While the rest of the world is racking its brains trying to figure out why the world's currencies are plummeting against the US dollar, the United States elite is using the strong greenback to set in concrete its dominance of the world economy.
The loss of value of the world's major currencies against the greenback has been constant for more than a year. The Australian dollar, for example, now buys 30% less US currency than it did at the beginning of the year. The euro, the joint currency of 11 major European nations, has lost similar value since its January 1, 1999, launch.
Coupled with rising oil prices, the strength of the greenback now threatens to drag down living standards outside the US, to force businesses into bankruptcy and to cause banks, and even countries, into default.
The threat is particularly grave for the Third World. Most of its trade and external borrowings are in US dollars — a strong dollar will make essential imports even less affordable and the servicing costs of foreign debts even more crushing.
Moreover, the 1.75% rise in US interest rates in the last 16 months has inflated the Third World's external debt servicing bill by tens of billions of US dollars, pushing many countries close to the edge. The Third World's external borrowing totalled US$2.45 trillion at the end of 1998.
The main reason cited for the slide against the greenback is the generally weaker growth of the major economies outside the US. The euro-zone countries' gross domestic product (GDP) grew by an average of 2.2% a year since 1995 and Japan's by 0.3%. In contrast, the US's grew by 4.5%.
While the growth differences matter, they alone are insufficient to explain the stark gaps in currency valuations.
US 'miracle' economy
The most propagated reason for the US's booming "new economy" — its unique path of high growth, high employment, low inflation and a roaring dollar — is its alleged superiority in information technology (IT).
Fuelled by rocketing share prices for high-tech US firms, this superiority in IT has supposedly resulted in a productivity edge over the European Union (EU) and Japan.
While IT's potential to boost productivity mustn't be underestimated, there is as yet no conclusive evidence to suggest that the benefits are already filtering through to the US economy.
Even the arch-neo-liberal British Economist magazine, a fervent backer of the "US model", does not readily buy this theory of the IT miracle in the US. Its September 23 edition revealed that, between 1987-97, productivity actually declined in many US sectors that use computers most intensively, including banking and education. The sectors which have registered the highest productivity growth — mining and wholesale trade, for example — are light on IT.
Similarly, the alleged US superiority over the EU and Japan in IT-led productivity growth remains unsubstantiated. The September 23 Economist acknowledged that a cross-country comparison of IT's effects on the economy remained difficult because different measurements are used, adding, "All things considered, it seems likely that official figures understated European productivity growth relative to America's".
Although the US is still on the cutting edge of high technology in selected areas, especially in the production of war machinery, it isn't the most competitive in many key productive activities.
Part of the reason for the US's health is the ailing state of the rest of the world economy.
With stagnant sales and declining profitability in other parts of the world, capital owners have sought to maximise their returns through speculative activities, such as in shares, currencies and real estate. The New York Stock Exchange and the NASDAQ market for high-tech stocks have become the first choice destination for these capitalists — their funds have added even greater liquidity to the US economy and fuelled its growth.
The costs of this capital inflow have, as always, been incurred far from US shores. The resulting volatile movements in currency values, which generally have little to do with economic fundamentals, hold many economies to ransom, further subjugating already impoverished Third World countries, but even affecting some smaller rich economies, such as Australia's.
On the other hand, shortfalls in balance of payments generally should undermine a currency's value. But this doesn't seem to affect the US dollar.
The US's current account deficit is poised to hit $400 billion this year (4% of GDP), after ballooning from less than $100 billion in the early 1990s to $331.5 billion in 1999. The main reason is a massive excess of imports over exports.
Nevertheless, the greenback has continued to appreciate. In contrast, the EU and Japan's current account surpluses seem to have helped little in supporting their currencies' values.
Mighty 'paper gold'
The US's position as the world's dominant imperialist power rests not only on its military might. Washington's supremacy rests no less on the greenback's critical post-war role as the prime anchor and medium of international payments and reserves, the role once played by gold.
The world's other imperialist powers agreed to the primacy of the US dollar at Bretton Woods in 1944, on condition that Washington agree to surrender gold at a fixed rate on demand to redeem the US dollar.
The US's gold reserves were increasingly dwarfed by the post-war boom in financial transactions caused by the rapid growth of international trade and production. This shortfall was made worse by Washington's enormous military expenditures.
Its Vietnam War spending seemed to be the last straw, prompting President Richard Nixon in 1971 to unilaterally renege on the US commitment to maintain the dollar "as good as gold".
Without a viable alternative acceptable to other imperialist powers, global capitalism since then has operated on the "strength" of this "paper gold" — hardly an anchor of confidence. From then on, the best interests of the international monetary system have been at the mercy of the US Treasury.
Yet there are no grounds to suggest that the US Treasury has ever put its responsibilities to the world economy ahead of the interests of the US ruling class and its specific imperialist ambitions. Quite the opposite: the greenback has been used to ensure US capital's dominance at everyone else's expense.
Today, two-thirds of all international reserves remain denominated in US dollars, predominantly in the form of US Treasury bonds and bills — the IOUs of the US government.
Armed with this unique privilege, the US can take on enormous debts and expenditures in both the private and public sectors with virtual impunity. This has allowed the US economy to shrug off, at least partially, the lingering drag of overcapacity in production; it simply buys on credit.
Little wonder, then, that the US can be the world's "market of last resort", sustain enormous current account deficits and still retain a strong dollar.
Challenge of the euro
The interests of the US ruling class aren't always best served by a strong greenback, however. In other situations, the US Treasury has acted to depreciate the dollar and has still come out on top.
When the threat of a powerful Japanese export machine became too much in the mid-1980s, for example, Washington negotiated the September 1985 Plaza Accords and began a concerted effort to push up the value of the Japanese yen. The result was a reduction in Japanese export competitiveness, as its products became more expensive, and the rapid inflation of Japanese asset prices. The country's "bubble" burst in the early 1990s and hasn't yet recovered.
Manipulating the relative strength or weakness of the greenback to improve the US's competitive position vis-a-vis other imperialist economies has become Washington's chief privilege — and weapon — with minimal distorting costs to its economy.
The US dollar is not without its competitors, however. Throughout the 1980s and 1990s, European ruling classes never stopped seeking to install an alternative arrangement. The 1999 launch of the euro was the most serious threat yet.
Whatever might have been the immediate causes for the long slide of the euro, US Treasury chief Larry Summers made it clear as recently as September that the US has little interest in interfering with the strong dollar, or propping up the euro.
It surprised no-one that the September 22 intervention of the Group of Seven rich countries agreed to give little help to the euro. According to a Reuters report in early October, the G7 countries between them bought only US$5-6 billion worth of euros in the intervention, a drop in the ocean of the US$1.5 trillion in foreign exchange turned over each day.
Unmoved by appeals to help the euro, the real direction of US enthusiasm can be gauged by the pointed mid-September remark of Alfred Broaddus, a president of the US Federal Reserve, that the prolonged weakness of the euro raised "questions about its viability and its longer-term success".
The US dollar is still king, and Washington and Wall Street will do anything to keep it that way, even if it beggars the rest of the world.
BY EVA CHENG