The local TV channels were showing baseball and football games last night, and the big story in this morning’s local paper is about an unexpected surplus in the state budget. Here in Lakeland, Florida, the sun is shining and the sky is blue. Life goes on.
The world may be teetering on the brink of financial chaos but we seem unmoved by it all. We don’t understand finance, so we have to trust the folks in charge of such matters. The trouble is the folks in charge apparently don’t understand finance either. They don’t seem aware that the United States dollar is in danger of losing its privileged role as the world’s “reserve currency,” for example.
By “the folks in charge” I mean the people Americans elected to run the country, the ones who can’t seem to keep the government operating.
They’re a motley crew, these men and women from varied walks of life and they used to trust hired experts to manage such intricate matters as finance. But the current crop of elected representatives – many of them, anyway – have lost their faith in the experts. There is widespread suspicion that the experts are a pack of thieves intent on using their special knowledge to loot the national treasury.
So the elected representatives are trying to manage the budget themselves – and they’re forming their own homespun theories to guide them.
Obviously, many of these representatives have no clue. They think that running the world’s richest economy is like managing their household budgets. As for America’s role in global finance, I bet they’ve never heard of it.
I doubt that dentists or veterinarians, lawyers or obstetricians, doctors of divinity or bachelors of business administration learned about the Bretton Woods conference while they were in college, for instance. And that event laid the foundation for today’s global financial system.
There’s an old saying that the spoils of war belong to the winner, and the United States emerged from World War II as the big winner – financially and militarily. In that political climate, delegates from the 44 Allied nations gathered at the Mount Washington Hotel in Bretton Woods, New Hampshire to create a global financial system for the future. Here’s how Wikipedia explains the system that has emerged since the conference:
The chief features of the Bretton Woods system were an obligation for each country to adopt a monetary policy that maintained the exchange rate of its currency within a fixed value-plus or minus one percent-in terms of gold and the ability of the IMF to bridge temporary imbalances of payments. In the face of increasing strain, the system collapsed in 1971, following the United States’ suspension of convertibility from dollars to gold. This created the unique situation whereby the United States dollar became the “reserve currency” for the states which had signed the agreement.
I can see your eyes glazing over already, but there are practical benefits to be derived from being the world’s “reserve currency.” In 2008, for example, the US Fed made $43 billion from interest on the dollars provided to other countries. And as the world’s reserve currency, the US has unrivaled flexibility in managing its money supply.
But that privileged position is in danger. For years, China, Russia and other countries have questioned the dollar’s role as the world’s reserve currency. And with the impasse in Washington over the US debt ceiling increase, the pressure to replace the US dollar is mounting. China, which holds more than a trillion dollars in US debt, is calling for the dollar to be replaced as the international reserve currency and is urging “broader steps” to create a “de-Americanized world.”
Obviously, this doesn’t faze the Tea Party crusaders intent on decimating the federal government. Like children playing with a box of matches, they apparently don’t know or care about the danger threatening them – and the rest of us who depend on them to manage our affairs responsibly.
Click here for China’s reaction to US crisis.
Click for the Bretton Woods story.
