The Dollar is Becoming Risky

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.
  • Transcript


Question: Why is the dollar becoming dangerous? 

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

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

So they can intervene to keep the dollar strong, which then accelerates their exports into the U.S. market. It allows them effectively to overproduce and to over-export. Interestingly, on the other hand, because as long as the world will accept dollars, deficits really don’t matter to Americans; as long as the world will take dollars, we can just keep printing dollars and say "Hey, we want more oil here’s a few more green pieces of paper with presidential pictures." So it allows us to be irresponsible, allows us to over-consume, overspend, and over-borrow. And as a result, both we and our trading partners are acting irresponsibly. And that means the system is not sustainable.

We just saw with this crisis one element of what can happen when the system becomes unsustainable. And as I said earlier, we haven’t really fixed it; so it’s still unsustainable. And what can happen is that we could get into a situation in which other countries just say "Hey, we can’t keep taking all these dollars; we don’t want dollars anymore." And the oil producing countries, for example, maybe they say "Look, we’re just choking on dollars here; we’d rather be paid in a combination, maybe some dollars but some Euros, and some Yen or something like that." Or, what we find happened right now is that countries with large dollar holdings are trying to diversify. China is buying agricultural land in Africa or oil wells in other parts of the world, and other countries are investing in commodities but they’re trying quietly to kind of get away from the dollar. So the long-term prospect here is that at some point the dollar is likely to devalue and the living standard of Americans—we’re living above our means right now, we’re living beyond our means, so the living standard of Americans is likely to decline. 

Recorded on May 10, 2010
Interviewed by Jessica Liebman