In January 1998, Federal Reserve Board Deputy Governor Laurence Meyer gave a talk at the Economic Strategy Institute titled “The Economic Outlook and Challenges Facing Monetary Policy.”
Commenting on the what some then called America’s ‘miracle economy,’ Meyer said that the country’s phenomenal economic strength over the last decade had been the result of “an era of positive shocks.” He presciently warned that it was beyond the bounds of reason to expect a never ending spiral of positive circumstances and that negative events were probably on their way.
Today, with an unraveling dollar and other nations’ central banks flirting with a reshuffle of their dollar-denominated holdings, America may be soon feeling the economic pain resulting from irresponsible economic policy management and the “dependence” part of global financial interdependence.
Stephen Roach in the New York Times welcomes the decline of the dollar as something that will discipline American overconsumption and compel other nations to loosen their labor markets and take measures to spur their own domestic demand. He may be right, but I see the declining dollar as more the manifestation of the absence of strategy and policy than the result of one.
If he sees the dollar’s decline as a welcome shock that will compel better economic housekeeping in Washington, I’m not sure I feel the same sense of relief. Rather, I have the instinct that the plummeting dollar, China’s positioning that it may be less interested in purchasing treasury bonds, and general global disdain for American foreign policy and President Bush are converging, gathering speed, and becoming economic forces beyond control.
Alan Greenspan’s comments about the dollar recently are several years too late and appear to be more political, cover-his-ass moves than prognostications regarding wise policy.
I hope that Roach is right and that the decline in the dollar will order our accounts in such a way that there is not a destabilizing financial quake along some of the world’s most seriously imbalanced economic fault lines. I fear, however, that this normal economic pessimist is far too optimistic.
Even if his scenario takes its best course, many in America and abroad will lose jobs and feel more poor tomorrow than they do today. To some degree, standards of living will fall as the dollar is less able to pay for the lifestyles Americans enjoy.
Major currency tsunamis may hit some developing economies, particularly in Southeast Asia, as American purchasing capacity dries up, and financial positions held by hedge funds and other global investors may rapidly unwind as the unexpected scenario of the collapse of American demand becomes a real nightmare.
And what is really scary is that this could all get much worse than even imagined.
— Steve Clemons