A post by Maynard
According to Alan Greenspan, the dollar is now sharing the stage with the Euro. Most people won’t appreciate what this means, but it’s an important and ongoing event.
The dollar is the major world’s reserve currency, meaning that it’s held by national and international banks and used for countless international transactions. We got to this position because, as WWII ended, the dollar was the most stable and significant national currency, and thus it effectively became a global currency.
The world has changed a lot since the end of WWII, and America is no longer the only major power with a stable currency. The new currency of Europe, the Euro, is a growing challenge to the dollar.
Working against the dollar is the American balance of payments deficits. This means we’re leaking dollars into the world, and effectively living beyond our means. We can get away with this because the world has been happy to accept dollars. But there’s a limit. At some point, the world will hesitate to absorb an endless torrent of dollars. As a nation, we must restore financial balance.
Effectively this means we’ll need to tighten our belts and consume less and save more. The politicians are aware of the problem, but it’s not a thing that politicians speak of. Politicians prefer to tell us we need more, not less.
Enemies of the US would prefer to avoid dollars. For example, Iran would rather trade oil for Euros than dollars.
It’s a big issue with countless details, but the bottom line is that the dollar is becoming less of the supreme currency. The dollar will continue to be important, but it will have to share the crown.
Ultimately, the US will have to put its financial house in order. Unfortunately, politics being as it is, we’ve put off doing anything about this, and we’ll likely continue to do so until the problem becomes a major crisis and can no longer be ignored. When we change gears, we’ll suffer some national economic pain, as is always the case when an economy re-orients. Naturally, when that happens, each of the political parties will blame the other, and all the rhetoric will be complete nonsense.
In other words, business as usual until the economic hangover we’re headed for forces the politicians into action.
Maynard, the Euro won’t even be around in 15 years. Neither will the EU as we currently know it. European currency union has been a disaster in the making from the start, a purely political project that makes no economic sense at all.