The many interventions of the Federal Reserve Bank that failed to avert the worldwide economic slowdown are proof that the U.S is losing its dominance of the global economy. Indeed, a bold approach by the incoming Obama administration that recognizes this simple fact is needed, because the times when economists confidently appraised a downturn of the U.S economy as cyclical are gone. The Bretton Woods accords (1944) from which derive U.S economic supremacy have been irreversibly altered with the coming of age of competing centers of economic power, the excessive U.S consumerism during the last two decades and other occurrences. Simply put, the dynamic is no longer the same. A new global economic order requiring belt tightening by the U.S must replace the current one, as those aforementioned developments could have ramifications of biblical proportion.
In fact, the first cracks started appearing in the 1970’s when the U.S abandoned the essential feature of the Bretton Woods agreements of July 1944, which linked all currencies to the dollar under a fixed value in terms of gold. By repudiating the gold-based currency system in 1971, the U.S no longer had to spend money relative to its gold reserves and federal spending started an upward climb that perverted the system. It soon produces the system of currency floating that requires countries, the developing world in particular, to accumulate enough reserves of the mighty dollar to support their national currencies and service their dollar-dominated foreign debts.
Accordingly, a most-favored trade status with the U.S granting unfettered access to the U.S market becomes the most sought-after commodity in the intricate world of commerce and finance, as it allows the beneficiary to amass the dollars needed to prevent a devaluation of its currency but also keep the value of the dollar artificially high. Moreover, any excessive reserve of dollars had to be reinvested in the U.S, since it may cause the beneficiary country’s currency to be overvalued and its economy ravaged by inflation. The result: U.S assets, foreign and domestic, are prohibitively overvalued while U.S consumers benefit from low inflation with the abundance of cheap imports. For example, Sony, the Japanese company paid 600 millions of dollars for a stake in the Rockefeller Center Corporation in the 1980’s. When Sony resold the stake, it lost hundreds of millions on the transaction.
With the dollar as the only global currency, the system amounts to the U.S owning all the world’s natural resources; the U.S produces dollars and the rest of the world manufactures the products that dollars buy. Because everything seemed fine, no one thought that the system based on the U.S facilitating the economic development of the developing world by absorbing its products and paying with dollars needed adjustments. But a cloud was gathering. By the mid-1990’s, the U.S, the leading creditor nation since WWII, had become a net debtor, relying on heavy borrowing to finance a standard of living that many Americans considered a God-given privilege. The time has come for U.S political leaders to square with the American people by telling them that the house of cards has fallen. That however may not be easy because the remedies would be perceived as socialistic, therefore un-American.
When the European Union adopted the euro as a common currency on January 1st 1999, economists were at odds over its relevancy and what it meant to the supremacy of the dollar, the global currency. Partly because of strong nationalistic sentiments existing in Europe for centuries, many economists could not fathom the euro competing with or surpassing the dollar as the world’s leading currency. Others, taking a more rational approach, were able to perceive the threat because the E.U economic sphere was expanding while the U.S had long reached maturity. Indeed, incorporating the less advanced European states into the Union and bringing them to par with E.U standard fueled economic activities in Europe and contributed to the euro being the currency with the highest combined value of cash in circulation in the world today. Coinciding with the introduction of the euro is the economic rise of China, whose huge population provides room for unlimited growth, and the intractable U.S account balance deficit that ultimately creates the present disequilibrium.
The magnitude of the crisis is such that bailouts, stimulus packages, and tax cuts could only create a temporary reprieve to a problem that requires shock therapy. Since its founding, the U.S has performed beyond expectations and could well produce a spectacular comeback because the American genie is still alive. While American ingenuity may, as has been the case in the last two centuries, also provide the breathing space needed, nothing short of a complete overhaul of the current system could save the U.S economy from collapsing in the near future.
Unfortunately, certain purposes and ideas do not have the same connotation for Americans as for the rest of the world. Rescuing or restructuring the U.S economy serves a common purpose that remains at odds with global thinking, as the prospect of the U.S raising taxes to the level of other industrialized countries and U.S consumers paying the same prices as the rest of the world remains as farfetched as it is unthinkable. But has anyone in Washington giving a thought at what would happen when Americans are forced to pay for their imports with currencies other than the dollar.