Picture this: Finance ministers and central bankers from Brazil, China, France, Japan, Russia, and the Arab oil states, meeting in secret, scheming to replace the sliding U.S. dollar as the world's top currency with a new arrangement backed by gold and foreign money.
If successful, there would be less demand for U.S. dollars, higher U.S. interest rates, higher U.S. consumer prices, an end to our extravagant way of life.
The plot was reported in London's Independent newspaper last week, citing unnamed "Arab and Chinese banking sources in Hong Kong."
Despite such flimsy support, the story circled the globe. "Will we become the new Argentina?" reader Elaine Hughes asked me. It prompted relentless denials: "Absolutely incorrect," the head of Saudi Arabia's central bank told reporters.
Still, sober observers noted truth behind the gossip: Oil producers and Wal-Mart suppliers are tired of being paid in dollars that are losing value. Chinese and Japanese bond buyers worry the U.S. debt they've been buying for decades is a declining investment.
So Asian currencies rose on the report, and U.S. economists, traders, and politicians used the occasion to ask, "What if?"
"China, Russia, and Brazil have been publicly bad-mouthing the dollar all year," noted economist Ed Yardeni, of Great Neck, N.Y., in his report to clients.
Reminding us how presidents since at least Ronald Reagan have called for a "strong dollar," even when they let it slide, Yardeni accused the government of borrowing too much and not caring what comes next. He questioned whether there was "adult supervision on economic issues" in the President Obama White House. And he stayed bullish on China stocks.
On Thursday, Bloomberg TV's Peter Cook asked Obama's economic adviser, Lawrence Summers, about the Independent's report. Summers put it down as "conspiracy theory."
But Cook held Summers to one of the big questions behind it all: "Is it inevitable that China replaces the United States as the world's largest economy?"
Could happen, Summers said. China has a lot more people than we do. "If it runs its economy successfully, even if that economy becomes only a quarter as rich on a per capita basis, [China] is going to be a larger economy."
Meanwhile, the United States cannot afford to keep borrowing so much, from China and everyone else, Summers said. "That's going to require policy adjustments," he added. Especially in health-care spending. As he has said before, we'll need to save more, and borrow less.
Buy our stuff
Cheap dollars aren't all bad. "The downside of a weaker dollar is that imported goods can become more expensive. The upside is that our products are becoming cheaper on the world markets, making it easier for our companies to compete and export," economist
of Holland, Bucks County, told clients last week.
But a cheap dollar also "risks foreigners' abandoning the purchase of our debt," warned economist David Kotok at Cumberland Advisors Inc., of Vineland, N.J. "The result will be higher interest rates," which mean an even slower economy.
How bad is the dollar, really? When last year's financial crisis hit, "there was only one safe haven in the world. It was the [U.S.]
, professor of finance at Penn's Wharton School. "The dollar soared. The dollar-price of the euro fell from $1.60 to $1.25." So much for replacing the dollar.
This year the dollar (it took $1.47 to buy one euro Friday) has merely given up some of what it gained last year. Marston calls it a "sigh-of-relief" rally by foreign currencies, stocks, even junk bonds.
It is a rule of politics that you cannot beat Somebody with Nobody. Summers has made the same point about currencies: What alternative is there to the dollar?
"A 'basket' of currencies will not do it," Marston said, citing the claim in the Independent report. It's hard enough to influence one currency, let alone keep several in line. Especially if you include China's money, which is more tightly controlled by the central government than elsewhere.
"The real question," Marston added, "is whether the euro could replace the dollar." He says it probably could, "if the U.S. keeps running fiscal and trade deficits. We will eventually exhaust our credit."
How soon will that be? The dollar, Marston concluded, only replaced the British pound as the world's currency around World War II, "long after the U.S. economy had become much more important than the British economy."
"We will be able to get away with profligate spending for at least another decade at least," Marston contends. "That's a testimony to the tremendous reputation and incredible wealth that previous generations of Americans have built up."
Tell your kids.