The World Needs to Go on a Dollar Diet
Dolors & Sense
by Sanford Rose
KISSIMMEE Florida—(Weekly Hubris)—6/20/11—The dollar, battered and beleaguered as it may be, is the world’s safe-haven currency.
When emergencies—economic, political or even meteorological—occur throughout the globe, public and private investors rush into dollar assets, raising the greenback’s value.
That’s good for the USA. Isn’t it?
On balance, the answer is no.
Not that our safe-haven status is without advantage.
It has many advantages, not the least of which is that it fills us with pride. The pride of being a “great” country.
There are obviously more mundane benefits—e.g., lower trade-transactions and capital-raising costs than would otherwise prevail.
But the price of being a safe-haven and a “reserve” currency is too steep. Especially now.
The persistent demand for dollars keeps the US exchange rate too high.
This circumstance saps our export potential while subsidizing our imports, which helps enfeeble our manufacturing industries and speeds the exodus of jobs to other countries.
It isn’t worth it.
And it can endanger the entire world economy.
There is a compelling thesis that the late, and possibly returning, financial crisis was caused by a shortage of so-called “safe assets.”
That is, discouraged by the stock-market crisis of the early 2000s, the new rich of Asia and the Middle East developed an insatiable appetite for US fixed-income paper—an appetite that was satisfied by Wall Street’s crafting of mortgage and mortgage-derivative securities which were obligingly certified as AAA by credulous rating agencies.
Such was the drive to acquire dollar assets and such the confidence foreign investors reposed in our legendarily deep financial markets that few bothered to question the value of this paper.
That’s too much hunger. Years later, the appetite remains, although the choice of investment vehicles has obviously changed.
Other countries want the US to pay its debts, but they don’t want to let us export our way out of debt by allowing the dollar to stay cheap long enough.
They keep piling into dollar assets. That’s understandable but it really isn’t safe. Dollar dieting is prerequisite to stabilizing the global trading system. Of course, if we default—even for a day—that could lead to a lot of sudden and undesirable conversions to calorie restriction.
It would be a “crash” diet—in every sense of the term.
Sanford Rose
Sanford Rose, of New Jersey and Florida, served as Associate Editor of Fortune Magazine from 1968 till 1972; Vice President of Chase Manhattan Bank in 1972; Senior Editor of Fortune between 1972 and 1979; and Associate Editor, Financial Editor and Senior Columnist of American Banker newspaper between 1979 and 1991. From 1991 till 2001, Rose worked as a consultant in the banking industry and a professional ghost writer in the field of finance. He has also taught as an adjunct professor of banking at Columbia University and an adjunct instructor of economics at New York University. He states that he left gainful employment in 2001 to concentrate on gain-less investing. (A lifelong photo-phobe, Rose also claims that the head shot accompanying his Weekly Hubris columns is not his own, but belongs, instead, to a skilled woodworker residing in South Carolina.)