Dollar Dethroned By Red Ink
Paul Craig Roberts
Clearing House" -- -- Will Congress allow President Bush
to waste another year on his Iraq misadventure while
serious problems overwhelm the United States?
During 2006 while the US government focused on the
deteriorating situation in Iraq, the US dollar declined
sharply against many currencies. By December China’s
central bank was expressing its concern that the massive
US trade deficit could lead to a run on the dollar and
to an international financial crisis.
Since WW II the US dollar has been the world’s reserve
currency, the currency in which oil is billed and
international trade accounts are settled.
The low US saving rate means that Washington’s budget
deficits must be financed by foreign lenders, who are
awash in US Treasury bonds. The massive US trade deficit
means that foreigners acquire US assets as payment for
US consumption of goods made abroad.
Foreigners are worried about their large dollar
holdings, because there is no indication that the US can
reduce either deficit. The war against Iraq has run up
the US budget deficit, and the practice of US
corporations of producing offshore for their US markets
has increased the US trade deficit. Every time a US
company moves its production abroad, domestic output is
turned into imports.
China has indicated that it will continue to accumulate
dollars, but at a slower rate by trading some of the
dollars for other currencies.
On December 18 Iran announced that it will cease to use
the US dollar as reserve currency.
On December 28 United Arab Emirates, a close US ally,
announced that the weakening US dollar has caused its
central bank to move some of its foreign exchange
reserves from dollars to Euros.
The decisions of foreign central banks to reduce the
rate at which they acquire dollars implies higher US
interest rates at a time when the US economy is slowing,
making it difficult for the Federal Reserve to ease
monetary policy and more expensive for the US to borrow.
If foreigners take the next step and begin dumping their
dollar holdings, there is nothing the US government can
do to avert the catastrophe. Washington must take steps
before it is too late.
The only timely solution is to reduce the US budget
deficit. This requires Congress to cut spending or raise
taxes or both. Raising taxes on a weakening economy is
not a good idea. As entitlements
(Social Security and Medicare) comprise most of
nondefense spending, the easiest step for Congress to
take is to stop funding Bush’s pointless war. With less
red ink to be financed, there would be less pressure on
It is possible that Washington has waited too long to
address the dollar problem. If 2007 brings recession to
the US, the rise in the budget deficit from the loss of
tax revenues could offset deficit reduction achieved by
ending the war.
Many economists offer false solutions. We hear, for
example, that a weaker dollar will lead to more exports
and a reduction in the US trade deficit. This “solution”
overlooks the impact of offshoring. With so many US
brand name manufactures now produced offshore, there is
less for the US to export. Some economists still believe
that the gap can be filled by the export of services,
but offshoring has also taken its toll on professional
services. The US cannot simultaneously offshore the
production of goods and services and reduce its trade
Other economists still think that the Federal Reserve
can rescue the dollar by raising interest rates, thus
making US Treasuries more attractive to foreigners.
However, the US economy shows many signs of weakening.
By stifling growth or provoking recession, higher
interest rates can simply generate more red ink that
must be financed by foreign borrowing, thus increasing
the pressure on the dollar.
The US cannot afford the Iraq war, and it cannot afford
the distraction from the serious economic problems that
a war-obsessed government has permitted to accumulate.
Offshoring is destroying the ladders of upward mobility
that made America an opportunity society.
Economists, in their commitment to offshoring, offer
“solutions” that conceal offshoring’s real impact on
Americans. For example, we are told that education is
the solution to “America’s competitiveness problem.”
People who advance the education solution are obviously
unfamiliar with the character of US job growth in the
21st century and with the Bureau of Labor Statistics’
predictions of the areas of job growth over the next
The problem America faces is not a lack of educated
people, but a lack of jobs for educated people. In the
21st century, the US economy has been able to create net
new jobs only in domestic services, such as waitresses,
bartenders and health and social services. The vast
majority of these jobs do not require a college
education, and they do not produce tradable goods and
services that could be exported or substituted for
imports. Income inequality is worsening as CEO pay soars
while median income stagnates.
This new year will be the fifth year that the American
people will have let President Bush commit their country
to an illegitimate war that cannot be won. Will the US
extract itself from Bush’s misadventure and address its
real problems, or will the dollar’s decline bring new