Losing Faith: The Costs of Mismanaging the Dollar

Losing Faith: The Costs of Mismanaging the Dollar

Winston Churchill, the storied politician and former prime minister of the United Kingdom, once said, “I think I can save the British Empire from anything—except the British.” Churchill’s quote cleverly points out that great power decline is not just a function of external factors; often the worst wounds are self-inflicted. In recent weeks, observers around the globe watched with alarm as a dysfunctional American political system pushed the world’s most powerful economy to the brink of default. How could a country with so much global prestige and power risk both over petty partisan squabbling? Why would policymakers choose to squander America’s hard-won credibility and all of its attendant benefits? To paraphrase Churchill, recent events in Washington have the world wondering: Who can save America from the Americans?

The truth is, the U.S. seems to have developed a penchant for high-profile self-inflicted wounds recently. The last time political infighting pushed the country to the precipice of default was barely two years ago. That manufactured crisis was quickly followed in 2012 by the fall over the “fiscal cliff.” Going back even further, America’s self-destructive tendencies can be traced to the global financial crisis which, of course, germinated within the American economy. Such developments do not come without costs. Taken together, these events have imposed great pain on the U.S. and the world, and have tarnished the country’s international standing.

Moreover, the past five years of American folly, coupled with its relative economic decline, could speed up the retrenchment of the U.S. as a global economic power. This is especially true with respect to the global role of the dollar. Beginning with the 2008 crisis and intensifying with each manufactured political crisis thereafter, an emergent consensus has popped up in capitals around the world: The global economy needs to become less dependent on the U.S. dollar and the increasingly unreliable government that backs it. While no viable alternative exists at the moment, increased demand for a rival to the dollar is speeding up the process by which change in the global monetary system is taking place. In particular, governments on every major continent are looking to China and its currency, the yuan (or renminbi), as the prescription they might use to kick their unhealthy habit of hoarding greenbacks.

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