Money, money everywhere....

• Author: Greenberg, Maurice R.
• Position: A Fistful of Dollars - Evaluation of U.S. dollars

IT IS TIME the United States wakes up to a serious problem. The dollar is increasingly losing the position it has enjoyed for nearly half a century as the world's currency of last resort. And as that happens, the advantages we have gleaned from that status--the ability to finance our twin fiscal and trade deficits while keeping our interest rates low--will also be lost. And yet no one, particularly in Washington, seems overly concerned.

The world is awash in dollars right now, and the situation cannot last. My concern is that many in this country continue to have unrealistic views about the sustainability of the status quo. Yes, our domestic economy is doing reasonably well--we have modest but real growth, inflation is quiet, the stock market is booming. But we also have not done anything to address an out-of-control federal government budget deficit and the ongoing huge trade deficits we run up with other nations. How long will other countries continue to provide us with our credit card? Other countries may no longer be willing to provide Washington with a blank check--literally.

China's enormous trade surpluses with the United States have generated more than one trillion dollars worth of reserves. In the past, Beijing has purchased a large quantity of U.S. Treasury bonds, enabling us to finance our government's deficit spending. But the Chinese have now indicated that they will begin to pursue alternative investments with their surpluses, from purchasing companies and assets to diversifying their holdings into a basket of currencies--devoting at least $300 billion of their reserves to this purpose. One thing high on Beijing's agenda: trading their excess dollars for ownership of natural-resource assets.

Japan and Russia are the second and third largest holders of dollars (some $900 billion and $300 billion, respectively). Right now, Tokyo is interested in keeping the yen weak vis-a-vis the dollar in order to make its exports competitive. Russia continues to accumulate dollars because oil exports remain denominated in that currency. But there is a limit as to how many dollars can be absorbed by other countries--and no one wants to hold on to their dollars endlessly. Pressure is building to diversify. We are seeing a move away from the dollar to gold and other currencies--most notably the euro. At the end of August 2003 a U.S. dollar was worth 0.90 [euro]; by May 2007 that single greenback would only get you 0.74 [euro]. Other currencies...