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Clyde Prestowitz is founder and president of the Economic Strategy Institute. He has played key roles in achieving congressional passage of NAFTA and in shaping the final content of the[…]

The fact that we can just keep printing dollars allows us to be irresponsible. As a result, we over-consume, over-spend, and over-borrow.

Question: Why is the dollar becoming dangerous? 

Clydern Prestowitz: Well, the dollar is very interesting and it’s subtle. rnThere’s an inherit tendency if you’re an American to think, "Yes, strongrn dollar that’s good. We want strong dollar it means America’s strong." rnAnd we’re kind of proud that the dollar is the world’s money that rninternational transactions are done in dollars. And it certainly makes rnlife easy for us because we can borrow in our own currency and we sell rnin our own currency, it just makes life easier. But actually, one, the rnrole of the dollar is becoming increasingly more problematic because rnthere’s so many dollars out there. We have such a huge international rndebt, and foreign banks are holding so many dollars, that the foreign rnbanks are beginning to scratch their heads a little bit and say "Wait, rnall these dollars represent a promise of payment by the United States."

But,rn there’s a lot of them saying: "Are they really going to pay all of rnthis? Aren't they going to inflate this away as most big countries do rnwhen they get into trouble?" But even more than that is the following rnsituation. The dollar is a floating fiat currency, so it's not linked torn gold, or silver, or any other commodity; it’s just the dollar. It’s rnjust a promise of the full faith and credit of the United States. Now, rnwhat that means is that in international markets, countries like China rncan intervene in currency markets; they can buy dollars, which tends to rnraise the price of the dollar and reduce the price of the Yuan, which rneffectively reduces the price of their exports. So it's a kind of rnsubsidy to their exports.

So they can intervene to keep the rndollar strong, which then accelerates their exports into the U.S. rnmarket. It allows them effectively to overproduce and to over-export. rnInterestingly, on the other hand, because as long as the world will rnaccept dollars, deficits really don’t matter to Americans; as long as rnthe world will take dollars, we can just keep printing dollars and say rn"Hey, we want more oil here’s a few more green pieces of paper with rnpresidential pictures." So it allows us to be irresponsible, allows us rnto over-consume, overspend, and over-borrow. And as a result, both we rnand our trading partners are acting irresponsibly. And that means the rnsystem is not sustainable.
rn
rnWe just saw with this crisis one element of what can happen when the rnsystem becomes unsustainable. And as I said earlier, we haven’t really rnfixed it; so it’s still unsustainable. And what can happen is that we rncould get into a situation in which other countries just say "Hey, we rncan’t keep taking all these dollars; we don’t want dollars anymore." Andrn the oil producing countries, for example, maybe they say "Look, we’re rnjust choking on dollars here; we’d rather be paid in a combination, rnmaybe some dollars but some Euros, and some Yen or something like that."rn Or, what we find happened right now is that countries with large dollarrn holdings are trying to diversify. China is buying agricultural land in rnAfrica or oil wells in other parts of the world, and other countries arern investing in commodities but they’re trying quietly to kind of get awayrn from the dollar. So the long-term prospect here is that at some point rnthe dollar is likely to devalue and the living standard of rnAmericans—we’re living above our means right now, we’re living beyond rnour means, so the living standard of Americans is likely to decline. 
Recorded on May 10, 2010
Interviewed by Jessica Liebman

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