Home Political science The colder war
This is the climax of the story I promised at the beginning of The Colder War. It describes the financial tsunami headed for the West in general and for the United States in particular, and how the maneuverings of Russia's diminutive earthquake generator, Vladimir Putin, will disrupt your life.
What you've read is what some in Washington already understand but are not willing to acknowledge publicly. Putin and his allies are embarked on a mission to sabotage the petrodollar. You now know this, and you know its importance. It is certain to happen—not if, but when. So the critical question is: How will it all unfold?
When the petrodollar era ends, will it go with a bang or a whimper? History has little guidance to offer. The decline of the British pound, as noted in the preceding chapter, took 30 years and two world wars; the unwinding of the empire took even longer. Is something similar in store for the United States? Perhaps, but three factors argue persuasively that the undoing of the dollar will be comparatively abrupt and disturbing.
First, in its heyday, Britain ruled a vastly different world. Many of the great population centers economically were all but living in the Dark Ages and posed no threat to British hegemony. Today there are multiple centers of financial power—including Russia, China, and Brazil—with the technical ability to build dollarless systems and with sufficient size to attract wide international participation.
Second, ubiquitous computing capacity will make it easier to leave the dollar. In pen-and-ledger days, maintaining accounts in multiple currencies just wasn't practical for any but the largest businesses. Today, thanks to modern data handling, any business that wants to can have a multicurrency bank account and run a multicurrency accounting system. So the need for a reserve currency that serves as a financial common language for international business is no longer pressing. It will be far easier to wave good-bye to the dollar than it would have been to leave the pound.
Third, the volume of the assets that will be shunned will be unprecedented. The British, because they were constrained by the pound's redeem ability for gold, never came close to the extravagance with which the United States has abused its position as the issuer of the world's reserve currency.
The United States slipped away from gold discipline in 1971, when President Nixon "closed the gold window." Since then, exporting dollars and dollar-denominated IOUs has been a major growth industry. That was never the case with the pound, so the volume of dollar assets that foreigners will be shifting away from will be much bigger and will move like a landslide.
The U.S. economy's relative position in the world has declined over the past several decades as one country after another has modernized and played economic catch-up. The United States is no longer the behemoth astride a ruined world that it was after World War II. Most cars built in 1946 were built in the United States. In 2013, it accounted for only 12 percent of world auto production.
On the other hand, the United States is still by far the world's strongest military power and will continue to be for some years to come. It can rain death on any selected patch of earth, and the threat of doing so can intimidate any troublesome country not equipped with nuclear weapons. It's clearly preferable to have that power than to be on the other side of the transaction, but it comes with drawbacks, both of which are damaging to the dollar.
First, there's the cost. In 2013, the United States spent $643 billion on its military—over one-third of the world's total military spending and just shy of 20 percent of total U.S. federal spending.
The United States no longer can afford it. Of every dollar Washington has been spending, 46 cents is borrowed money. Even if Russia and China weren't cheering for the dollar to drop dead, and even if Putin took up knitting, the river of IOUs running out of the United States and into foreign investment portfolios would eventually drown the dollar. So the U.S. military's megabudget, which accounts for nearly half the U.S. government's deficit, works to soften up the dollar for its attackers.
Second, no country likes being pushed around. Possessing overwhelming power has its advantages, but only a near-saintly degree of self-restraint can save that power from attracting resentment. For the United States, such self-restraint hasn't been part of the program, and now, reasonably or not, the world is full of resentment. As the need for U.S. currency declines, the resentful will find dumping the dollar entirely agreeable, a satisfying exercise in passive aggression.
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