The World

I recently wrote a column on the political consequences of $100 oil, which drew quite successfully (I thought) on an earlier discusssion on this blog. So I would like to repeat the experiment.

There is no shortage of analysis of the global economic consequences of the falling dollar. But what about the global strategic consequences? Over the long term, a feeble currency is usually both a symbol and a cause of national decline. I’m not sure you can yet read anything too profound into the current movements in the currency markets, although Hugo Chavez is doing his best.

Still, even in the here-and-now, I think there could be political ramifications to the falling dollar. Off the top-of-my-head, here are four possibilities:

1) Americans feel humiliated and anxious – It cannot be nice for New Yorkers to have lots of chavvy Brits and Europeans, staggering around their shops, chortling about how cheap everything is. And those Americans who travel are experiencing severe sticker shock in Europe. People feel all macho about their currencies. The Germans used to love the strong D-mark. The Brits felt that the slide in sterling reflected their decline as a nation. Will similar concerns spread in the US?

2) Foreign companies buy up the US  – One thing that could spread national anxiety in America would be a few foreign bids for high-profile American assets: the Rockefeller centre, Universal Studios etc…Particularly if those bids were from the Chinese or the Gulf Arabs.

3) It is more expensive to project American power – All those American military bases overseas need supporting. And a lot of those costs cannot be borne in dollars. American aid budgets will be relatively smaller this year. The American economy will be a smaller share of the world economy, and the American market will feel a little less important.

4) American debt will become less attractive to hold – This is the big one. What happens if the Chinese or other Asians or the Arabs buy less American debt? Theoretically, they have the Americans by the balls. (I think one can say that on a blog?) But, they also have themselves by the balls. Too rapid a withdrawal from the dollar will cause a further fall in the currency, forcing down the value of their own foreign reserves, which are largely held in dollars.

Those are my four points. What other political consequences of a falling dollar should we be thinking about? And what should I be reading?