Plugged nickel 091009

When the Soviet Union collapsed scholarly debate considered the survival of great powers. As the surviving great power the United States became the focus of debate. Purely academic thesis gave way to two emotional hypotheses; the pending and inevitable collapse of the United States as a power, or the surety that it would continue to dominate as the sole world power.

Doom and gloom v. Sound of music in America’s survival and power. Doomers point to history and recent American missteps as proof of decline. Musicians romanticize Americanization and claim overwhelming military and economic power that can never be matched by any other nation. Various musicians claim victory over the Soviets was the result of: Christianity defeating Atheism, democracy over socialism, technology over antiquity, or our stick is bigger than your stick. The truth is that the Soviet economic central planning model failed.

America’s capitalist economic model just cracked loudly enough to be heard around the world. Musicians gleefully sing that the economy is rebounding showing it strength. It’s not strength or government intervention that insured its survival. The fact is that for the moment the world cannot afford to allow an American economic collapse on the scale of the Soviet’s.

Paraphrasing economist John Maynard Keynes a small debtor is at the mercy of the banker while he is at the mercy of large debtors. America has gone from being the banker to being a very large debtor. The international community owns to many dollars and too much American debt. If the American economy collapses so do the linked economies of the community. For sometime the community has been considering its economic options. The Euro is emerging as an economic reality of Europe along with its trading partners and the renminbi is becoming powerful in the Asian trading block. Russian trade is linked to both currencies by location.

Other trading blocks will probably emerge but it will take time for Euro, renminbi and others to mature into international reserve currencies. For the near future the dollar will retain its position as the reserve currency of the world economy but its days of dominance are limited. It will take considerable time for nations to divest themselves of American debt without damaging their own economies.

America will probably attempt to impede the rise of other competitive currencies. It is in the interest of America however to support a multilateral system of reserve currencies. With the world tied to one national currency it is held hostage to that nation’s economic hiccups. Every investor knows the value of diversification. A return to a multilateral system in merely diversification that moderates risk and reduces the possibility of a foreign bank foreclosing America. A multilateral reserve of currencies dampens wide swings in the reserve value. It also forces policy makers to act more responsibly to maintain reserve value than America has demonstrated. For the moment the leaky nickel has been plugged.