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The Dollar and US Hegemony

by Ingo Schmidt Thursday, Dec. 20, 2007 at 2:20 PM

The dollar devaluation since 2001 is a necessary adjustment for the twin US deficits, the national budget deficit and the foreign trade deficit. US imports are nearly double US exports. A drastic change of lifestyles is imperative where modesty and simplicity are encouraged.


U.S. Dominance Lacks Serious Challengers

By Ingo Schmidt

[This article published in December 2007 in: SoZ-Sozialistische Zeitung is translated from the German on the World Wide Web, ]

Once again there is speculation about a crash of the dollar. Since the 1970s, the leading role of the US currency and economy has often been put in question – closely coupled to the course of the dollar and economic activity. Every devaluation, every economic slump, was interpreted as the beginning of the end of US hegemony. Despite all the shipwreck forecasts, the US could be No.1 in the capitalist world system for a long time.

One leader in the current debate over the future of the dollar and the US economy is the star economist and New York Times columnist Paul Krugman. In one of his last articles, he compared the dollar with Wile Coyote. This comic figure known in the US ran over the cliff and stood in the air for one frightening second before gravity cast him to the abyss. Keeping to this picture, the real estate crisis in the summer of 2007 was the last abyss over which the “dollar coyote” ran. In the meantime, the gravity of the deficit balance of payments has led to a dollar devaluation. However this can hardly be termed a crash.

Whether Krugman’s gloomy prognosis of a transition of the dollar from decline to a nosedive will prove true is uncertain. The dollar has lost value since the end of the New Economy in 2001, particularly in relation to the Euro. Despite all market logic that assumes a reduction of the balance of payments deficit from devaluation of the currency, the foreign trade deficit of the US climbed from one record to another. This is new. In the past, devaluation and a declining balance of payments deficit went hand in hand. What does the uncoupling of the dollar and the balance of payments deficit mean?

Since the 1970s, the US dollar has passed through two upgrading phases with peaks in 1985 and 2001. The dollar and the balance of payments deficit only developed opposite during the first of these two phases. Since the 1991 economic crisis, the deficit of the balance of payments has risen constantly independent of the dollar’s course and the economic course. If the foreign trade deficit of the US had depended on interest rate development, the dollar falling since 2001 would have raised prices of imports in the US compared to domestic production and led to decreasing imports and balance of payments deficits. This did not happen.

Keynesian economists dispute the connection between interest rates and commodity imports and exports. From their perspective, the upward development of the economy beginning after the 2001 recession – accompanied by massive credit expansion and considerable capital infusions – washed up additional purchasing power in the US used to finance large-scale shopping tours in other countries – independent of the dollar rate. The consequence was an increasing balance of payments deficit. As plausible as this explanation may be, it is not completely convincing since the infusion of foreign capital in the US was connected with a rising dollar demand and therefore led to upgrading. However this did not happen.

Some economists including the prominent Yale professor Robert Shiller have drawn the conclusion that irrational conduct of economic actors is responsible for “market-damaging” developments. Krugman’s argument goes in this direction. Poorly informed investors long accepted the nominal dollar rate at face value. In the near future, they will be punished with lower prices and must bid farewell to their assets-illusions.

Economists like Krugman and Shiller see the cause of irrational conduct and economic crises in excessive profit-seeking and deficiency of information. These could be avoided if investors make their investment decisions on the basis of complete information and not on instinctive behavior. This way of looking at things fades out the fact that the right to publish incomplete business information or in a version pleasing shareholders is part of capitalist private property. That capitalist competition makes impulsive profit-mongering and over-accumulation into the survival conditions of capital is also not considered.

With Marx, we may speak of an irrational system within which individual capitalists act more or less rationally. Their socially divisive conduct leads necessarily to crises that appear to practicing capitalists and rational economists as results of individual misconduct. The highest form of this misconduct is political conduct, literally intervention contradicting market logic. If the accumulation drive and political intervention are understood as unavoidable elements of the capitalist way of production from a Marxist perspective and by capitalist apologists, the uncoupling of the dollar course, balance of payments deficit and economic development can be rationally explained.

In the 1970s, the disintegration of the system of fixed rates of exchange, economic crises and an upswing of anti-imperialist and labor struggles largely put in question the post-war order led by the US in the capitalist part of the world. After recovering from the shock of its own vulnerability, the US bourgeoisie reacted to this challenge with a declaration of war on the Soviet Union, on anti-imperialist movements and on the American working class. In this way, the world market should be expanded and income distribution within the capitalist economy shifted from labor- to assets income. Owners of capital from all capitalist countries honored the strategic far-sightedness and daring of this program for profit expansion with investments in the US. Higher dollar rates were the consequence. This was a barometer reflecting the trust of capitalists of all countries that crowded behind American political leadership.

The union-organized working class in the US was pushed back with every rise of the dollar in the years 1979-1985. Imports that were more competitive compared to US goods owing to the strong dollar limited the sales possibilities of domestic industry and encouraged attacking incomes and working conditions of employees in the US.

The anti-socialist rollback began bearing fruits after a few years. The interim Soviet leader Andropov showed readiness for concessions toward the West led by America that became reality under Gorbatchev. Under Lane Kirkland, the AFL-CIO was helpless from the start toward the capital offensive. Under these conditions, the dollar bridle could be loosened. On urging of the US government, a coordinated intervention of American, German and Japanese central banks occurred in 1985 reversing the direction of the dollar’s direction. Accordingly US industry could expand its sales at home and abroad.

The devaluation of the dollar was ended just like it was introduced – through a synchronized intervention of the central banks of America, Germany and Japan. As much as American industrial capital rejoiced over higher sales and profits in the backwind of the declining dollar, Wall Street was increasingly worried about America’s financial place.

In the early 1990s – the US had survived a recession and set out building a new world order after the collapse of the Soviet Empire – the financial world convinced the government that negative dollar records were incompatible with the reputation of the remaining superpower. The “Wall-Street-Treasury-complex” formed that under Clinton became the driving force of multilateral market opening…

Profits beckoned and the dollar rose again until the New Economy bubble burst in 2001. Afterwards the military-industrial complex increasingly replaced the flimsy capital fetish. The iron fist of the US army was declared the guarantor of profiteering and no longer the invisible hand of the market. The circle to the 1970s closed with its inability to end the pathetic military uprisings in Iraq and Afghanistan. At that time, the American way of life struck the limits of its productivity, profit and attractiveness. Since then, the appearance of US- and dollar-hegemony could be restored in two ways in the name of a second Cold War, a new world order and a new economy. Its survival presently depends on the absence of serious challengers – whether in the form of imperialist rivals or anti-capitalist movements. As long as these challengers do not appear, the leading role of the US and the dollar with it will remain in suspense.


By Marc Batko

Here are links to articles that set the mortgage crisis in the larger contexts of (1) human greed: "The Empire of Debt":

and (2) the Washington Consensus of deregulation, privatization and opening markets: "The Cure is the Sickness":

Randy Rhodes on Air America has said: Telling the truth takes a second; telling lies takes a lifetime.” As crisis and opportunity are represented by the same Chinese letter, we can use the present crisis (in foreign-, investment-, taxation-, distribution- and labor market-policy) for either abstract humanism (the dystopia of the total market) or concrete humanism (state regulation, relativized economy, safeguarding of human rights and nature as a despoiled partner and foundation for a human future).

Albert Einstein said the bomb changed everything except the way we think. In truth, Hiroshima changed the meaning of security and strength and sickness and health. War was forever changed; weapons were seen as destabilizing and world security depended on interdependence and disarmament. The 1968 anti-Vietnam generation left a legacy of anti-militarism and anti-authoritarianism. That legacy has been distorted by a monolithic corporate media still caught in the might is right, hire and fire, winner take all and right of the stronger misanthropy. As universal health care will help reinstate the state as a kindness, abandoning the myths of abstract humanism (humanitarian intervention, torture as saving life, the total market as a panacea etc.) will prevent the rise of a new feudalism and exploding inequality.

As infinite growth in a finite world is a fatal illusion, thinking cooperation and competition cannot coexist is a dreadful illusion leading to fatalism, resignation and market worship. (cf. "Cooperation, not Violence," "Community Centers: Learning from O Canada," and "Memorandum 2007":

Work must be redefined and shared. As work and income are uncoupled (since assets income sustains people), work and security must be uncoupled (so human rights are protected, housing, health care and education are rights and not privileges).

If the market is stylized as total, absolute and self-healing and problems are defined as interferences with the market, we are in the realm of idolatry, plutonomy, feudalism and exploding feudalism. Social disconnection and alienation could give way to interdependence and public spirit. Nature is our mother, partner and foundation for a human future, not an external, free good or sink.

300 translated articles await you at Other important sites are,,, and

I look forward to your comments. May we finally put the horse before the cart and mend our own pockets before turning countries into parking lots and our national reputation into aluminum scraps. May we abandon the path of least resistance (market radicalism) and support one another in alternative economic thinking, truth-telling and story-telling where the future is open, welcoming, supportive and creative. May we treasure our welcoming tradition and turn from the tradition of fear and scapegoating, intimidation and double standards. The choice is between building our economy on a rock or on the sinking sand, between protecting the future or promoting economic feudalism.

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