The End of the Dollar

 This year, the US national debt crossed the US $10 trillion threshold. That’s a heap of money. If you took that many dollar notes and placed them end to end, they would stretch a billion miles, deep into the cold recesses of the solar system. Hurtling through space at the highest speeds we humans have managed to come up with, a space shuttle flying non-stop at maximum velocity would take over 10 years to cross that distance.

And it just got worse. By some estimates, in the last couple of months, the American government quietly slipped another $7 trillion onto the tab. Now, that extra seven trillion isn’t quite debt. Most of it resulted from the Federal Reserve Board buying securities from the banking system so as to inject money into the economy. Barring an end-to-history sort of crash, most if not all that money will eventually return to the government, as the US economy regains its footing and a market for those securities re-opens.

Nonetheless, a corner has been turned. At the moment, the US dollar is strengthening as a result of a flight to safety. That panic won’t last forever, though. And when it stops, it is likely that the longer-term trend will be against the dollar.

You could be forgiven for wondering where the hell all that money has disappeared to. The truth is, only a tiny fraction is in bank notes. And only a tiny fraction of it is created by the government. Most “money” is little more than digits in cyberspace or on slips of paper, as we consult bank statements and buy with plastic.

And when you go to the bank and take out a loan, the officer doesn’t call the government for permission. By crediting your account with a nominal figure, the bank has just “created” money. So nobody really knows for sure how many US dollars there are sloshing around the global economy.

But, because so far, we’ve all trusted the US government to honour its commitments and preserve the value of its currency, the world has continued to accept US dollars in payment for what it sells. That gave the US license to “print” money to pay its bills, by merely crediting the accounts of foreign governments with yet more “cash” when, each year, the country spent more than it earned.

That may now change. There are already so many IOUs with Uncle Sam’s name on them that the world may begin to ask for collateral in return for loans. When the dust has settled on this crisis, there’s a very good chance that folks everywhere will begin hedging their bets. They may start asking for payments in currencies other than the greenback.

Should that happen, it will be the end of an era. The US, which grew so accustomed to living on credit, will have no choice but to live within its means. Such an adjustment would be long, and hard.

And at the end of it, America may find itself a diminished power. It wasn’t that long ago that Britannia ruled the world. We well know that nothing lasts forever.

Posted by John Rapley in Hot Money | November 28, 2008 8:06PM |