My father had a very good war—he spent 1942-46 on carriers in the South Pacific, making him part of the first generation of American men at war to have to deal with suicide bombers—so I took it that he knew whereof he spoke when, in answer to my question as to what he considered the single greatest quality of the American fighting man, he answered without hesitation, “His common sense.”
We could use some common sense in examining our situation today. Take the dollar. Common sense—as well as that most enduring and unarguable of economic theories, the late, great Herbert Stein’s dictum that if something can’t go on forever, it won’t—tells us that the situation of the currency is parlous. Balance-of-payments deficits, inadequate domestic savings, government spending run amok, hideous levels of domestic debt creation at usurious consumer rates, a putative housing bubble, etc., etc. All true, all unarguable.
But set against this something else that common sense argues with equal power, but that we’re seldom told. Namely, that what underpins a fiat currency—and in this day and age, all major currencies are fiat currencies, whose reserves consist of holdings of other fiat currencies—is as much its political and cultural character as its statistical integrity. In our case, democracy American-style is the dollar’s hole card.
A while back, I was asked by an advisor to a philanthropic entity I’m mixed up with what event I would consider to be truly catastrophic for the dollar. My answer was: if OPEC and the world’s other major oil producers should decide to invoice substantially in currencies other than the dollar. Oil being the straw that stirs the drink of world commerce, this would be the tipping point that might incite a perfect-storm convergence of the other dire factors enumerated above.
I don’t think that’s going to happen, not for some time. The oil producers and outsourcees want a currency they can trust. Sure, if you’re the central bank of a country like China, like Russia, like Saudi Arabia, holding billions upon billions of the folding green, and you were beset by pundits warning you about balances of payments and so on, you might think of shifting out of the dollar. But where? Quo vadis? To which other central bank would you turn, on which could you rely? China? Who knows what’s going on there? India? Same problem. Unfledged capitalist systems are like teenagers: not to be entrusted with the food money. Russia? You’d entrust your hard-earned reserves to Putin the Confiscator? The Euro bloc? Yada, yada, yada. Japan? Been there, done that. Wherever you turn for an alternative, you find them too untransparent, politically uncertain or underdeveloped, internally riven, simply too small or, in social terms, potentially ill-disposed to capitalism and its fruit-pickers.
In this country, what you see is what you get, and common sense tells me this outweighs every other negative consideration the gloom-and-doom crowd can bring up. We’re always being told that we can get by as long as our overseas trading partners are “willing” to finance our abysmal savings rate, etc., by sending us back their dollars. Common sense tells me they will always be so willing as long as the only alternative is some inscrutable ministry in Beijing, Moscow or Delhi, or that crowd of first-class, chateau-bottled blitherers in Brussels.
In this connection, one other point should be made. Currencies are like salmon: Their instinct is to return to the tributary in which they were hatched. The stream called the United States can handle a whole bunch of finned creatures—which is just great as long as you can trust the folks who control the fishing rights.
The dollar has virtual monopoly status as a reserve currency, which is Walter Wriston’s great if unintended legacy. Back in the 1970’s, when the oil price shot up, he conceived the idea of “petrodollar recycling” and thus protected OPEC from eventually being obliged to sell its oil here and there for tender other than that bearing the stamp of the Federal Reserve Bank. I thought—and said at the time—that this would beggar the rest of the world, as it pretty well did, but that it would insulate us from the consequences of our own improvidence. And so it proved. In time, the dollar became essentially the only game in town. It still is—and I expect it will remain that way until something drastic happens to alter perceptions of this great Republic.
What might that be? Obviously, a significant alteration in the American political landscape, a sharp veer in the direction of class-war anti-capitalism led by a person on a white horse. Can’t happen here? Common sense tells me that the corollary of the Stein dictum has to be that if something’s never going to happen, it very well may.
What’s going to bring this about? In one word: corruption. Sure, we need to get our fiscal house tidied in the ways the pundits prescribe—higher savings rate and all that—but what my common sense tells me is that the great threat to our dollar hegemony, and thus to our economic comfort if not survival, is the corruption that has permeated Washington and Wall Street in the past decade. It’s the big ugly story of my lifetime. It comes in every form, flavor and strength, from the ethically dubious to the downright criminal, from Abramoff to Zero-coupon. Wherever one turns, the game’s afoot and it stinks: insider trading, Congressional budget payoffs, everybody on every side of every deal (hello, Goldman Sachs!), phony bookkeeping, obscene executive pay and income gaps, a mountain of pork taller than Everest, a hideously unfair tax system, hedge-fund rates of return that smack of hanky-panky, the system being gamed every which way—and all as far as the nose can smell. The market boys and politicians seem determined to see how far they can push it. The watchdogs have more or less rolled over, or are under stockholder fire themselves. Right now, this doesn’t particularly concern overseas dollar-holders; that’s generally how they do business themselves. But what about the citizenry here?
Eventually, there will be a moral and political convulsion, helped along by $4 gasoline, 25 percent credit-card interest rates, mortgage principal coming due. The public will come to its senses on its own or be brought to them demagogically. The wrath of the electorate may then be unlovely to behold, and that will give pause to the big external dollar creditors. Overnight, Beijing won’t seem a dubious safe haven; suddenly, it will seem possible to overlook the quarrels and arcane social policies that encumber the Euro bloc.
Abraham Lincoln invoked the better angels of our nature to bind up the nation. If we’re going to keep on having the fun we’ve been having, we need to do something about the worser ones. That task will have to start at the top, and it’ll take more than talk and symposiums and think-tank studies to do it. Let’s just hope it will take something less than heads on pikes.
