Question: Why is the dollar becoming dangerous?
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."
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