John Rapley, Contributor
DURING THE Cold War, it was a truism that while the Soviets could match the Americans militarily, their economic influence on the planet paled in comparison to that of their superpower rivals.
In the post-World War II period, a key prop of this American dominance was the United States dollar. Initially backed by gold in the Bretton Woods system set up by the Western allies in the wake of the war, the U.S. dollar became the principal medium of foreign exchange around the globe. Even America's enemies were eager to keep stashes of its currency, since they could be used to buy goods most anywhere on the world market.
This placed the U.S. in a uniquely privileged position. Since everyone wanted to get their hands on dollars, the U.S. could pay for its imports by printing money. It did not have to actually augment its exports, as every other country in the world had to do.
Moreover, since reserves held in dollars were stored in U.S. accounts, the U.S. had access to a huge pool of savings which it did not have to withdraw from its own income. Americans could spend like there was no tomorrow, yet still invest to maintain economic growth. The rest of the world was subsidising its lifestyle.
This was pretty much the rule throughout the post-war period. However, in the early decades, American spending was propping up the recovering economies of Europe and Japan, so nobody objected to American profligacy. By the 1960s, though, things were changing. War-torn economies had bounced back. The world was no longer recycling dollars through the U.S. with an eye to supporting global recovery.
The loss of confidence due to the "dollar overhang" the fact that the U.S. had by now printed far more dollars than there was gold to back them up forced the U.S. to abandon the gold standard. What followed was a painful decade in which the American economy tried to work out the excesses that had accumulated over the previous years. Gold surged as the world's investors fled the dollar for the safe haven of metal.
Come the 1980s, a deep recession and a sweeping restructuring of the U.S. economy began restoring global confidence in the American economy. For-eign investment returned to the U.S. Gold stocks were run down.
FREE-SPENDING HABITS
But by the 1990s, American free-spending habits returned. Subsidised once again by a vast influx of investment from around the world, Americans ran down their savings and loaded up on debt.
As I wrote in last week's column, the U.S. seems to be losing the confidence of the world once again. The planet's appetite for U.S. dollars has suddenly diminished. Since October, the volume of sales of the American currency on world markets has rocketed, and the dollar has plummeted. All indicators are that the trend will continue.
BELT-TIGHTENING
If, as I said last week, there is a rush for the exits, U.S. interest rates will surge and financial markets will tank, to use the parlance of market analysts. A few years of belt-tightening might not suffice to restore U.S. economic dominance. In the 1970s, there were no real alternatives to the dollar as a reserve currency. Gold became a calm port in a storm, but nobody ever expected it to actually replace the greenback.
Today, though, many countries are eyeing the new European currency as an alternative to the dollar for their reserve holdings. If countries begin trading increasingly in euros, their need for U.S. dollars will diminish. The U.S. pool of savings will dwindle. Americans will thus have to boost their savings. In that case, they will have to cut their spending. They will also have to reduce their imports and increase their exports.
In short, the U.S. will have to start living within its means. In this respect, it will cease to be extraordinary, and will become a country much like any other. That, more than any battlefield defeat, would signal the end to U.S. dominance as we have known it.
John Rapley is a senior lecturer in the Department of Government, UWI, Mona.
