From the October 23, 2009 Washington Examiner
October 23, 2009
by Irwin Stelzer
The Chinese are cross because the falling dollar means the stacks of U.S. IOUs they have in their vaults will be paid back in a devalued currency.
The Americans are cross because the Chinese refusal to allow their renminbi to appreciate means goods made in Chinese factories will continue to displace made-in-America products and provide jobs for Chinese rather than American workers.
The Europeans are cross because the strong euro threatens to abort the export growth they need to fuel their economic recovery. The British are cross because the weak pound is causing sticker shock when they travel abroad, and portends a spurt of inflation.
In short, everyone seems to be very unhappy with developments in the currency markets. Well, not very.
The Chinese might be unhappy that the dollar is declining in value, but are delighted that their policy of pegging the renminbi to the dollar is keeping their export machine humming -- they need millions of new jobs to prevent their still-poor masses from wondering whether some other form of political organization might provide a better life.
The Americans might be fearful that further declines in the dollar will dethrone it as the world's reserve currency, but the Obama administration is hoping that a cheap dollar will make imports more expensive and exports more competitive, creating jobs.
European exporters might be groaning about the growth-stifling effect of their high-flying currency, but eurocrats are secretly delighted that the euro is proving a source of strength in these difficult times for members of euroland.
Oil and other commodity producers don't like to see the dollar fall, but are raising prices to make up for the declining value of each dollar they receive by earning more of them.
More important, some nations see an opportunity to replace the dollar as the currency in which the world does business, to cut the United States down to size -- think China, Russia, Venezuela, Iran.
It is one thing to want to want to replace the dollar, quite another to find a suitable substitute. The renminbi can't be the chosen currency so long as it is pegged to the dollar, for its value will move with the dollar.
The ruble is not a candidate, since there is not enough of the currency around to handle the volume of world trade and, besides, it is not the sort of money on which you can rely to hold its value, especially if oil prices collapse.
The euro is held back by investor uncertainty as to the euro area's growth potential, and flaws in its economic governance structure. Talk about pricing oil in euros instead of dollars remains just that -- talk. And in the recent crisis, it was the Federal Reserve Board that was called upon to provide currency to meet emergency needs for liquidity -- that means dollars.
Still, investors remain worried that the dollar's decline, so far acceptably gradual and not dissimilar from previous cycles, will turn into a rout, perhaps by 2011. Federal Reserve Board Chairman Ben Bernanke says that can be avoided if two policy steps are taken.
First, the government must make "a clear commitment to substantially reduce federal deficits over time." Second, Asian countries must boost domestic demand and allow their currencies to appreciate against the dollar so that the U.S. trade deficit continues to fall as a percent of our gross domestic product.
What Bernanke did not say is that neither of these things is likely. The Obama administration is planning to run huge deficits for a decade and more, and the Chinese are unlikely to allow their currency to appreciate. Trade imbalances therefore will persist.
Which puts the ball right back in the Fed's court. Unless Bernanke drains liquidity from the financial system, and shrinks the Fed's balance sheet by winding down $2 trillion in support programs, the dollar's decline will accelerate, shattering confidence in its long-term value.
One well-respected expert tells me that in two to five years, the dollar will no longer be considered safe enough to be the currency in which the world does business. Its replacement will be separate deals in local currencies -- the Chinese paying for Brazil's oil in renminbi, which the Brazilians use to purchase stuff made in China -- and the International Monetary Fund's drawing rights, bits of paper backed by a basket of currencies, including but not limited to the dollar. That would mark the end of an era that has seen world trade flourish and millions emerge from poverty.
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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