and...a more balanced external accounts position.” Adoption of the euro by Europe’s principal oil producers, Norway and Britain, could create “a momentum to shift the oil pricing system to euros.” Thus, concluded Yarjani, “OPEC will not discount entirely the possibility of adopting euro pricing and payments in the future.”5

If foreign investors get cold feet, ceasing to invest in U.S. industries or selling off their dollar holdings, the dollar would start falling faster. Interest rates in the United States might surge, borrowing money would become harder, and consumers would pay more for imported goods, draining income from other purchases and dampening the economy. A dollar rout could cause skittish investors to dump U.S. stocks and bonds, sending Wall Street into a dive. In any event the dollar is now perceived to be as risky an asset as the euro and possibly two or three other currencies (yen, sterling, Swiss franc).

...and more...