Decline of the Dollar

Don't believe everything you read on the Drudge Report. Well into the next few decades, the global economy will still be all about the benjamins.

BY CHRISTIAN CARYL | OCTOBER 16, 2009

The greenback is looking a bit green around the gills -- and no matter where you look, the bad news for the U.S. dollar just seems to be getting worse. America's currency has been plunging in value against the euro and the Japanese yen (and the Barack Obama administration has shown little inclination to brake the slide). Dark mutterings from the world's other great powers about the need for a new global reserve currency have accelerated the trend. Rumors about plans to topple the dollar from its pedestal abound. And just in case someone might be inclined to dismiss all the dire talk as a foreign conspiracy, the (American) head of the World Bank went on the record last month with a warning: "The United States would be mistaken to take for granted the dollar's place as the world's predominant reserve currency," Robert Zoellick said in a speech. "Looking forward, there will increasingly be other options to the dollar."

Some onlookers cite the dollar's decline as yet one more bit of evidence that the long period of American global dominance is coming to an end. The greenback's function as the world's leading reserve currency has been one of the key features of Washington's privileged place in the world since World War II. For decades the dollar has been the currency the world's countries tend to use when they do business with each other. Most central banks around the world have held the lion's share of their foreign exchange reserves in dollars, while most globally traded commodities (like oil) have been priced in the U.S. currency, too. It's an arrangement that translates into many benefits for the United States, most notably lower borrowing costs (because there's always more demand for the reserve currency than others). And then there are the myriad political and cultural knock-on effects -- the power and the prestige -- that accrue to the currency at the top of the economic pecking order. So it should come as no surprise that predictions about the impending "demise of the dollar" tend to go hand in hand with the expectation that America's hyperpower days are numbered.

There's just one problem with this picture: It ain't necessarily true. Or not yet, at least. The creation of the euro and the rise of new economic heavyweights like China are indeed opening up prospects for a global monetary system that is much less dollar-centered than today's. For that to happen, though, will require myriad changes that are likely years, if not decades away. And in the meantime, Benjamin Cohen of the University of California-Santa Barbara, points out, "It's clear that the dollar is still the leading currency in almost every category."

Overall, he notes, the dollar continues to remain well out in front of the pack in foreign exchange trading, trade, and international banking markets. Although most countries have been adding euros to their reserves since the European currency was introduced in 1999, the amount of reserves held in dollars is 2½ times greater -- "and in terms of absolute magnitude, the amount of dollars held in reserves is still on the increase," Cohen says. In fact, he points out, the dollar's share of the world's global currency reserves is actually much higher than it was at the beginning of the 1990s. In 1990 the dollar accounted for just 45 percent of reserves; today the figure is 65 percent. (For what it's worth, Cohen adds, the dollar's share peaked at 71.5 percent in 1999, the year of the euro's introduction. So sure, the euro has made a dent.)

Cohen and other economists -- including those who are less sanguine about the dollar's future -- point out that much of the current hysteria (or, depending on where you stand, euphoria) about the greenback's role tends to confuse two things: present volatility in the foreign exchange markets and the dollar's medium- to long-term structural role in the global economy. Take a look at history, in fact, and the present aura of uncertainty about the dollar appears, well, historical. Some dollar doomsayers have been claiming of late, for example, that the world's oil-producing countries are contemplating a wholesale switch to pricing oil in euros rather than dollars -- a move that, the pessimists claim, would mark the virtual death knell of America's economic dominance.

BAY ISMOYO/AFP/Getty Images

 

Christian Caryl is a contributing editor to Foreign Policy. His column, "Reality Check," appears weekly on ForeignPolicy.com.

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ANNAN AMOS

4:44 PM ET

October 20, 2009

International Commerce is definitely dependent on USD

International commerce has long been dependent on US dollars, as it had become, and still is for good reason, the standard currency for international commerce. I'm sure we all remember that WW2 concluded, and then ushered in the golden age of the American empire. At that time, the U.S. was a major exporter and producer of goods, and also there was the Bretton Woods system, in which other nations would deposit gold in exchange for dollars, as they needed our trade. In the 70s, we were removed from the gold standard in order to combat a rising cost of goods due to the oil embargo, and also to counter the ill effects of both Great Society spending, and notably spending on the Vietnamese War, Nixon canceled Bretton Woods and implemented fiat money in lieu of hard commodity.
This should have put much of the world economy off the U.S. dollar, as fiat currencies are typically...troublesome at best, and in the meantime, the buying power of the U.S. dollar has vastly declined, along with the ranks of the middle class. That said, there's a good reason why the U.S. dollar is still the most widely used world currency - we're the largest single importer and consumer of goods. That doesn't show much signs of slowing down. We still consume a lot of oil (the Saudi's won't tick off their best customers) and we go through a titanic, voluminous amount of electronic goods. (Ditto for the Chinese.) We also don't like a lot our domestic automakers, except for full size "light" pickups. (That takes care of the Japanese, and then there's also the profits of their cartoons to consider among young children, and the geekier among college students. That line is so good I'm going to bookmark this page to remember it.)
So yes, the dollar isn't going anywhere. However, some sort of reform of if not outright abolition of the Federal Reserve is in order, as the basis FOR the dollar before there was nearly the amount of international trade, was a currency by and for Americans, and the power of it's printing was, and is if you go by the Constitution, supposed to reside with Congress, not a pseudo-private bank that doesn't want to show it's books.

 
January/February 2010