December 26, 2004
...BARELY NOTICES:
China Expands. Europe Rises. And the United States . . . (FRED KAPLAN, 12/26/04, NY Times)
The European Union, in many respects, is looking more and more like this new tycoon. Its currency, the euro, has risen in value by 35 percent against the dollar in the last three years.Again, that is not necessarily bad. In theory, a falling dollar makes American exports cheaper, attracting demand that then boosts the dollar; a rising euro crimps European exports, which then lowers the euro; equilibrium is restored. In reality, this process unfolds slowly and shakily: in October, for instance, American exports rose, but American imports soared, too.
A more serious consequence of the dollar's fall is that the euro has become more rewarding for foreign investors, and they are reacting accordingly. In 2001, Middle Eastern oil-producing countries kept 75 percent of their currency reserves in dollars; now the figure is 61 percent, with much of the rest in euros. Chinese and Russian central bankers are also shifting reserves. This trend, at some point, could set off a spiral: the dollar declines, causing further sell-offs, leading to a further decline, and so on.
When the dollar has fallen in the past, the United States was a net creditor and there was no serious rival currency. Neither condition holds true now. As The Economist recently put it, "Never before has the guardian of the world's main reserve currency been its biggest net debtor."
Financiers and diplomats are beginning to ask: How much longer will the dollar remain the world's principal reserve currency? One could also ask, how much longer can the United States remain, as Madeleine Albright put it, "the indispensable country" of world politics?
This year, the United States spent nearly as much on its military as all other countries combined. No other nation possesses, or aspires to, anything like the reach of American armed forces.
Yet, if someday the United States finds that it can no longer count on foreigners to bankroll its deficits, it may also find that it can no longer afford a globe-spanning military.
No one actually read Paul Kennedy's book, just kept it by the bed for a few months--like Allan Bloom's Closing of the American Mind and Norman Mailer's Harlot's Ghost--so he can be excused for not understanding it at all.
But two rather simple numbers amply illustrate the inanity of his argument here:
(1) Eurozone growth for 2005 is, probably overoptimistically, projected at 2%, or half that of the U.S.. The same central bank policies that are keeping the euro at artificially high levels are helping stifle Europe's economy.
(2) The U.S. spent $450 billion out of a GDP of $12 trillion on its military this year. Mr. Kennedy made the case that if a nation were: allocating over the long term more than 10 percent of gross national product (GNP) to armaments, that is likely to limit its growth rate.” In other words, if history is our guide, we'd have to triple defense spending and maintain it at that level for a period of years before we risked decline as a result. Recall that during the Cold War, a period during which we likewise expanded our economic lead over the rest of the world, we averaged a spending level of 7% on defense for close to fifty years.
Just as Mr. Kennedy's book was little more than a quarrel with Reaganism and the winning of the Cold War, so too is Mr. Kaplan grining an ax against George Bush and the decision to radically transform the Middle East rather than treat al Qaeda as a criminal matter. The truth is that the War on Terror has been waged, and very nearly won already, without our so much as having to break a national sweat.
Posted by Orrin Judd at December 26, 2004 11:04 AMLike everyone else at Slate, Fred Kaplan probably would both be better at and would prefer licking doorknobs at GOP HQ in New Hampshire.
You are of course correct OJ. European growth rates are nonexistent, except for Eastern Europe, the part less likely to engage in sclerotic statist economic policies. Among the economies of Western Europe, Germany is the fastest growing, speeding along at a dizzying 1.6% per annum.
The reality is not that our currency is undervalued merely that the Euro is being kept at a rate sure to strangle the emerging nations of the East in the cradle. The only really undervalued currency in the world today is probably the yuan or renminbi. And if the PRC let it rise to its natural level, their economy would collapse because it is entirely dependent on the export of mass produced cheap goods.
Kennedy's book isn't a bad read, but he is really bad at numbers, although he tries. You are correct to point out that our defense expenditure is in line, and arguably less, than it was during much of the Cold War. However, imperial overstretch is a reality, exacerbated because the American political class lacks the tenacity of the 19th century British ruling class, and will cut and run at the first sign of trouble. It's good to keep the problem in mind when thinking about policy.
Posted by: Bart at December 26, 2004 11:29 AMArguably less? Try half.
Posted by: oj at December 26, 2004 11:32 AMWhy all this blather? Would anyone seriously choose any currency but the dollar for their long term investments? Economist sometimes forget our treasure is the genius of our people. American ingenuity -- we got it and they don't.
The euro will be a bad joke in ten years unless they get serious and stop posturing very soon.
Any time spent worrying about exchange rates is time wasted.
Posted by: David Cohen at December 26, 2004 5:12 PM