Why the dollar is taking another beating now

Krugman says he has been predicting a dollar fall for a long time but that it keeps not arriving. The fundamental issue is not the trade deficit, nor the budget deficit.

The issue is confidence.

The simplest way to put this is also the bluntest. The United States exports global security. It also exports the global model for consumption. This creates two very credible threats in the global world. One is that should the United States find it expensive to run a big military, then it will stop, and the resulting political and economic instability will be worse than whatever the difference in interest rates is. The second is that the United States, to some extent because of research that flows out of the defense establishment, and to some extent because of the ability of consumers in the United States to consume, will be the home of another technology boom, and thus dollars will be in short supply again.

These two credible realities keep foreign entities buying dollars. In essence they do not want to be caught short of dollars. Many of these entities were caught short of dollars before Rubinonomics and the internet boom.

However, these two realities are not immutable and permanent. As the chance of a dollar shortage goes down, so too does the marginal preference for dollars over other currencies. This marginal preference is not going to evaporate over night, which is why the dramatic dollar collapse, so common with other currencies, has not happened.

On the other hand, as a marginal preference deteriorates in the face of mounting evidence that the risks that keep that preference in place have gone down, this creates a relentless downward pressure, one that is hard to reëstablish without significant actions.

Right now, objectively speaking, the chance of a dollar drought is very remote. Neither the fiscal nor monetary authorities in the United States have shown any willingness to take the pain of a recession to reduce inflation, and such a recession would increase, not decrease, fiscal deficits. Currencies heal not with recessions, but with the following expansion. Since the recessionary cycle would last at least two years, it is therefore at least two years – even if everyone in Washington woke up tomorrow and decided to do something about it – away.

The next problem with the dollar is that the United States is losing two wars. One of the reasons to bet on the dollar in the face of the Iraq war is the effect of adding 3million barrels a day to the global oil supply. In 2002 this would have made a significant difference, now much less so.

The next the problem with the US dollar is that it is clear that the body politic in the United States has decided to finance their spending with the twin taxes of inflation and devaluation. Absent the willingness to tax themselves, other entities will rationally wish to avoid paying further taxes.

Finally there is the reality of globalization. With each step of exporting the US supply chain overseas, there is progressively less likelihood that the US will be the home of the next revolutionary technological advance in large scale manufacturing, and less and less chance that during the next boom that some commodity that only the US can make will be in short supply.

Thus we should continue to see what we have seen, not a one day meltdown of the US currency, but a constant and continued erosion, followed by an extended period where the dollar will be very weak compared to other currencies. This will continue until there are clear signs of a change in policy regime in the United States.

The trade deficit, itself, does not matter in this context, except to the extent as to the sphere of dollar holding is getting larger or smaller. In the context of a strengthening currency, a trade deficit can actually work to American advantage, by expanding the number of global entities that hold dollars, allowing the United States to have looser monetary policy than would otherwise be sustainable, and thus greater growth. That is, so long as that growth produces more new goods and services that other nations want to buy. This virtuous circle was the 1990’s. The vicious circle we are now in is that the more the US wastes, the smaller the sphere of dollar holders are, and the more dependent we grow on the ones who are left, and the less likely they see it as being likely that there will be a dollar drought any time soon.

See, Ben Bernanke can’t run a central bank and We have moral cripples for political leaders, parts one through five hundred and seventy three in a continuing series, collect them all.

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Stirling Newberry


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  • This took place under Clinton: “This virtuous circle was the 1990’s.” As we noted some time back, it made his job easier.

    I think you have the central drivers correct here. In any economic situation I’m always uncertain as to whether I have all the drivers and they can change, but right now and over the last several years, those that you mention have been prominent.

    “Finally there is the reality of globalization. With each step of exporting the US supply chain overseas, there is progressively less likelihood that the US will be the home of the next revolutionary technological advance in large scale manufacturing, and less and less chance that during the next boom that some commodity that only the US can make will be in short supply.”

    There is also progressively less likelihood that our consumption will matter globally.

    I think it is pretty clear that economists run nothing but their mouths, so I don’t expect much out of Bernanke. When his words turn hollow to the public, what will run the economy will be the thirty year bond.

    Someone needs to take the lead on showing what a moral cripple is. The right has prayed its way into much of these difficulties. However, the postmodern left has no mooring. I don’t know who is going to clean us up when this is over.


  • (my dad disocovered many of the wells in the Putamayo basin), I can tell you that occupying the land and producing the wells are two distinct matters. As long as the locals believe their resources are being stolen from them and provide no benefit for the home team, people will destroy pipelines, infrastructure and take pot-shots at the people operating facilities. Defending all of this is very difficult and costly.

    The short answer is we won’t win.

    I did inhale.

  • Even assuming this were remotely possible first and second without bringing us to war with global rivals like China and Russia, then our short term economic outlook would be decent – like Britain has managed to ride the North Sea express. However, long-term we will suffer the fate of all bullies – we will grow still fatter and lazier gorging ourselves on our stolen honey until one of those global rivals beats our pants off with the technological advances they have earned not stolen.

    This isn’t a game purely about who has the most at a given moment regardless of how you get it. The game is about what you can actually create.

    Most of American history has been a balance of taking the virgin extractable wealth of this continent together with an ability to innovate and create with the cheap labor of imported talent. The theft part was never so obvious nor did it effect global rivals. The theft that you propose is obvious and is out of the pockets of global rivals. This usually does not end well expecially when you start to lose your ability to create and innovate and when you close your borders and when your essence is that of a selfish, gluttonous bully.

  • we perfected this strategy eons ago. the neocons fucked it up by spouting “democracy”. install a strong man. call up a draft. rig their elections. it ain’t that hard, is it?
    damn, it is going to take a nuclear false flag or provocation to win this, ain’t it? and you guys wonder why the Dems capitulate?
    EVERYTHING is riding on winning at this point.

  • from under this decline of our empire? really. given the current parameters, end the wars, fix the debt, fix the economy. how ya gonna do it? because we need a viable answer to combat the CW of DC.

  • now apply your Marxist past and get us out of this. or is your inner Marxist happy? ;>
    editted to add:
    I bring up the Marxist angle, because at the beginning of this war, I found an article by some Indian Marxist economists that argued that this war was about dollar hegemony. And it was completely pooh-poohed by the agonist BB members then. but there were more wingers and less economists then, as opposed to now. you and I both know, there’s no better critique of capitalism than Marx. and judging from where we’re at, he predicted things to a T.
    me, I’m predicting r/evolution by 2012. and now I must go make breakfast corndogs. happy thinking, people.

  • The CW in DC can jump up and down and shout from the rooftops we are winning or in the future we have won but it won’t matter to most of the world. To them we have already lost.

  • I’m not going to take the bait. There are long, complicated ways to work off the consequences of overindulgence which other people here at the Agonist can do a far better job of explaining.

    It is you, however, that I am particularly concerned with. You have done a great job representing the neocon realpolitik here. Steal and murder your way out of your problems.

    Frankly and simply your laziness and greed disgust me.

  • you have to study your enemy to defeat him, this I know.
    corndogs, corndogs, corndogs….
    but I really need that drink, preferably something w/ bitters!

  • As far as my thinking goes, the middle east is a declining resource. And other countries aren’t going to let the United States have all of it–their economies are as dependent on the black gold as yours.

    The fuel that runs the world is dwindling and it isn’t possible for economies to grow their economies based on a declining resource.

    When push comes to shove, the American dollar as a reserve currency will be dropped like a hot potato.

    What is the plan when it becomes obvious, that fiat currencies are as worthless as the printing presses that churn them out?

  • rather than thinking like a Marxist or any other political economist, will get us out of this somehow.

    If you want me to put America first, I can suggest some things that will be painful, but they will be more painful for America’s opponents.

    1) A super trade war. We’ll survive; China will have a revolution. Russia will no longer have the inflated oil wealth to make mischief. Iran won’t have the money it has; its power will implode in the Middle East. There will be chaos, and we’ll need to find bases there out of the way until the chaos subsides.

    2) Rationing here of commodities as in World War II. Downsizing retail, debt, etc by regulation and rationing.

    3) Forgetting capitalism for a while. Focusing on training the next crack American work force.

    4) Retooling education so it is cheaper and so everyone has a skill after a two year degree. This means downsizing university programs that impart little value today.

    Ian said he’d like to see another Roosevelt. You’d have to have one to do this, and you’d have to have legislators with the nerve to follow him. So you’d have to have a moratorium on much of the special interests that have corrupted the House and Senate.

    And you’d have to be very flexible, so that when rationing was not doing its job, you changed it up.

    Then you would wait and watch the world try to recover without the American dollar while you fix your own house.

    You asked.


  • I wouldn’t put any bets on America in that sort of fight with China. They had thousands of years of mercantile and macroeconomic experience and understood the relationship of economics to warfare when America’s grandparents in Europe were throwing their bones onto rush-covered dirt floors for the dogs to gnaw. They will have unpleasant surprises for America that are orders of magnitude more sophisticated, subtle and forward-thinking than the current leadership shows any signs of being able to grasp. Even an American victory would wind up as an interchangeable term for “Pyrrhic victory”.

    For everyone’s sake I hope this ide is strangled in its crib.

    “The best-informed man is not necessarily the wisest. Indeed there is a danger that precisely in the multiplicity of his knowledge he will lose sight of what is essential.”

    – Dietrich Bonhoeffer

  • a couple million men, sure, it can make the oil flow. As long as it’s willing to, say, kill a couple million for Iraqis very publicly.

  • – EOM

    “The best-informed man is not necessarily the wisest. Indeed there is a danger that precisely in the multiplicity of his knowledge he will lose sight of what is essential.”

    – Dietrich Bonhoeffer

  • of revolution.

    Odd how reminiscent much the anti-terror infrastructure efforts of the last five years seem to be of the kind of Baron-Haussman-like infrastructure you’d build to suppress violent revolution, isn’t it?

    “The best-informed man is not necessarily the wisest. Indeed there is a danger that precisely in the multiplicity of his knowledge he will lose sight of what is essential.”

    – Dietrich Bonhoeffer

  • the way, raising my bet while the millions of jobs they need to create to avoid unrest go uncreated, while the new buildings in Beijing go empty. They had a mini implosion of real estate in Guangdong a few years ago. It was not pretty. It would be something else in Beijing and Shanghai. Cinda Asset Management and the other three bogus entities for Chinese bank bad debt would be the only growth industry in the country.

    Meanwhile, we could invest some time in alternative energy research while the oil producing states go hungry. So ten years from now when they try to sell that stuff to us, we can say ‘no’ to most of it.

    You don’t need to fight this war with men, you save your own folks to retool for the next global go-round if there is one.

    I’m an old style Democrat. I think about my people first; I’ll let you think about yours first.


  • Getting out of where we are requires new leadership and the complete dashing of the neocon dream.

    The country will have to grow up and quit being the world’s teen age bully, and the Republican party can’t handle it.

    I tend to think a new progressive party is our only true hope to get out of where we are without a great deal more pain and suffering. I don’t see it happening for a while, though. I don’t think the Dem leadership will accept a progressive takeover, so a third party may have to arise. It will be the death of the Republican party, or perhaps a new system of government. And the ruling elites don’t like that idea much, they would rather go down with the empire they know and think they can control, more fools they.

    Of course the other answer, and I’m afraid the more likely one, is the slow and steady decline of empire that every country seems to require to grow up at last.

    The question is really if all our musings on the progressive netroots are simply musings, or if someone can take all of it and all of us and run with it. I haven’t seen that person step up to the plate – yet.

    “It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is the most adaptable to change.”

    Charles Darwin

  • would spike through the roof and the dollar would have a run on it. Do it at the same time with oil producers, and you’re looking at a 20% to 30% decline in standard of living.

    If Americans are willing to do that, then sure, at the end of the day they might “win”.

  • the absolute poorhouse, generally with much more unstable populations. We would win relative to them. We are losing relative to them now. Also, the dollar would not likely have a run as the economies of the other countries would turn south faster. It might become the secure and preferred currency once again.

    As John Kennedy said, ask what you can do for your country(take a cut in standard of living); not what it can do for you(subsidize Chinese Industry through trade policies that allow you to buy three Barbies instead of one).

    If you don’t do something along these lines, you’re looking at a huge cut later. And I’ve already taken one, if I hold the S&P 500. We’re back to 2000 levels with the dollar down 40% against the Euro.


  • The dollar has declined 63% against the Euro under Bush. The question is why? Was this unintentional stupidity or was there a dark reason behind it?

    The unspoken rule of international finance is that a country, especially a major player in the game like the US, defend its currency from depreciation, whereas the Bush administration has not only failed to take any steps to defend the falling dollar but seems to have actively promoted its decline through monetary and fiscal policy.

    While this may be the consequence of voodoo economics, there may be a dark reason behind this. First, the result will be to reduce the US middle class to the level of wage slavery comparable to the role previously played only by the poor in the First World and the workers in the Third World,, with the bulk of the wealth rising to the top. This was indeed the historical situation through most of the “civilized” world for several millennia. The only real exception to this was the US after WWII, when the middle class as “allowed” to share the wealth in an unprecedented way. Since FDR instituted the New Deal, the chief objective of the Right has been to reverse it. That objective is now almost in hand, and will be finally cemented when Social Security and Medicare are deemed to expensive to continue funding. Since their funding comes form the regressive payroll tax, which the wealthy do not pay much into, these programs will be doomed as US wages sink, and the rich are not taxed progressively.

    Secondly, this de facto devaluation of the dollar with reference to the Euro will undermine the “socialist” economies of Europe, another key objective of the US Right. As the dollar drops, the Euro-based economies become “richer” in terms of what they can buy from the US, but their export markets are choked out. Their social programs are too expensive to continue funding under such pressure and will have to be cut, and another objective will have been met.

    Then the world will be reduced to a gilded age in which the wealthy live in unprecedented luxury, supported on the back of wage slavery. This will be justified on the grounds that the “enterprising” people are being amply rewarded by the “free” (unregulated) market for their creatively assuming risk, and the uncreative people are being “punished” for their lack of enterprise and daring.

    [crossposted as a comment on Dailykos]

  • if the US is willing to shoot itself in the foot it has on the throat of some other economies, I suppose it can “win”.

    Actually, something like that is going to happen unintentionally anyway. I expect major protectionism within 2 congresses. 3 absolute max.

  • dk is far from the way you desscribe- but is simply doing left realpolitik blueskying in the way some people on the left refuse to do.

    It is unlikely the US will “win the wars” and get out- but it is not a logical impossiblilty- and treating it as not to be talked about
    is actually a weakness in many people’s view of the future.. Say how it’s not possible, demolish it, but never never refuse to bring it up.

    1.”George Washington did not cross the Delaware for Capitalism,” -Shmuley Boteach.
    2.The Dems haven’t punished the GOP enough, so you’re going to reward the Republicans?

  • The reason the article was met with hostility because it was a crock of shit in proposing that we invaded because Iraq was thinking of going to euros.

    It isn’t essential which currency oil is traded in, nor is it essential for the dollar to be the world’s “reserve” currency. What is important is where money ends up, and what is done with it once it is parked there.

    If money continues to be parked in the US, then they could trade barrels of oil in Zloty’s or Quatloos for all the difference it made. If money is not parked in the United States, and is not spent on goods the United States makes, it can be traded in dollars and it won’t matter. Oil was traded in pounds for a while after the British Empire was already kaput.

    The other question is what is done with parked money. In this decade the US has built out our mcMansion infrastructure with parked money. This was bad all the way around for our economy, and good for those people who wanted to see us have huge sunk oil costs and large houses to fill with junk. These people were, not coincidentally, loaning us the money.

    Strange how drug dealers are willing to extend a great deal of credit to buy more drugs, that.

    People often latch on to irrelevant technical details, and ascribe them great importance. Saddam’s threat to go Euro is an example of false cause and effect thinking. The war in Iraq was about oil, and it is the control of oil that supports the dollar, not the accounting unit involved. This is why petro-currencies such as the pound and the loonie have done well. Oil isn’t traded in Canadian dollars, and that doesn’t mean anything at all, because the Canadians are, right now, selling asphalt mixed with sand at $75 a barrel.

    Keeps going this way and I am going to start sneaking out at night and prying up parts of the interstate…

  • By snorting the libertarianism crack about unregulated buying and selling leading inevitably to a free market. Democracy? We’ve installed weak Democracies before and done perfectly well. Taiwan, Japan, Germany, Italy, South Korea are all examples of nominally Democratic states which were produced by US occupation, that never-the-less managed to elect governments we were prefectly happy to do business with.

    A strong man is coming to Iraq sooner or later, and we will do business with him.

  • There is a change in energy basis coming, we are entering a new wave of industrialism. I used to refer to the first one as the water/wave economy, but a friend of mine has made excellent arguments to call it the mechanical economy.

    Mechanical economy – printing press, sailing, water wheels, gunpowder, the factory. basic mill
    Pressure economy – steam engine, chemistry, physics, precision tools, measurement, telegraph, advanced mill
    Analog economy – petroleum, telephone, broadcast, reproduction, the assembly line

    Digital economy has many components, but not its engine. If the United States wants to survive the transition of states, as the UK did from later mechanical to the pressure economy, it has to do what the UK did, and stake everything on the future, look at the world through the eyes of that future system, and dominate it, rather than spending all our effort to defend the old system.

    Note that the British in the war of 1812 did not attempt to recapture the lost American colonies, but focused increasingly an Africa and India and China, which were the places that would produce the next wave of goods and profits. They also got obsessive about recoaling stations before most nations did.

  • arguments have been overdrawn although some reports are that some of those doing that kind of paranoia were running around the OSP in 2002 fulminating against Saddam for threatening the dollar.

    But my understanding is that there are significant advantages to being the world reserve currency and with oil priced in dollars because it has meant that capital flows will have to come to American banks and through the stock and bond markets. Isn’t that how the money parking lot was in part constructed?

  • and the ultra conspiracy minded. everybody is buying the biggest aquifers they can. there’s a lot of money to be made in dwindling resources, IIRC.

  • it might help me to understand “super trade war” and “forgetting capitalism” all in the same sentence. I suppose it’s possible.

    you haven’t gone ex-pat yet, have you?
    my only interest in America first-ing, is that it would seem that we are the drivers of this train wreck; and as such, it is our responsibility to avert it. which might be better than having China
    or whoever allow us to sleep in the bed of our own making
    yes, it seems insurmountable. but I have faith that there may be a win-win scenario, lest we radioactively go the way of dinosaurs.

    ow, who knew 2 budweisers could hurt the next morning? I was hoping that Booker’s might quiet the dogs, cuz coffee ain’t doin a thing ;>
    I’d like to ask more questions though, when my head is not pounding.

  • means we minimize purchases of Chinese and other foreign goods( a buyer’s strike, if you will).

    Forgetting capitalism means largely what we did in WWII, or a version of it; there was rationing for a time.

    I have no faith that there is a win/win situation with the current political landscape. It will be they win/ we lose.

    The universities, largely run by postmodern democrats, are as much a part of the problem as Wall Street. They take the funds of the middle class and return them an education that is for the most part meaningless.

    Wall Street, meanwhile, is raising capital to outsource the jobs which the education is allegedly for.


  • the underlings will revolt from being suppressed and all hell will break loose.

    Every suppressed group rose against their dominators. And every empire that ruled over others fell by the wayside.

    China, the last of the communist countries moved toward democracy, yet the United States took a backward route and presently chases imperialistic Neocon fantasies. My prediction, ruling over others is fated to fail. Bullies get their own way for a short time because of their size and power, but ultimately the smaller, peaceful guy triumphs because there are soooo many more of them.

    Societies based on large disparities between the classes don’t succeed as history recorded numerous times.

  • but I’ve always agreed w/ you re: wall street, universities, and a lack of faith in the current political landscape. but I do have some faith in the general population left….well, up until you squashed it. ;D

  • that the woman was at fault–that ‘she’ seduced him against his better nature! Wasn’t it men that wrote the books?

    Women gained power since then. Globalism–destined to meet the same fate.

    Some groups take more time before rebelling and casting off their yolks, but eventually all do.

  • Easiest way to tax.

    “Small government” = Unitary Executive (dictatorship of the presidency)

    “Low taxes” = Game of Monopoly with US owning Park Place (deregulation and asset inflation, along with money parking in the US, means that wealth flows to the top without the middle class perceiving itself as being “taxed”)

    “Strong military” = Military-Industrial-Governmental complex (the “revolving door”) rules. (neoconservativsm = neo-fascism)

    “Traditional values” = Authoritarianism (with added benefit of co-opting social conservatives for neo-liberal economic purposes and neo-imperialistic politics)

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