the visible hand

it is the theory which decides what can be observed – einstein

America faces a diplomatic penalty as the dollar dwindles

Posted by ecoshift on January 2, 2008

FT.com – America faces a diplomatic penalty as the dollar dwindles
By Daniel Dombey
Published: December 27 2007 17:41

At the end of a year in which the dollar has endured a marked decline against other currencies, an unsettling question is beginning to be voiced: can the troubles of the US currency be confined to the financial world or are they set to undermine Washington’s place on the international stage?

“This is the neglected dimension of the dollar’s decline,” says Flynt Leverett, a former senior National Security Council official under President George W. Bush. “What has been said about the fall of the dollar is almost all couched in economic terms. But currency politics is very, very powerful and is part of what has made the US a hegemon for so long, like Britain before it.”

Along with some other commentators, Mr Leverett brackets the dollar’s recent fragility with related phenomena, such as the greater international use of rival currencies. He argues that if such trends continue, the result will be costly for the US. While a lower dollar is associated with greater financing costs for America’s twin current account and budget deficits, he says, currency movements can be determined by politics as well as economics – and the US security could be damaged if America’s creditor nations move against the dollar.

“Americans will certainly find global hegemony a lot more expensive if the dollar falls off its perch,” adds Kenneth Rogoff, former chief economist of the International Monetary Fund, in an article published this month.

He maintains that the US has been fortunate to be able to use the huge low-interest dollar holdings of the central banks of China and Japan to finance higher return investments elsewhere, “but between the sub-prime US mortgage crisis and the dollar’s ongoing decline, America’s exorbitant privilege now looks a bit shaky . . . American voters, who are famously loath to increase taxes, might start thinking a lot harder about the real economic costs of their country’s superpower status.” …

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4 Responses to “America faces a diplomatic penalty as the dollar dwindles”

  1. Mary S. Anderson said

    Rethinking our “Superpower” status sounds like a good idea to me.

  2. ecoshift said

    The US is still a pretty big player on the world stage, but it does appear that our financial clout is suffering along with our reputation. It’s interesting that these comments and perspectives come from the press outside the US… we are so unaccustomed to thinking of ourselves as anything but Number One that I think it’s difficult for US citizens to think strategically about how to function in a multilateral world.

  3. Anonymous said

    So eco, SHOULD we accept a multilateral world or attempt to maintain our dominance?

  4. ecoshift said

    Good question. I though about it longer than I intended. I don’t necessarily assume that the intentions of the rest of the world are benign. So, here goes.

    We have defended our dominance as a force for good: democracy, freedom, etc. Yet as the rest of the world knows, democracy and freedom were often not the outcomes of our actions.

    US technological capacity and capital ‘success’ have been enviable, but we face a number of challenges both as a nation and as a planet. If the rest of the world successfully follows our path to material success we will face a crisis in resource shortages, climate change, etc., long before everyone in the world is living an American lifestyle. I don’t know if this crisis can be completely averted. But, I do think it can be mitigated.

    We still have tremendous resources at our disposal. Do we have the vision and the capacity to provide positive and effective world leadership? If so, we should step forward and exercise our influence. If not, we should probably focus on minimizing impolitic policies and behaviors that catalyze crisis and energize anti-US world opinion and learn to live within our means.

    It is a multilateral world. That’s the reality. Even under US dominance. So I think a demonstrated US capacity for cooperation with the positive aspirations of the rest of the world would be a step in the right direction. For instance cooperation with the consensus emerging from the Global Climate Summit would be reasonable place to start. Stopping US subsidies of corn and soy that enable US junk food and soda pop laden with corn syrup to compete effectively with relatively healthy food systems both here and abroad might be something else to look into. I don’t think this will make terrorism disappear, but at least it will begin to lessen it’s influence and power.

    What do you think?

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