In the Realm of the Dying Dollar

Great powers die slowly. The world is losing confidence in the dollar, in no small part because it has lost confidence in America's strategic judgment and in its sustainability as a great power in the face of record budget and trade deficits, which are forcing the United States to borrow ever more money from future rivals like China and Russia.

Meanwhile, Osama bin Laden seems to be achieving his publicly avowed goal of provoking the United States into overextending itself and draining its economy.

Nobel laureate Joseph Stiglitz, a former World Bank economist, notes that President Bush took a nation with a budget surplus upon assuming office and turned it into a global debtor, and he has underinvested in education and alternative energy. "The United States had not experienced a turnaround of this magnitude since the global crisis of World War II," Stiglitz writes.

If the passing of American hegemony happens, it will occur very slowly--death by a thousand cuts of credit.

While China and other big dollar-holding countries such as Singapore, Russia and the Persian Gulf states are very worried about the erosion in value of their dollar-denominated holdings and inflationary pressure, they also know that an abrupt move to cut their pegs to the dollar or to sell off in large amounts would force a run on the currency. That would leave them even poorer. Instead these countries are pursuing careful reallocations of their investment holdings, shifting slowly to the euro or a "basket" of currencies that will allow them to hedge against the dollar's decline. The effect will be more like a slow-acting poison: drip, drip, drip.

[Newsweek]