The U.S. dollar’s predicament can be summed up in three observations:
- The U.S. balance of payments deficits have multiplied three-fold since the 1980s, and now typically run between 2.5 and 5 percent of GDP.
- Manufacturing’s share of GDP is down to 11 percent.
- Services do little exporting.
Taken together, these facts spell doom for the U.S. dollar. Short of attempting – highly unrealistically – to increase its manufactured output by nearly 50 percent and to sell the increased output abroad, America can’t dig itself out of the hole — at least not if it sticks with free trade. The ultimate outcome will surely be a total collapse of the dollar. And in that event, as the former top Reagan administration economic policymaker Paul Craig Roberts has pointed out, shoppers in Walmart will feel they are in Neiman Marcus.
The world’s kingpin currency for more than half a century, the dollar has survived in recent years thanks only to the “charity” of strangers: export-minded East Asian governments, principally those of Japan and China, have bought ever larger amounts of U.S. Treasury bonds to keep their own currencies low. For the East Asians, the attraction is that they can continue for a few more years to hollow out the American manufacturing base. But elastic bands can be stretched only so far and this one is near breaking point.
Of course, conventional wisdom holds that it is other currencies that are in trouble. The current issue of the Economist magazine, for instance, cites various superficial problems elsewhere in the world to suggest that the dollar is headed higher. Entirely missing is any reference to international trade. In the long run the trade figures will determine the dollar’s fate – and the Economist’s failure to allude to them illustrates the sort of air-headed thinking that makes East Asians question (discreetly, of course) Western sanity.
Let me fill in the gaps: in the latest twelve months America ran a current account deficit of $426 billion. By contrast the Eurozone earned a surplus of $208 billion. Even Japan has been showing surprising strength, with a surplus of $56 billion (not bad in any circumstances but particularly impressive given the continuing constraints and adjustments consequent on the Tohoku earthquake).
The key question now is precisely when will the East Asians pull the rug from under the dollar?