The World after the Dollar

America has given up its role as economic anchor.

When future historians try to date the fall of American dominance, November 2010 will be a hot candidate. The symbol of dominance was the exceptionality of the dollar. It was not a national currency, but an axis of worldwide financial stability. The dollar was the new gold. When a country couldn’t cope with regulating its own currency, it banded it tightly to the dollar or directly dollarized. Central bank reserves around the world are mainly in dollars. Sometimes when people are afraid of inflation, they transfer their savings into dollars.

That role gave America an obligation and, at the same time, unique opportunities. No one else could afford to accumulate such colossal private and public debt at such low interest rates. The price for that was the responsibility not to fiddle with the dollar and by so doing bail out its own economy. Americans have broken the dollar taboo now that they are printing and releasing into the economy $600 billion. President Obama and Gov. Bernanke* claim that they only wish to induce people to spend and for firms to invest. Everyone else, from the Chinese to the Germans, sees things differently.

The world is losing its anchor, and chaos is beginning, because there is no available alternative. The euro is a problem in and of itself. The Chinese have not managed to get very far on their plan for a new reserve currency. A world open to trade, in which one country helps itself against another — not by creativity and productivity, but by weakening its currency — is unsustainable. After the devaluation, there will inevitably be a new wave of protectionism. Speeches on free trade can be heard at conferences, but voters demand from politicians the protection of national powerhouses and jobs. Václav Klaus was in all probability off-target when he chose the threat of global government as his new intellectual thesis this time. [The reference is to the Czech president’s recent speech in Moscow, the text of which appeared in the newspaper Právo—translator’s note]. At present, everyone in global organizations of the G-20 type has enough problems to come up with a way to continue doing business, either together or as sovereign countries.

*Editort’s Note: Ben Bernanke is currently chairman of the Federal Reserve.