Apocalypse Not Yet

With the euro touching $1.33 and the pound so high I couldn’t bear to look at the rate, thought on a flight home from across the pond turned painfully to the decay of the once-almighty dollar, and to the cries of fear emanating these days from Wall Street. The current jitters are no surprise; the few Keynesians left in the economics profession have long thought them overdue.1 Here are the most important reasons why this is so: • We have over many years worn down our trade position in the world economy, from overpowering supremacy sixty years ago, to the point where high employment in the United States generates current account deficits well over half a trillion dollars per year. We have become dependent for our living standard on the willingness of the rest of the world to accept dollar assets - stocks, bonds, and cash - in return for real goods and services, the product of hard labor by people much poorer than ourselves in return for chits that require no effort to produce. For decades the Western world tolerated the ‘exorbitant privilege’ of a dollar-reserve economy because the United States was the indispensable power, providing reliable security against communism and insurrection without intolerable violence or oppression, conditions under which many countries on this side of the Iron Curtain grew and prospered. Those rationales evaporated fifteen years ago, and the ‘Global War on Terror’ is not a persuasive replacement. Thus, what was once a grudging bargain with the world’s stabilizing hegemon country is now widely seen as a lingering subsidy for a predator state.