Dollar Power -- Slipping, slipping ...

Years ago, when I was in high school (and Eisenhower was President), I got to thinking about the true source of American power. No doubt SAC (Strategic Air Command) was a significant part of it, as were the carriers, escort cruisers, tanks and troops.
But what was the actual core of American power? It quickly became obvious that the real basis of America’s status as a superpower was the dollar. Stacks of “Eurodollars” sat in foreign government vaults as backing for their currencies. The gold was in Fort Knox.
Our dollars absolutely controlled most small Caribbean nations—Cuba, Costa Rica, Guatemala, Panama and so forth. Dollars, in the form of Marshall Plan grants, stopped West Europe and Japan from voting Communists into power—and guaranteed our control of those nations.
More importantly, dollars PAID FOR the mighty bombers and ships that projected American military power throughout the globe. Dollars built the factories and shipyards that produced these things and so much else that made up the American lifestyle.
Dollars bought oil (as well as the allegiance of dictators all over the world). Others paid five dollars a gallon; we paid thirty cents. Dollars built the fantastic super highways that produced the most awesome distribution system in the world.
Dollars made Wall Street the center of world finance. Dollars built the finest universities in the world and created the awesome technological revolution that made TVs and personal computers essential for a civilized society. There lay the true power. Atom bombs, hydrogen bombs and delivery systems all came from a surfeit of dollars.
Last week’s “Newsweek” published an article called “An Empire At Risk” –“we won the cold war and weathered 9/11. But now economic weakness is endangering our global power”. I’m delighted somebody else sees this!
It isn’t just foreclosures, unemployed Americans or faltering car companies; everything goes down if the dollar falls. It’s like giving Sampson a haircut. And our foolishness has placed the dollar at risk. That should concern us all, perhaps more than anything else.
The biggest danger, according to “Newsweek”, is that as the national debt increases, interest rates go up as people who buy our governmental bonds (who loan the money to us) start to ask for higher rates of interest if they are to continue holding those bonds.
Higher interest rates just add to the sheer cost of maintaining the debt (look, for example, at the amount of interest your credit card company charges you for a balance you don’t pay off in 30 days; think what happens to your payment if they raise the interest rate from, say, eighteen percent to twenty-nine percent).
Governments get hammered just like you do. “Newsweek” offers a sobering list of previous world powers that found themselves paying so much just to service their indebtedness that they lost the ability to project power and collapsed.
Spain, the ultimate superpower of the 1500s, was forced to default on its debts 14 times by 1696—and it hasn’t been a serious world power since 1700. Before the horrors of 1789, France was spending 62% of government revenues just on interest.
The Ottoman Empire saw the cost of debt service go from 25% to 50% in 25 years—and earned the sobriquet of “the sick man of Europe”. Forty years later the empire disintegrated. After World War I, England paid 44% of her budget to service her debt. She was a “dead man walking”, just waiting for a strong wind like World War II to blow her away.
“Newsweek” calls it “the fatal arithmetic of imperial decline”. We owe trillions now—and we’re on the hook for a whole lot more. At some point somebody’s going to raise the rate on our national credit. Then who pays for carriers, highways, rockets, or planes?
With the dollar goes the dream of what we have come to call the American Standard of Living. Pay attention!