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What's behind the dollar crisis?

By Lance Selfa | December 3, 2004 | Page 9

FEDERAL RESERVE Chair Alan Greenspan's November 21 warning about the size of the U.S. budget and trade deficits sent the stock market and the foreign exchange value of the dollar plunging. Late last month, the dollar stood at record low levels against the Euro and at long-time lows against the Japanese yen.

It's clear that the Bush administration has allowed the dollar to decline in value against the yen and the euro, despite the Treasury's and Bush's constant reiteration of their commitment to a "strong dollar."

The falling dollar provides some short-term benefits to the U.S., allowing its manufacturers to boost their sales abroad while choking off exports from its (in the main) European competitors. In this way, the U.S. has used the sinking dollar as a way to offload the cost of recovery onto its European competitors.

Behind this economic competition lies the political competition between the U.S. and its rivals. No doubt many in the Bush administration feel the appreciation of the Euro against the dollar is payback for the refusal of France and Germany to support the U.S. adventure in Iraq. "What's happening in the currency markets is simply American unilateralism in a different guise," wrote Larry Elliott in The Guardian.

Yet the Europeans are hardly innocents in this competition. As the Euro gains in value, Eurozone trade ministers and politicians will increasingly push to expand the use of the Euro as the world currency for trade and investment. If producers of leading commodities like oil and natural gas decide to bill in Euros, rather than in dollars, the dollar's supremacy would be under serious threat.

While few analysts think the Euro stands on the verge of pushing the dollar aside, this--along with a "run" on the dollar, a sudden collapse of U.S. stock markets, and a rapid spike in U.S. interest rates--forms the "nightmare scenario" that the most pessimistic analysts worry about.

Despite the increasing unease of the leading financial actors with the dollar's fall--and with the Bush administration's seeming unwillingness to do much about it--the "nightmare" scenario remains a remote possibility, at least in the near term. That's because national central banks, especially those of China, Japan and South Korea, have exhibited a tremendous appetite to continue financing the twin U.S. deficits.

Yet the return they receive in the form of interest on U.S. Treasury notes is quite low--and it is paid for in a depreciating currency.

When a national economy runs budget and trade deficits for years at a time, the mandarins of international finance step in to demand repayment and "structural adjustment" to fix the economic imbalances. Yet we don't see Chinese or Japanese investors calling in their loans to the U.S. Since these three countries have a huge stake in helping the U.S. buy their exports, their willingness to buy U.S. debt is understandable.

But a more fundamental dynamic of the way U.S. imperialism functions as an economic system is also at work. In contrast to British finance capital that acted as the world's leading creditor during the heyday of the 19th century British Empire, the U.S., "[r]ather than being the world banker...makes all other countries the lenders to itself," writes Michael Hudson in Super Imperialism. "America's seeming weakness has become the foundation of the world's monetary and financial system. To change this system in a way adverse to the United States would bring down the system's creditors to America."

The U.S.'s economic and military superpower status has allowed it to operate outside the rules that its agents like the International Monetary Fund and the World Bank impose on other countries. The simple threat of throwing the world economy into chaos preserves the current dysfunctional U.S.-dominated system.

U.S. policymakers hope the lower dollar will lead to a healthy "rebalancing" of the world economy. But that's unlikely to mean much to ordinary Americans who will almost certainly bear the brunt of that "rebalancing" in higher prices and interest rates and in government budget cuts.

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