The Dollar's Reserve Currency
Role is Drawing to an End
by Paul Craig Roberts
It is difficult to know where Bush has
accomplished the most destruction, the Iraqi economy or the US
In the current issue of Manufacturing
& Technology News, Washington economist Charles McMillion
observes that seven years of Bush has seen the federal debt increase
by two-thirds while US household debt doubled.
This massive Keynesian stimulus produced
pitiful economic results. Median real income has declined. The
labor force participation rate has declined. Job growth has been
pathetic, with 28 percent of the new jobs being in the government
sector. All the new private sector jobs are accounted for by private
education and health care bureaucracies, bars and restaurants.
Three and a quarter million manufacturing jobs and a half-million
supervisory jobs were lost. The number of manufacturing jobs has
fallen to the level of 65 years ago.
This is the profile of a Third World economy.
The "new economy" has been running
a trade deficit in advanced technology products since 2002. The
US trade deficit in manufactured goods dwarfs the US trade deficit
in oil. The US does not earn enough to pay its import bill, and
it doesn't save enough to finance the government's budget deficit.
To finance its deficits, America looks
to the kindness of foreigners to continue to accept the outpouring
of dollars and dollar-denominated debt.
The dollars are accepted, because the
dollar is the world's reserve currency.
At the meeting of the World Economic Forum
at Davos, Switzerland, last week, billionaire currency trader
George Soros warned that the dollar's reserve currency role was
drawing to an end: "The current crisis is not only the bust
that follows the housing boom, it's basically the end of a 60-year
period of continuing credit expansion based on the dollar as the
reserve currency. Now the rest of the world is increasingly unwilling
to accumulate dollars."
If the world is unwilling to continue
to accumulate dollars, the US will not be able to finance its
trade deficit or its budget deficit. As both are seriously out
of balance, the implication is for yet more decline in the dollar's
exchange value and a sharp rise in prices.
Economists have romanticized globalism,
taking delight in the myriad of foreign components in US brand
name products. This is fine for a country whose trade is in balance
or whose currency has the reserve currency role. It is a terrible
dependency for a country such as the US that has been busy at
work offshoring its economy while destroying the exchange value
of its currency.
As the dollar sheds value and loses its
privileged position as reserve currency, US living standards will
take a serious knock.
If the US government cannot balance its
budget by cutting its spending or by raising taxes, the day when
it can no longer borrow will see the government paying its bills
by printing money like a Third World banana republic. Inflation
and more exchange rate depreciation will be the order of the day.
Paul Craig Roberts was Assistant Secretary
of the Treasury in the Reagan Administration. He is the author
of Supply-Side Revolution : An Insider's Account of Policymaking
in Washington; Alienation and the Soviet Economy and Meltdown:
Inside the Soviet Economy, and is the co-author with Lawrence
M. Stratton of The Tyranny of Good Intentions : How Prosecutors
and Bureaucrats Are Trampling the Constitution in the Name of
Thirdworldization of America