American Dream Slip-Sliding Away

June 1, 2020

The dollar has been the lynchpin of the international monetary system since the Second World War. This special role in itself generates enormous economic advantages that other countries do not enjoy. This is not an essay about the perks of dollar hegemony but rather an examination of the basis for enduring confidence in the dollar as a store of investment value, favored pricing measure, and the main  medium used in international trade and financial asset transactions. Such confidence has survived multiyear periods of dollar depreciation and an episode of double-digit U.S. inflation, and conventional wisdom believes the dollar despite inevitable setbacks in the U.S. economy’s performance will stay the world’s primary reserve currency for many decades to come.

Dollar hegemony is overwhelmingly accepted not so much for what America is doing as from the promise of what it might become, or put differently what the American dream continues to embody. A strong and adaptable economy is important, but so are a lot of less tangible traits such as deep, broad, and resilient domestic financial markets as well as investment safety derived from  military strength and a tradition of rule by law. Geopolitical leadership, easy dollar redeemability, and political stability are also keys as well. And last but not least is the absence of other paper currencies acquiring enough of these desired traits to crowd out the dollar. Maybe a day will come when all these conditions are met but not before the second half of the 21st century according to most pundits.

A problem with forecasts that grant the possibility of a particular outcome but only a long time from the present is that in this age of uncertainty, once-in-a-lifetime events are happening with way faster frequency than imagined. Anything that can’t be ruled out can occur much sooner than historical precedent would suggest. We’re seeing that with extreme weather events, extreme recessions, and controversial and cliff-hanger national elections.

America was founded with big imperfections — genocide against previous existing populations in North America and enslavement of people with color to name two — but with a dream  to pursue improvement. If the American Dream ever dies, so will eventually the dollar’s favored currency status. Whatever the current disappointment, the dream embodies hope of  a safer environment, protection from threats both internal and external, less uneven justice, and the possibility of rising prosperity regardless of where one began life.

The state of America’s union has taken several big hits recently. Start with the nation’s two-party political system, which to function depends on a compromising give-and-take.  Republicanism was co-opted by conservativism a half century ago and underwent a second radical overhaul by Trumpism just four years ago. Each of these revolutionary changes excommunicated impure elements of the party, and to feed the xenophobic elements of his base, President Trump is fueling yet another lurch in the party that in a week full of scary news, the one weighing most heavily is the widespread fear that Trump will either fabricate a justification to postpone November’s election, find ways to corrupt the voter count in such a way as to win, or refuse to step down if he loses. He may claim fraudulence and use the military to stay in power.

Nothing might be beyond the pale. Reports of white supremacist agitators infiltrating the urban protest marches and turning such assemblies violent brings to mind the Reichstag fire of February 27, 1933 in Berlin just four weeks after Hitler’s election. Perpetuated by Nazi arsonists, the fire was blamed on political opponents and used as a pretext to enact harsh restrictions that put Germany on its catastrophically infamous path of death and propaganda.

Initial hopes for a V-shaped business cycle in the United States have been widely tempered, but a consensus continues to look for a fairly impressive rebound in the second half of 2020. Three downside risks could spoil that hope. The obvious one occurs if the Covid-19 pandemic either fails to slow sufficiently or does so but quickly flares up again after the briefest of respites. It’s widely accepted that few areas in the United States or the world for that matter have yet attained herd immunity large enough to avoid renewed epidemic conditions. So social distancing norms will have to be followed widely for the foreseeable future, and infection tracing and testing needs to be much more comprehensive than such has been. The odds seem heavily stacked against an epidemiological path that maximizes the chance of coaxing the U.S. economy back to normal, that is barring the development of a safe, effective vaccine that is also widely disseminated at an affordable price.  To believe that opening things up, and they will come is to oversimplify consumer psychology.

A second big risk overhanging an early and steady exit from America’s historically steep recession is the simultaneity of the recession throughout the world of nations. The global economy lacks a clear locomotive economy to lead the way back. With just about all nations deep in recession, the drag is apt to exceed the sum of the parts. It doesn’t help either that the United States government continues to play the isolationist card. Containing the pandemic and the recession that sheltering at home has produced will be further impeded by America’s continuing pursuit of trade protectionism.

Monetary policy will not be sufficient to pull the U.S. economy out of recession. Fiscal policy has to pick up the slack, but the Republican senate is unwilling to authorize much additional support. Since the programs helping unemployed workers will run out, Congress has to run the fiscal ball merely to stand still. If it delays or does too little, it will be a step backwards and depress economic growth. All in all, the growth risks surrounding baseline forecasts seem tilted to the downside, and in a recession with as much unemployment as now, a dampened recovery as seen after America’s last two recoveries presents yet an additional danger of allowing the recession to develop dynamic momentum of its own. The slower the recovery, the more temporarily laid-off workers will find their jobs permanently lost, and many more businesses than otherwise will close down.

Americans like to think of their country at the best to be found in the “first world.” Only monies from first world nations can vie for reserve currency status. Unfortunately, America this year is not behaving like a first-world member in many respects. The business-funded healthcare system is what one might expect from a third-world country. Other elements of the social safety net functioned poorly. Elementary and secondary school education is no longer the envy of the world. The U.S. transportation system, something about which candidate Trump complained in 2015-16, gives one a third world feeling. So too is the state of democracy. To be sure, the military is first world-worthy, so they say, but what really has been won? The Korean War ended in stalemate. The Vietnam War’s peace with honor held up only two years before being exposed as a virtual defeat. Beirut was a fiasco. The Persian Gulf War didn’t make the Middle East safe for democracy. Wars in Afghanistan, Iraq, and against ISIS followed and have been endlessly long, costly and demoralizing. One wonders what would be different without all that carnage, and just maybe some unneeded money had instead gone to preparing for a pandemic. As things turned out, that’s what providing for the common defense is about in the 21st century.

The headline delivered on September 12, 2001 spit out the raw details of a national tragedy: U.S. Attacked: Hijacked Jets Destroy Twin Towers and Hit Pentagon in Day of Terror. As bad as the news was that day, the nation unified and rebuilt. The paper delivered on May 31, 2020 gave a much more unnerving message: Spreading Unrest Leaves a Nation on Edge: In the Flames, a Fear of Spiraling Chaos. The enemy this time is us, and the reaction of the nation has been paralysis and chaos, not unity and resolve. People are trying to cope not just with uncertainty and a drain on their resilience, but also with an Orwellian destruction of truth as a virtuous and necessary foundation of all relationships. The greatest lie of all is found in the MAGA promise, which above all fails the Reagan test. Are you better off than you were four years ago? Really?

Copyright 2020, Larry Greenberg. All rights reserved. No secondary distribution without express permission. 


Comments are closed.