The Coffee House
A Crisis Candidates Don't Want to Talk About
By Maggie Mahar
A recent Bloomberg News story highlights a moment in a video for the movie ``American Gangster,'' where hip-hop maestro Jay-Z thumbs through a wad of 500-euro notes on a night of cruising the concrete canyons of New York City. Of course he can’t spend Euros in Manhattan, but the scene says something about the value of today’s greenback.
The Bloomberg piece on the dollar's decline begins by reminding us just how cavalier the U.S. was in 1971 when President Richard Nixon, in a stopgap move to cope with the inflationary financing of the Vietnam War, announced that the dollar would no longer be backed by gold: ``It may be our currency, but it's your problem'' was Treasury Secretary John Connally's taunt when the U.S. unhooked the dollar from the gold standard in 1971, unilaterally rewriting the rules of world business in America's favor.
Now Bloomberg notes, “the world is taunting back. Almost four decades after the U.S. tore up the monetary arrangements that governed the post-World War II international economy, the dollar's fall from grace amounts to a tectonic shift in the global hierarchy. This time, the U.S. currency is on the losing side.
“After declining in five of the last six years, the weakest dollar in the era of floating currencies reflects a period of diminished U.S. political and economic hegemony. Whoever wins the White House next year will confront two unpopular choices: Accept the fall in U.S. clout and the rise of new rivals, or rein in record public and consumer debt that the rest of the world no longer wants to bankroll.”
Put simply, a new administration faces two choices: Accept the fact that the U.S. dollar is a declining currency, which means accepting the reality that all imports, including oil , will become more and more expensive. Or, raise interest rates---which will make the dollar more attractive to foreign investors who buy our Treasuries. But
higher rates also will make it that much harder both for U.S. consumers and for the government to pay off the heap of debt that has been keeping this country afloat. Stepping back and surveying what has happened both at home and abroad in recent years,
some observers doubt that the dollar will ever recover: “For the first time,” Bloomberg reports, “economists are raising the once-improbable specter that the dollar's monopoly as the world's dominant reserve currency is under threat. "'Part of the depreciation is permanent,’ Harvard University professor Kenneth Froot, who has been a consultant to the Fed, told Bloomberg: `There is no doubt that the dollar must sink against periphery currencies to reflect their increase in competitiveness and productivity.’''
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http://www.tpmcafe.com/blog/coffeehouse/2007/nov/25/a_crisis_candidates_dont_want_to_talk_about