The declining (plummeting) dollar

I first started thinking along these lines in 2004 when the dollar was approaching 1..30 against the Euro. Imagine a rate as low as that! And let's not even start on this summer's exchange rate with the pound. This has been not just a decline for the dollar but a free fall, spun euphemistically as a "confirmed, long-term downtrend."

The foreign exchange market - which was among the first to globalize in the mid 1970s - is the largest global market at the moment and probably the most important. There is a well-documented relationship between currency exchange and national deficits: when exchange rates were fixed under the Bretton Woods system, national debt had to be financed out of official reserves, so governments could not run up huge deficits as the U.S. has done now. (We could also not run up massive credit card debt as we do now, with the average individual debt at $8,562 and total consumer credit at $1.7 trillion.) Now, it is precisely "the towering" deficit of $427 billion that will decrease the value of the U.S. dollar against other currencies.

One obvious consequence of the debt bubble will be the increased cost of imported goods. (Right now, China pegs its currency to the dollar, so these imports would not significantly rise in cost, but it remains to be seen if the new "third-way" China will or can continue to hold its currency to the dollar.) Conversely, the strong dollar meant low-cost imports and the much-heralded "US financial hegemony" in the 1990s. It's not for nothing that there was a pervasive sense of optimism in the Clinton years. Another consequence - and one apparently desired by Bernanke et al because it would, again apparently, contribute to job growth - would be the growth of US exports because they are now cheaper. But there are other consequences: there is some speculation that the Euro will replace the dollar as the reserve currency of choice.

In sum, the free fall of the dollar indicates the loss of faith in the dollar itself. As a counter measure, everyone seems to be preaching the IMF doctrine, "a thorough macro economic and fiscal restructuring." As we know, interest rates are going to have to be raised, which will stabilize the housing market but lead to quite a few repossessions as people find they can no longer afford the payments on their jumbo loans, even with two-three jobs. What will this restructuring and debt crisis mean for the US political scene?

Since the assertion of military power is often read as a compensation for the loss of global economic and cultural power, I think we can understand the prioritizing of the PNAC agenda over the last four years in these terms. There are of course other reasons why the neocons have been given free reign but I do not think we can overlook the economic basis of the desire for military hegemony. This may seem a cheap conclusion but we cannot forget that it took an economic crisis for the NSDAP to come to power in Weimar Germany.