Thank you very much to the Mises Institute. It's a pleasure to be here and talk about the currency that has come under recent pressure and I try to make an analysis directly towards the future.
So I'm doing some risky business here. Economists shouldn't predict because it deals with the future.
When confronted with complaints about the sinking value of the dollar, the U.S. Secretary of State of the Treasury responded to his European visitors.
The dollar, it is our currency, but it's your problem.
That was in 1971, and the Secretary of the Treasury at that time was John Connolly.
His boss was Richard Nixon, who also made a very famous statement about the Italian lira, which I cannot repeat here.
Today, the Italian lira no longer exists. It forms part of the euro, the European common currency, which is challenging the global position of the US dollar.
In 1971, it took only the Europeans less than a year to launch the first project of having a common currency, the so-called snake system.
From that on, the Europeans tried, each year more or less so, to get a common currency.
Just because the impression was we are, in terms of the US dollar, under benign neglect.
And also in terms of the internal trade, a highly volatile system would disrupt the process of European unification.
So, in 1999, the euro was established, first in banking trades and in 2002 as a physical currency.
What does that mean for the US dollar? It is common to look at growth differentials,
to look at innovative potential and so on. But the major factor that makes the euro attractive is just coming merely from its liquidity to be a challenge to the US dollar as of now. There is another currency available which has just as much potential in terms of size as US dollar.
So when you look at the exchange rate movements, there can come news, U.S. economy is growing, inflation rates rising or not rising and so on, this does not affect very much the exchange rate actually, yeah.
What we are observing right now during the past couple of years is a continuous shift from central banks, from investors, large investors,
Just to go into the Euro because there you have also another currency with a high degree of liquidity due to its size.
So it's not so much the strength of the currency or the solidity.
We had currencies that were stronger in terms of the stability of the economy and the inflation rate like the Swiss franc.
The Swiss franc, but the Swiss franc never was a challenge, never could be a challenge to the US dollar, and the same was with the German mark, which has increased in value threefold against the dollar during the past 40 years, but it was not a challenge in this respect, so merely the size of the euro market is a factor that will, let's call it, weaken the US dollar, and this will happen in my view
Irrespective of growth rates, we know that in the long run, growth rates are more or less even between the European Union and the economies of the European Union and the United States.
So in the short run, there may be growth differentials and so on. So this does not really impact. And I think that's important to see this aspect.
What else is impacting on the future of the US dollar? Besides its pure size, the other major element of dollar dominance up to now was political, and for some time it seemed, particularly in the 1990s, that this element of dollar dominance had actually increased.
So during the 1990s we saw a recovery of the dollar against its major competitors of that time, the yen, the German mark and so on.
A temporary dollar revaluation. So what is behind this phenomenon and how has it changed in the meantime?
With the fall of the Soviet Union, and let me add to understand currency, one cannot just be within the field of economics.
International finance is international politics, international monetary systems are political systems.
So let me add a few words about the global environment which is changing rapidly.
With the fall of the Soviet Union at the beginning of the 1990s and the dissolution of the Soviet Empire,
the U.S. had emerged clearly as the sole global military and political power,
and so it seems also as the major undisputed economic power.
As you may remember, the 1990s saw the entry of Japan into a prolonged recession.
The major competitor of the 80s, when you remember the 80s, how many books were written about the Japanese challenge.
Japan somewhat disappeared as a contender.
Similar and a different form happened to Germany.
Germany entered into the process of managing reunification which was just a morass and cost a lot of money and the former locomotive of Europe more or less stopped up to now in a certain way and lost a lot of its steam.
So, it could all seem like a replay for the US, just like the end of World War I and World War II, with the US emerging for a third time on top of the world, and of course this got reflected in the strengths of the US dollar.
In the early 1990s, the trials of global dominance seemed well in place for the United States.
Unchallengeable military might, a booming and innovative economy, and the issuer of the only global currency.
As seen in retrospective, it seems as if we have lived somewhat in the 1990s in an illusionary world and under the spell of this triple illusion, a profoundly wrong assessment actually of the military, financial and political situation.
It was only at the beginning of the 21st century when these assumptions were challenged.
In the military field, it has become clear that the U.S. military power is somewhat inefficient.
I use the term in a pure economic sense that the output is not very favorable
in terms of the huge input cost that is being in place.
It may in fact more represent an economic burden than an effective political means to
make one's will certain in the world.
The US economy looks strong in terms of consumption, call it the stomach of the world, but it seems
becomes rather weak in terms of productive capacity, as it is simply shown by the persistent
trade deficits.
And finally, and probably most important, while after 1919 and 1945, the U.S. has emerged
As the largest international creditor, the United States is now the world's largest debtor.
Also in contrast to the 1920s and 1940s, the economies of Russia, Western Europe and Southeast
Asia have not been devastated. In terms of industrial production and financial resources,
They stand on an even footing and are even superior in certain areas.
International finance and international politics are intimately interwoven.
In order to assess the dollar, we must not just look at the economics but also at international
politics.
The dollar has been a political currency as much and probably to a lesser extent it is
an economic currency.
Even more so, one could speculate that the U.S. economy, to a high degree, has been,
in its performance, a function and dependent on the role of the U.S. dollar that he has
played in the world. And the role of the U.S. dollar depends on the political and military
Position of the United States.
Seen in this perspective and under these headings, where are we going probably? Where is the
dollar and the U.S. economy supposed to go? As I mentioned before, in terms of liquidity,
The U.S. dollar clearly faces a major rival. This is undisputable. And it will continue.
So just of matters of diversification, this will go on.
Financially, the U.S. economy is no longer in a creditor position, but a debtor nation.
There has been a financial power shift of global proportion going on.
And in addition to that, new political military powers are emerging, like China.
Military also, the overkill capacity of the United States is in check.
The Soviet Union has disappeared, but Russia continues to be a major nuclear anatomic power.
Also, we see new and rather strange alliances showing up.
Firstly, of course, there is this strange axis of evil, as President Bush has defined,
But this is composed of economic, financial and military dwarfs and far away from the United States.
But what about the other axis that is being formed presently?
Among the President Lula from Brazil, Chavez from Venezuela and Fidel Castro,
What about the persistent rumors that Brazil strives to get a nuclear bomb?
And what about the deals, the major deals that China is taking in making in in southern America?
China is on their out to particularly with countries like Venezuela, which is a major oil supplier to the United States,
Brazil, which is a major supplier of agricultural products to have a footing in this region.
And then, of course, there's this other strange alliance ranging from Paris to Berlin to Moscow
covering this huge Euro-Asian continent.
In order to correctly assess the seriousness of the problem, we must recognize that a solid
position of the dollar represents an essential underpinning of the economic prosperity at
home. Secondly, as much so as the political underpinnings of the dollar are being challenged,
The US economy must enhance its productive capacity.
So what my prime thesis is as a summary, that the dollar loses its privileges, the privilege
to be the only major currency representing a huge liquidity, and it is losing its privilege
due to the military position.
The dollar will lose its dominance
when the current account deficit will not be reduced.
So we have three elements in the game.
Two of these can hardly be resolved.
These are long-term trends.
And we have only one variable that could be changed,
which is the current account deficit.
So, my message basically is that the US dollar is becoming less so a political currency and
is becoming more like an ordinary currency.
The real danger comes when a weakening dollar begins to seriously affect the performance
of the U.S. Economy. Then we have the vicious cycle, and this has to be avoided at all costs,
so to speak. There seems to be a consensus now among the major players in this area,
particularly the governments and the central banks, that a rapid, dramatic fall of the
dollar should be avoided. So there's a consensus. The Europeans don't want the crashing dollars.
On the one hand, this could allow the United States to adapt gradually to the new constellation.
On the other hand, such a policy could lead to the further postponement of urgent adaptation.
We must not forget three of the most essential prices in the modern economy are political
prices or politically manipulated prices, the oil price, the interest rate and the exchange
rate.
This way, investors are prone to receive false signals from these markets, from these prices
and Make False Investment Decisions.
While political action can distort prices, it cannot eliminate the basic laws of economics.
According to these laws, the price of the US dollar will have to go down, and the price
for imported oil in terms of dollars will go up, and the price of money and credit for
The U.S. dollar must go up as well, that is the interest rate.
So given the importance of these three prices for the U.S. economy and their potential direction,
if you do away the political manipulation, which would imply when we had free markets
and would induce political intervention, that the dollar already would be much weaker, that interest rates would be much higher.
It is not difficult in this perspective to assess the prospect of other prices for the US economy, particularly those of stocks, bonds and real estate.