a time for committed and credible American leadership

In last Sunday's Outlook Section, a Washington Post columnist made some of the same arguments about international finance which I made in a recent post (a process of mutual understanding). The article is No Cushion Against Hubris, by Jim Hoagland. Here are a few extracts:

"The first panacea for a mismanaged nation is inflation of the currency; the second is war." -- Ernest Hemingway, Esquire magazine, September 1935

There is still time to covet and honor the American greenback as the strongest link of stability in the international financial system. [But] the "golden moment" that enveloped the global economy for most of this decade is fading -- at least psychologically if not materially -- as we reach the end of an era of hubris in global affairs.

[The moment is fading] not just because President Bush will leave the White House next year, although that will help. The brash Texan has personified the global zeitgeist of his time: one of audacity curdling into hubris. He was elected to pursue a powerful nation's impulses and ambitions to be stronger and richer than any country in history, and he and his compatriots have pursued those dreams into the ditch.

However necessary and skillfully managed, the rescue efforts [of the Federal Reserve] add devastating new pressure on the dollar's value as a traded currency (which then affects oil and other commodity prices) and on rising U.S. inflation rates. They also eat into the fixed-income investments of many retirees. Like so much that has happened on Bush's watch, the bill for today's maneuvers will come due after he has gone.

It is hard to see how the world's global trading and financial systems can be fixed or even rebalanced without committed and credible American leadership based on realism and not hubris. But it is even harder to see that leadership coming forth unless the United States can first put its own house in order.

Hoagland doesn't say so directly, but it's implicit in his argument that we're at risk of destroying the status of the dollar as the world's standard currency. This de-facto standard has given Americans the ability to set internal monetary policy without considering international repercussions. As this site points out:

Today over half of all dollar notes in circulation are held outside the borders of the US. Almost half of US Treasury securities are owned by foreigners, mainly held as reserves by foreign central banks. The dollar is the main currency in international capital flows, as well as the currency of invoice for commodities and for many manufactured goods and services. All countries that trade directly with the US invoice both imports and exports in US dollars. . . . The US can issue dollar-denominated claims to the rest of the world which may never have to be redeemed so long as it maintains the domestic purchasing power of the dollar. While this gives the US a unique advantage in terms of borrowing in its own currency, the existence of a safe reserve asset is a great convenience to other countries. Only a serious loss of confidence in the dollar could depose it as the primary medium of international exchange, such as might be due to a prolonged major inflation in the US.

It's the "loss of confidence" in the dollar that's now becoming a realistic possibility and the failure of Americans to recognize this fact is part of the hubris that Hoagland warns against.