The End of the Age of Influence?


Hopefully the debt ceiling crisis will be out of the headlines by the time you receive this note, as the looming deadline will have passed. The concept of the debt ceiling was introduced in 1917, replacing the need for Congress to approve each debt issuance separately. Since the end of World War II, Congress and the President have modified the debt ceiling more than 100 times.

The issue was never one of deciding how to spend the money: those choices were already made. The question, instead, was whether the country would honor its financial obligations for items that have already been legally approved and purchased. Paying, for example, government employees, Social Security recipients and contractors making military equipment for Ukraine.

With representatives of both parties posturing to improve their standing with their respective voters, I’m reminded of a line from the clever 1995 romantic comedy The American President. In it, Michael Douglas, playing President Andrew Shepherd, says: “I was so busy keeping my job, I forgot to do my job”. I’ll bet I’m not the only one who would prefer that our elected staff actually focus on doing, instead of keeping, their jobs.

Paying our country’s bills is not only important to those I mentioned above (and MANY more). It is also important for the well-being of our economy. The dollar’s position as the globe’s ‘reserve currency’ is called into question every time this happens. A reserve, or anchor, currency is the currency of one country which is held in large quantities by central banks of multiple countries and used for international exchange – importing and exporting things world-wide. Which currency has been considered the world’s reserve currency has ebbed and flowed along with the world’s geopolitical order. The first is likely to have been the Greek drachma. You might imagine that the rulers of the (then) known world considered themselves secure in their leadership position but times change and leadership positions can be challenged.

Under the post-World War II 1944 Bretton Woods agreement, the US dollar was agreed upon as the world’s reserve currency. Our government guaranteed that other central banks could trade their US dollar holdings for gold at any time. Of course, the US went off the gold standard in 1971 but the dollar remains strong because people believe it to be strong. However, Cornell University professor Eswar Prasad suggests that the foundations of the dollar’s strength are beginning to show cracks. He says: “It is becoming harder to view the US as a well-functioning, dynamic economy with a deep and sound financial system, backed up by a robust policymaking process with checks and balances.” This should come as no surprise given our history of partisan politics leading to legislative gridlock.

There are other currencies held in quantity by various central banks but none seem to be poised to assume the role. The euro is the second most commonly held currency, with about one-third of the total value of USD holdings. The euro came into being in 1999, generally replacing German marks, French francs and ten or so other European currencies. With the withdrawal of Great Britain from the Eurozone, however, the European Central Bank does not seem to have the single-mindedness to overtake the dollar. Other currencies, including virtual currencies such as Bitcoin have been proposed as a replacement but so far, none has gained sufficient traction.

How about China, the second largest economy in the world? Would theirs be a good replacement currency? So far, the lack of transparency exhibited by the Chinese government has not inspired many to stockpile the renminbi yuan. For example, you may recall the 2008 runup in world oil prices, just as our economy was falling due to the mortgage loan crisis. This has never been publicly confirmed but my own guess is that China was quietly buying up crude oil to be sure they had plenty as they hosted the 2008 summer Olympics. Post the games, prices fell as, presumably, Chinese stockpiling came to an end. By contrast, consider how open the Federal Reserve is about monetary discussions, even publishing their meeting minutes.

Oil Price Rises as Airline Fails - Our World

All of this is to say that the dollar’s enduring preeminence is not guaranteed. Just as the dollar took over from the pound, the pound took over from the florin, on back to Roman coinage superseding the drachma. Is the American Century about to come to an end? I am not predicting anything quite so dire. However, as George Santayana once wrote: ‘Those who cannot remember the past are condemned to repeat it’.