The Dollar`s Reserve Currency Role Is Drawing To An End

It is difficult to know where Bush has accomplished
the most destruction, the Iraqi economy or the

US economy. 

In the current issue of Manufacturing & Technology
Washington economist

Charles McMillion
observes that seven years of Bush
has seen the federal debt increase by two-thirds while
US household debt doubled. [The
Economic State Of The Union — 2008
, January 24,

This massive Keynesian stimulus produced pitiful
economic results. Median real income has declined. The
labor force participation rate has declined. Job growth
has been pathetic, with 28% of the new jobs being in the
government sector. All the new private sector jobs are
accounted for by private education and health care
bureaucracies, bars and restaurants. Three and a quarter
million manufacturing jobs and a half million
supervisory jobs were lost. The number of manufacturing
jobs has fallen to the level of 65 years ago.

This is the profile of a Third World economy.


“new economy”
has been running a trade deficit
in advanced technology products since 2002. The US trade
deficit in manufactured goods dwarfs the US trade
deficit in oil. The US does not earn enough to pay its
import bill, and it doesn`t save enough to finance the
government`s budget deficit.

To finance its deficits, America looks to the
kindness of foreigners to continue to accept the
outpouring of dollars and dollar-denominated debt.

The dollars are accepted, because the
dollar is the world`s reserve currency.

At the meeting of the World Economic Forum at

, Switzerland, this week, billionaire currency
trader George Soros warned that the dollar`s reserve
currency role was drawing to an end: “The current
crisis is not only the bust that follows the housing
boom, it`s basically the end of a 60-year period of
continuing credit expansion based on the dollar as the
reserve currency. Now the rest of the world is
increasingly unwilling to accumulate dollars.”
golden era is ending, warns Soros
By Edmund
Conway, Telegraph, (UK), January 25, 2008]

If the world is unwilling to continue to accumulate
dollars, the US will not be able to finance its trade
deficit or its budget deficit. As both are seriously out
of balance, the implication is for yet more decline in
the dollar`s exchange value and a sharp rise in prices.

Economists have romanticized globalism, taking
delight in the myriad of foreign components in US brand
name products. This is fine for a country whose trade is
in balance or whose currency has the reserve currency
role. It is a terrible dependency for a country such as
the US that has been busy at work offshoring its economy
while destroying the exchange value of its currency.

As the dollar sheds value and loses its privileged
position as reserve currency, US living standards will
take a serious knock. 

If the US government cannot balance its budget by
cutting its spending or by raising taxes, the day when
it can no longer borrow will see the government paying
its bills by printing money like a third world banana
republic. Inflation and more exchange rate depreciation
will be the order of the day.



Paul Craig Roberts

] was Assistant
Secretary of the Treasury in the Reagan Administration.
He is the author of

Supply-Side Revolution : An Insider`s Account of
Policymaking in Washington
and the Soviet Economy

Meltdown: Inside the Soviet Economy
and is the co-author with Lawrence M. Stratton of

The Tyranny of Good Intentions : How Prosecutors and
Bureaucrats Are Trampling the Constitution in the Name
of Justice
. Click

for Peter
Forbes Magazine interview with Roberts
about the recent epidemic of prosecutorial misconduct.