Requiem for the Dollar

Constantine the Great created the solidus, a gold coin that held its value well enough to be a monetary standard for seven hundred years.  The Bretton Woods monetary system survived a quarter century.  The U.S. dollar is worth maybe 5% of its 1900 value.

Jim Grant, the sage of the bond market, writes in the Wall Street Journal a lengthy, witty, thoughtful, and ultimately depressing "Requiem for the Dollar. "  He tells us, "To give modernity its due, the dollar has cut a swath in the world. There's no greater success story in the long history of money than the common greenback. Of no intrinsic value, collateralized by nothing, it passes from hand to trusting hand the world over. More than half of the $923 billion's worth of currency in circulation is in the possession of foreigners."

Yet like all great schemes it has its limits.  "But now the world is losing faith, as well it might. It's not that the dollar is overvalued—economists at Deutsche Bank estimate it's 20% too cheap against the euro. The problem lies with its management. The greenback is a glorious old brand that's looking more and more like General Motors."  Ouch!  Take away my membership in the American Economics Association before you compare me to Rick Wagnoner!

The strength of the dollar is of both economic and geopolitical significance. 

Stable monetary values make economic calculation easier and facilitates prosperity.  Unstable money gives incentives to speculate and invest capital and human energy into unproductive activities.  Diverting human and financial capital form productive activity makes society poorer.  It is one of the two legs of Robert Mundell's "policy mix," which not only won him a Nobel Prize, but also is the foundation of Supply-Side Economics as Brian Domitrovic demonstrates in his new book, The Econoclasts: The Rebels Who Sparked the Supply-Side Revolution and Restored American Prosperity." 

Our current international financial system has no anchor in the real economy.  We have floating exchange rates that float whithersoever the whims of speculators send them.  Wallace and Sargent demonstrated three decades ago that floating exchange rates have no equilibrium.  The result is uncertainty in trade, profits for banks, and the diversion of many clever folk into speculation.

President Obama's new realism (see "Is there an Obama Doctrine?" in the Economist) seems to say that we as a superpower will assert our selfs, if we can afford it.  With such an anemic dollar it is hard to say we will afford much!