The U.S. is losing two wars: Iraq and Afghanistan. No American presidential candidate has a credible plan for bringing a political settlement forward in Iraq, and the U.S. president has lost the domestic support of two-thirds of the population over his conduct of the Iraq war. NATO is helping the U.S. out in Afghanistan, but the war goes poorly, and it has little or no popular support in European nations.
The U.S. dollar is sinking. About one trillion U.S. dollars a year are flowing out into the world, as the U.S. buys about one trillion dollars more abroad that it sells to others. As U.S. dollar spending abroad goes up faster than the demand for these dollars, its price — the dollar foreign exchange rate — falls.
Most Canadians have noticed that the Canadian dollar will now buy you about 94 U.S. cents, while five years ago our money would only fetch 62 U.S. cents. But, our money did not so much go up, as the U.S. dollar went down.
The Canadian media do not tell us is what happens to our money against other world currencies: the British pound, Japanese yen, and the euro. In fact, Canada is probably the only industrialized country in the world where it is standard practice to ignore the value of our money against world currencies, and measure it only against the U.S. dollar. So Canadians get a distorted view of the world.
Compared to the euro, for instance, the Canadian dollar has fallen in value by a few cents, in the same five year period when it went up sharply against the U.S. dollar.Emotion matters in currency markets. As the U.S. dollar falls, people get scared it will fall some more, so they sell. Speculators smell U.S. dollar weakness, and sell dollars today, so as to buy them back later, for less, and pocket the difference as profit. Large scale selling will force down the price of anything. Speculators expect to win because the U.S. continues to spend abroad to buy assets, and fight wars.
Currencies are subject to confidence, and the world is losing confidence in President Bush; the U.S. dollar falls because of his perceived weakness, as well as because of the one trillion dollar deficit abroad.
Bush has defended American hyper-consumption of energy by waging war in the Middle East. His successor will have to plan how to reduce American energy use, deal with an emerging environmental consciousness, and figure out how to find a diplomatic settlement to the Iraq war. No wonder “Re-elect Al Gore” bumper stickers are selling well.
The weak dollar takes the initiative in world affairs away from the American president. To shore up its currency the U.S. needs support of the other world currency countries. While it bullies Japan, and dominates the U.K., the euro countries are capable of acting independently of the U.S.
At every G8 summit, the host is responsible for suggesting a priority agenda item. German Chancellor Angela Merkel wants this three-day meeting in the Baltic resort of Heiligendamm to be the climate change summit, and has called for specific targets to be accepted for greenhouse gas reductions.
Bush wants to derail international agreement on a green agenda this week, so he has announced his own climate change plan. Since this requires another timetable, effectively he has decided to pre-empt any concerted action at the Baltic summit. Instead of working with the host country, Prime Minister Stephen Harper announced a Canadian plan, doing his small part to help Bush divide the summit.
Both Bush and Harper need the G8. Without a plan to stabilize the dollar against the euro, interest rates will have to go up in the U.S. to make holding dollars more attractive. Holding up the U.S. dollar through interest hikes will provoke a recession in the U.S., and hurt Canada.
Bankers and financiers are used to a world led by the U.S. Dollar weakness signals both that the euro is a much stronger currency and that the U.S. is no longer in a position to lead on the issues that matter to the world.
The Bush dollar represents reduced status for the U.S., and neither Bush nor Stephen Harper seem to recognize what this means: the age of unilateral American leadership in world affairs is about to end, poorly.