America’s Soft Dollar Is Scary For Eveyone

by | Jan 29, 2011

Stephanie Flanders, the BBC’s economics editor, is in Davos, Switzerland this week, reporting from the World Economic Forum.

I don’t pretend to understand economics any more than I understand international politics, but I know enough to know I need to know more.

The rule is that America gets a free pass to run larger deficits, for longer, than anybody else. But you have to wonder – and everyone I speak to in Davos is wondering – how long America’s “exorbitant privilege” is going to last.

It took several decades, and two punishingly expensive wars, for the world to tire of holding sterling. But when they did, it changed British economic policy making forever. Indeed, we are still seeing the consequences today. Rightly or wrongly, the British government believes it cannot risk borrowing a lot more from international markets. The Americans know they have a lot more leeway.

They will have it for some time yet. But the lesson of sterling’s rise and fall is that if you run current account deficits long enough, and depreciate your currency far enough, the world will eventually stop giving you the benefit of the doubt. The biggest difference between Britain in 1945 and America now is that back then, there was a ready replacement for sterling, in the form of the dollar.

The word “empire” does not appear in the text above, but the concept of empire is certainly present. And as history shows, empire is not sustainable.

Meanwhile, President Obama delivered his State of the Union on Tuesday. Here he is saying, “We have to do more.” Roger that.