When Enough Is Truly Enough

The world is worried because its dominant currency — the U.S. dollar — has lost over 20% this year. It is not just monetary losses everyone is referring to, but also fears that the world balance of power might be shifting. In fact, economists are warning that if the world’s largest economies don’t get their, ahem, “stuff” together, the pain we’re feeling right now will be nothing in comparison, and, worse yet, the process itself may become irreversible.

So what is the coded message in the declining greenback? Simply, spending levels in the U.S. and savings rates everywhere else can no longer sustain their symbiotic relationship. The line between fiscal over-extendedness and bankruptcy is becoming less and less blurred.

In last Thursday’s “Globe and Mail,” Barry Eichengreen, Economics professor at the University of California, said, “It’s the year of reckoning.” Kenneth Rogoff, economics professor at Harvard, commented, “It’s definitely a delicate moment. If the rest of the world continues to grow at a good clip, that helps to cushion the global retreat. [However] I think we have yet to see the other shoe to drop.”

Professor Rogoff argues that while Asian and Middle Eastern countries are the ones with large international trade surpluses, because their currencies are not freely-floating, countries such as Canada, Japan, Australia and New Zealand and European countries have been forced to carry most of the global adjustment.

Furthermore, Professor Rogoff claims that as long as the U.S. dollar keeps on declining, as long as Asian economies keep their currencies stuck, and as long as there are fewer buyers for cheap American exports, potentially disastrous consequences are bound to happen sooner or later.

According to Professor Rogoff, the worst-case scenario would develop along the following lines. First, the recession in the U.S. would get progressively worse and spread like Ebola virus. Then, the U.S. economy would lose its number one status among world economies, most likely to China. As a result, other industrialized countries, connected to the U.S. economically and politically, will have to figure out how to resuscitate parts of their economies. In the end, we may all have to figure out how to live in a very, very different world.

Is there a way around this scenario? Well, some economists believe that the day of reckoning has already arrived. Last year, the Bank of Canada Governor, David Dodge, said that “We can’t delude ourselves into thinking that economic imbalances will be resolved in an orderly way through exchange rate adjustments alone.” Professor Eichengreen takes a somewhat “lighter” stance by saying that, “It will take more than a day, and probably a few quarters, but the world will eventually come through the adjustment. [In the meantime,] it’s pretty brutal for the world economies.”

In my humble opinion, unless the U.S. finds a way out of the far too many fiscal holes it got itself into, it will not only lose its economic and political prestige, but it may also force the entire world into unpleasant and volatile shifts of global economic and political powers.

I truly don’t have any idea how Americans, and the rest of the world, are supposed to deal with the U.S. total national debt, which, at the moment of writing this article, reached the figure that I just can’t get my head around $9.09 TRILLION! What kind of currency and other adjustments on the macroeconomic level is supposed to whisk this away, I truly don’t know. !