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The Demise of the Dollar? / Artikel mises.org, engl.

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The Demise of the Dollar?

 

By Antony P. Mueller

[Posted December 27, 2002]

[img][/img] Since
the early 1980s, the United States has been the major destination for foreign
goods on a global scale. With an increasing part of these imports being
financed by debt creation, the international monetary system has been swamped
with liquidity. A financial bubble has emerged and penetrated each corner of
domestic and international financial markets.

The funding of the US economy by foreign investors enabled
the U.S. to spend rather freely. The United States could act as the global
borrower and as the international lender of the last resort at the same time.
This way, the role of the United States as the main provider of international
liquidity has been perverted and an unsustainable situation has emerged.

The net external investment position of the United States
now is negative at more than two trillion US dollars. With the absence of
private savings and growing government deficits, the need of external
financing is growing. Whatever may be the appropriate political reasons for
the US government's new geo-strategic aims, economically the consequences will
be a cost push, and the risks are mounting that the U.S. will be headed for an
economic and financial disaster when foreign funding of its expenditures
should collapse.

The current global financial system is tilted towards
favoring excessive absorption by the United States as it shows up in the
current account imbalances (see table 1). For some time, a structure like that
is highly beneficial for the economy, which has the privilege of providing
international liquidity. The country that issues the global currency gets a
free lunch as long as its debt certificates serve as international means of
payments. At some point, however, the system must necessarily go into reverse,
when the discrepancy between the issue of debt and the productive capacity
becomes too large.

Table 1

Current Account Balances in Major Regions 1997-2002
(in billions of US dollars)

<table cellSpacing="0" cellPadding="0" border="1">
<tbody>
<tr>
<td vAlign="top" width="120" bgColor="transparent">

 

</td>
<td vAlign="top" width="120" bgColor="transparent">

1997

</td>
<td vAlign="top" width="120" bgColor="transparent">

2000

</td>
<td vAlign="top" width="120" bgColor="transparent">

2001

</td>
<td vAlign="top" width="120" bgColor="transparent">

2002*

</td>
</tr>
<tr>
<td vAlign="top" width="120" bgColor="transparent">

United States

</td>
<td vAlign="top" width="120" bgColor="transparent">

-140

</td>
<td vAlign="top" width="120" bgColor="transparent">

-445

</td>
<td vAlign="top" width="120" bgColor="transparent">

-417

</td>
<td vAlign="top" width="120" bgColor="transparent">

-435

</td>
</tr>
<tr>
<td vAlign="top" width="120" bgColor="transparent">

European Union

</td>
<td vAlign="top" width="120" bgColor="transparent">

107

</td>
<td vAlign="top" width="120" bgColor="transparent">

-28

</td>
<td vAlign="top" width="120" bgColor="transparent">

29

</td>
<td vAlign="top" width="120" bgColor="transparent">

30

</td>
</tr>
<tr>
<td vAlign="top" width="120" bgColor="transparent">

Japan

</td>
<td vAlign="top" width="120" bgColor="transparent">

97

</td>
<td vAlign="top" width="120" bgColor="transparent">

119

</td>
<td vAlign="top" width="120" bgColor="transparent">

89

</td>
<td vAlign="top" width="120" bgColor="transparent">

110

</td>
</tr>
<tr>
<td vAlign="top" width="120" bgColor="transparent">

Emerging Asia

</td>
<td vAlign="top" width="120" bgColor="transparent">

20

</td>
<td vAlign="top" width="120" bgColor="transparent">

92

</td>
<td vAlign="top" width="120" bgColor="transparent">

99

</td>
<td vAlign="top" width="120" bgColor="transparent">

78

</td>
</tr>
</tbody>
</table>

(*) Forecast

Source: IMF, World Economic Outlook,
Bank for International Settlements, 72nd Annual Report 2001/2.

Various factors are already in place and gaining force that
will contribute to reverse the past pattern of international capital flows.
While the U.S. is entering a phase of growing financial burden due to
increased security expenditures and unilateral transfers, the provision of
funds from abroad tends to diminish, making it difficult for the United States
to finance its global aspirations.

Japan, which has long been the principal source of financing
for the US current account, provided around 100 billion US dollars annually in
order to compensate part of the record American deficits of more than 400
billion each year since 2000. In the long run, given Japan's precarious state
of government finances and the advanced stage of the ageing process of its
population, it seems rather unlikely that Japan will be able to continue
providing funds at such a large scale for years to come.

Emerging Asia, with China as the most prominent economy in
this group, has registered current account surpluses of almost 100 billion US
dollars in the past years up from 20 billion US dollars in 1997. In China,
domestic needs are already surging more urgently making it more likely that
China must shift to higher imports for such items as oil and food.

The contribution of the European Union in terms of current
account surpluses, which was more than 107 billion in 1997, is already in
decline and will probably stabilize at around zero. In terms of long-term
capital movement, the Euro Area provided a combined contribution to global
financing by exporting capital amounting to 347 billion US dollars from 1999
to 2001 during a period when the United States absorbed a total of 1.3
trillion US dollars from abroad (see table 2).

Like Japan, the major European capital exporting countries
are facing an avalanche of rising social costs due to an ageing population.
Furthermore, the expansion of the EU to the East will redirect trade and
foreign direct investment from the United States to Eastern Europe and to
other world regions.

Table 2

Net long-term capital flows 1999-2001 (in billions
of US dollars)

<table cellSpacing="0" cellPadding="0" border="1">
<tbody>
<tr>
<td vAlign="top" width="120" bgColor="transparent">

 

</td>
<td vAlign="top" width="120" bgColor="transparent">

Net long-term capital

</td>
<td vAlign="top" width="120" bgColor="transparent">

Direct Investment

</td>
<td vAlign="top" width="120" bgColor="transparent">

Equities

</td>
<td vAlign="top" width="120" bgColor="transparent">

Bonds

</td>
</tr>
<tr>
<td vAlign="top" width="120" bgColor="transparent">

United States

1999

2000

2001

</td>
<td vAlign="top" width="120" bgColor="transparent">

 

370

485

445

</td>
<td vAlign="top" width="120" bgColor="transparent">

 

146

135

2

</td>
<td vAlign="top" width="120" bgColor="transparent">

 

-2

94

19

</td>
<td vAlign="top" width="120" bgColor="transparent">

 

226

256

424

</td>
</tr>
<tr>
<td vAlign="top" width="120" bgColor="transparent">

Euro Area

1999

2000

2001

</td>
<td vAlign="top" width="120" bgColor="transparent">

 

-228

-86

-33

</td>
<td vAlign="top" width="120" bgColor="transparent">

 

-125

26

-93

</td>
<td vAlign="top" width="120" bgColor="transparent">

 

-71

-235

126

</td>
<td vAlign="top" width="120" bgColor="transparent">

 

-32

123

-66

</td>
</tr>
<tr>
<td vAlign="top" width="120" bgColor="transparent">

Japan

1999

2000

2001

</td>
<td vAlign="top" width="120" bgColor="transparent">

 

-7

-35

-73

</td>
<td vAlign="top" width="120" bgColor="transparent">

 

-10

-23

-32

</td>
<td vAlign="top" width="120" bgColor="transparent">

 

71

-21

28

</td>
<td vAlign="top" width="120" bgColor="transparent">

 

-68

9

-69

</td>
</tr>
</tbody>
</table>

(A minus sign signifies capital export.)

Source: European Central Bank; National Data,
Bank for International Settlements, 72nd Annual Report 2001/2.

The relative strength of the US dollar in the past couple
years reflected in large part the massive capital inflows that came to the
United States from abroad. The United States experienced a benign circle where
foreign capital for direct investment was attracted by the high growth rates
when these inflows in turn contributed to create the superior rates of
economic growth. Additionally, the massive external financing of US bond sales—424
billion US dollars alone in 2001—helped to keep US long-term interest rates
low. The huge imports of foreign goods, which amounted to 452 US dollars in
2000 and to 427 billion US dollars in 2001 (see table 3), have kept down the
domestic price level thereby contributing further to lower interest rates and
higher real growth.

Table 3

US Current Account (1999-2001) in billions of US
dollars

<table cellSpacing="0" cellPadding="0" border="1">
<tbody>
<tr>
<td vAlign="top" width="150" bgColor="transparent">

 

</td>
<td vAlign="top" width="150" bgColor="transparent">

1999

</td>
<td vAlign="top" width="150" bgColor="transparent">

2000

</td>
<td vAlign="top" width="150" bgColor="transparent">

2001

</td>
</tr>
<tr>
<td vAlign="top" width="150" bgColor="transparent">

Goods

</td>
<td vAlign="top" width="150" bgColor="transparent">

-345

</td>
<td vAlign="top" width="150" bgColor="transparent">

-452

</td>
<td vAlign="top" width="150" bgColor="transparent">

-427

</td>
</tr>
<tr>
<td vAlign="top" width="150" bgColor="transparent">

Services

</td>
<td vAlign="top" width="150" bgColor="transparent">

84

</td>
<td vAlign="top" width="150" bgColor="transparent">

76

</td>
<td vAlign="top" width="150" bgColor="transparent">

79

</td>
</tr>
<tr>
<td vAlign="top" width="150" bgColor="transparent">

Income

</td>
<td vAlign="top" width="150" bgColor="transparent">

-14

</td>
<td vAlign="top" width="150" bgColor="transparent">

-15

</td>
<td vAlign="top" width="150" bgColor="transparent">

-19

</td>
</tr>
<tr>
<td vAlign="top" width="150" bgColor="transparent">

Current Transfers

</td>
<td vAlign="top" width="150" bgColor="transparent">

-49

</td>
<td vAlign="top" width="150" bgColor="transparent">

-54

</td>
<td vAlign="top" width="150" bgColor="transparent">

-50

</td>
</tr>
<tr>
<td vAlign="top" width="150" bgColor="transparent">

Current Account Total

</td>
<td vAlign="top" width="150" bgColor="transparent">

-324

</td>
<td vAlign="top" width="150" bgColor="transparent">

-445

</td>
<td vAlign="top" width="150" bgColor="transparent">

-417

</td>
</tr>
</tbody>
</table>

Source: European Central Bank; National Data, Bank
for International Settlements, 72nd Annual Report 2001/2.

The United States, due to its unique position as the
provider of the leading world currency, has been able to largely immunize
itself from the immediate consequences of a global contraction which is
already strongly felt at the periphery of the global financial system. However,
a shift or retraction of international capital flows; i.e., a
repatriation of assets out of the United States and back to Japan, Europe and
other foreign creditors, would affect the international payment ability of the
United States in a direct way because it would imply a weakening of the US
dollar and probably lead to higher interest rates. Consequently, the US
economy would face a severe economic downturn.

Given the trend that the US net investment account is
worsening while at the same time there will be rising government deficits and
increasing current transfers, the future role of the US dollar appears
problematical. Up to now the dollar could maintain its value due to its
undisputed position as the dominant international currency. This privilege,
however, does not imply that the international credit capacity of the United
States would be unlimited. With alternatives sought for and emerging—such as
the euro or the plans of a gold-based international currency—the dollar's
global role becomes increasingly vulnerable.

The consequences of a markedly diminished position of the US
dollar would be dramatic and of global proportions. While it would affect all
economies that are closely related to the US economy, the major impact would
fall on the United States itself. A demise of the US dollar as the dominant
global currency would mean that the current relation between domestic
absorption and production could no longer be maintained. Given the time and
difficulties it takes to build up adequate production capabilities the
immediate response would necessarily fall on private demand.

Dr. Antony P. Mueller is a professor of economics at the
University of Erlangen-Nuremberg, Germany and an adjunct scholar of the Mises
Institute. See
his Archive and Send him mail at antonypmueller@aol.com 


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