The Most Important Issue of All

Roger Cohen has hit upon an most important issue for American presidents, both the one we have and the one we’re trying to elect:

A weak dollar, outsized personal debt, a massive current account deficit, cash-strapped banks and Asian governments purchasing U.S. Treasury bonds to finance the national debt are not signs of American strength. Nor are they necessarily signs of American decline, because inherent U.S. vitality remains enormous.

But as Benn Steil, an economist at the Council on Foreign Relations, suggested: "We could be seeing a secular shift in confidence in the dollar as a store of value as the impression grows that the United States, to some degree, is losing control of its destiny."

Well, sort of.

The thing he missed was what is really the most important issue of all: the preservation of American dollar hegemony.

Dollar hegemony, for those of you who aren’t familiar with the term, is the phenomenon whereby the status of the dollar as the world’s premier reserve currency affords the greenback "privileges" that other currencies lack.  The best example is the long-running trade deficit.  Since we owe this deficit in our own currency, the impact on our economy is diminished, because we, in an indirect sense, owe ourselves the debt.

The Fed’s overriding concern for the health of financial institutions and the people that run them over the needs for a stable currency–which has driven the recent interest rate cuts–will further devalue the currency by accelerating the flight of capital into currencies and commodities that afford a better return, be that return in value gain or interest yield.  The more this happens, the more dollar hegemony erodes, and the more "real" our indebtedness–public, corporate and personal–becomes.

Once dollar hegemony recedes, we will indeed lose control of our destiny.  And Americans are not mentally prepared to deal with others as equals.  Yes, we have a lot of vitality, but that, like dollar hegemony, can be squandered in overconfidence.

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