From the September 9, 2009 New York Post
September 9, 2009
by Irwin Stelzer
There was a time when the US Treasury secre tary would stand on the steps of the Treasury building and pronounce America's policy of maintaining a strong dollar. No longer -- for two reasons.
First, the Obama administration doesn't seem to have any policy concerning the dollar. And, second, the incumbent secretary, Timothy Geithner, would be paid no attention were he to make such a declaration while simultaneously peddling another huge stack of IOUs as the president's deficits rise ever higher. (This year's red ink is set to hit $1.6 trillion -- and Congress will have to raise the legal limit on federal debt beyond $12.1 trillion sometime next month). And while Federal Reserve Chairman Ben Bernanke continues to print money.
More important, China's president, Hu Jintao, wouldn't be convinced. He intends to make his view known -- again -- when he meets with President Obama on Sept. 24-25 at the G20 summit in Pittsburgh.
China has been sending us all sorts of goods, and we've been sending them bits of green paper with pictures of American presidents. Those dollars, and the Treasury IOUs that they purchase, lie in the vaults of China's central banks.
Good for us, in a way: China's purchases of our Treasury paper keep interest rates down, a stimulus to our economic recovery. But not so good for China -- if that pile of dollar-denominated assets deteriorates in value significantly.
Which the Chinese fear will happen if the printing presses keep churning out more dollars, triggering higher inflation. Bernanke says he'll call back those dollars at some point, but his declarations bring to mind the famous prayer of St. Augustine in his dissolute youth -- "Lord, make me chaste -- but not yet." And Obama seems of the same persuasion when it comes to his deficits.
The Chinese have been ratcheting up the pressure on Obama and the Fed by musing aloud about finding a replacement for the dollar as the world's reserve currency. France heartily supports such an effort -- mainly to take the American "hyperpower" down a peg, a consistent goal of French foreign policy. Russia, naturally, joins the anti-dollar parade. The United Nations is also an enthusiast for an alternative to the dollar -- preferably one that can be managed by you-know-who on the East River.
All this has had some effect. The Chinese are making a few deals where they accept payment in the currency of the buyer rather than in dollars (most notably with Brazil, which they're wooing as a future oil supplier). And some nations are raising their contributions to the International Monetary Fund to support that agency's semi-currency for use in trade deals.
Yet, when the world economy is under real strain, a "flight to safety" still takes most countries back to the greenback. But we can't count on that forever.
Geithner has tried to placate China by promising that the flood of red ink will be brought under control. But even Obama economic adviser Larry Summers, who has reason to downplay the problem now that it's high on voters' list of worries, says the fiscal deficit won't reach sustainable levels until 2013 -- much less fade away.
That's not soon enough to suit the Chinese, who nevertheless want the Obama team to keep stimulating the economy rather than cut spending. They don't like our deficits, but they like a US slowdown even less, because they need our market to absorb their goods.
Where will all this end? The dollar will remain the dominant world currency, thanks to the stability of our political system and the rule of law that isn't a feature of many other economies. Some people are indeed buying euros and other currencies from time to time, but not in amounts that threaten the dollar's primacy. And the Chinese, stuck with a trillion dollars worth of our paper, aren't likely to drive down the value of that hoard by selling large amounts of dollar-denominated assets.
More likely, as the dollar declines in response to Obama's deficits, imports will become more expensive while our exports become more competitive. Add the fact that we are saving more, and we can expect our trade deficit to shrink -- and with it the outflow of dollars. That will stem or slow the slide in the dollar's value at some point, and might even reverse it, if Obama gets the deficit under control.
Either way, there's no currency on the scene or in prospect that can replace the dollar as the currency of choice for most of the world.
Irwin Stelzer is a Senior Fellow and Director of Economic Policy Studies for the Hudson Institute. He is also the U.S. economist and political columnist for The Sunday Times (London) and The Courier Mail (Australia), a columnist for The New York Post, and an honorary fellow of the Centre for Socio-Legal Studies for Wolfson College at Oxford University. He is the founder and former president of National Economic Research Associates and a consultant to several U.S. and United Kingdom industries on a variety of commercial and policy issues. He has a doctorate in economics from Cornell University and has taught at institutions such as Cornell, the University of Connecticut, New York University, and Nuffield College, Oxford.
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