The Hindu Business Line : Why the dollar should fall

THE declining fortunes of the dollar is becoming a global concern. The US is earning less from exports than it needs to pay for her imports. The US trade- and budgets-deficits are increasing. The dollar has been falling while the euro, the yen and the rupee are rising. There is a possibility that this may lead to dumping of dollars in a big way and bring the US economy down.

Many developing countries are dependent on the US market. The US economy will pull down these countries along with it. Thus, it is being said that the whole world, in its own self-interest, should rescue the dollar by continuing to buy it. In their article "Fall of the Dollar," James A. Paul and Marianna Quenemoen of Global Policy Forum. Say: "The dollar's fall will reduce the huge international subsidy enjoyed for two decades by the US economy, ultimately shrinking the standard of living of US citizens. At the same time, falling US demand for imports will likely harm economies everywhere else and set off further currency devaluations, pressures and financial instabilities — all with dangerous consequences."

In the same tone, Elizabeth Becker and Edmund Andrews argue in a New York Times article that "large budget deficits pose `significant risks' not just for the US but for the rest of the world." These commentators appear to say that the developing countries will stand to lose if the US economy collapses. But that is only in the short run.

A businessman may, indeed, feel comfortable by selling goods to a buyer against dubious promissory notes. But that will disappear when the promissory notes remain unpaid. The US economy today is like such a buyer. It is dependent on other countries buying it T-Bills so that it can continue to import their goods. The US is like a buyer asking for more supplies against a cheque which should not be presented for payment. It will obviously be better to sell the goods to another buyer at lower price but whose cheque is good. But, then, if the businessman stops selling to the dubious buyer and does not find another buyer then he is in trouble. It follows that the rest of the world should develop other markets instead of continuing to buy US T-Bills of dubious value and exporting to the US.

The problem is that other countries do not have an America-like appetite of making huge borrowings to import and consume goods from across the world. The US buys Chinese goods with money borrowed from China. But if China has to sell her cloth to the US with her own money then why should it not empower its domestic buyers to buy that same cloth against a similar borrowing? The Chinese Government could lend money to its people and they could buy that same cloth which is presently being exported to the US against the dollar-denominated T-Bills of dubious value.

This "lending" can be done by giving out unemployment compensation or by making greater investment in food-for-work schemes that also create productive assets. Such an approach will have two consequences. One, the non-purchase of US dollar by the developing countries will lead to that currency falling rapidly and the US economy will collapse. Two, the standard of living of the people of China will rise by the consumption of more cloth. The Chinese economy will remain unaffected by the US collapse because a domestic market will replace the one being provided by the US now. China cannot get full payment for its exports to the US. The money that China gives to the US to buy T-Bills is a "loss" to the Chinese economy because T-Bills cannot be sold. Beijing would incur a similar loss in giving out cheques for unemployment compensation to its people. In both cases the payment for the goods sold is not received. The difference is that presently the US consumer is consuming goods against T-Bills of dubious value; the Chinese consumer will do the same in the alternative dispensation.

Buying US T-Bills and propping up the American economy is not the only option. However, this is promoted because it leads to the maintenance of the US hegemony. The real concern is that US hegemony will be broken with the fall of the dollar. Thus, a false propaganda is being made that it is necessary for the rest of the world to buy dollars for stability and growth. The truth is that the collapse of the dollar and the US economy can lead to better standards of life for our people and also create a multipolar world.

(The author is a New Delhi-based freelance writer. He can be contacted at bharatj@nda.vsnl.net.in)