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As I am writing this, the dollar has been sliding in value. The euro is currently worth about $1.33, instead of $1.28 as it was in November. Is this important? The economist Robert Samuelson has observed that “. . . Asia, Europe and Latin America have feasted on the US trade gap. In 2006 the deficit will reach about $800 billion—bringing the cumulative total since 1996 to $4.4 billion. But as the US economy slows, so will America’s ravenous appetite for imports.” US exports will now be more competitive on global markets. There are indeed global imbalances, as in the trade deficit. But the reality is that the dollar is the main global currency. It is the currency used to set the prices for raw materials, oil, wheat and copper. It is the currency most used to conduct trade. Japan “invoices 52% of its exports in dollars, South Korea 85% and Australia 68%. Even France and Germany, which trade mainly in euros, use the dollar for about a third of their exports. Dollars also represent the primary exchange reserve of governments worldwide, with China and Japan having the largest ($1 trillion and $900 billion respectively).
Samuelson also comments that “The dollar’s global role reflects America’s political stability, its large and wealthy economy, its low inflation and its deep financial markets (there’s plenty to buy and it’s easy to sell). Not surprisingly, the dollar dominates international bank loans and bonds. It’s the favored way global investors hold their wealth in stocks and bonds or bank deposits outside their own countries. Likewise, many non-Americans use dollars as cash. The International Monetary Fund counts 13 countries that have adopted the dollar as their domestic currency; Ecuador is the largest. The Federal Reserve estimates that about $350 billion in cash—roughly half of all circulating dollar notes—is held abroad.”
This global understanding is remarkable, for the US provides the global currency and it is repaid with imports. American consumers are the main beneficiaries of this process, for the prices are lower and the choices more varied. But this could be changing and 2007 might be the harbinger of that change. Samuelson writes that “the US economic advantages may be narrowing as other countries grow richer and develop better financial markets. Or, at some point, the big trade deficits may spill more dollars abroad than foreigners want to hold.”
The other challenge is that America’s economic growth has been driven by consumer spending. That kind of spending, supported by dwindling savings and increased borrowing, is unsustainable. Sooner or later this will begin to unwind. Could 2007 be that beginning?
See Samuelson’s article in the Washington Post (8 December 2006), The Economist (9 December 2006), p. 82 and The Economist (2 December 2006), p. 13.
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