The Dollar’s Crisis & the Left

Against the Current, No. 114, January/February 2005

Loren Goldner

INCREDIBLE AS IT may sound, ever since the late 1950s the world economy has been tossing around a “hot potato,” in the form of an ever-increasing mass of “nomad dollars.” These are dollars held outside the United States, whose actual conversion into tangible wealth would plunge the world economy into a deflationary crash.

Even now, few people are aware of the extent to which this “technical” question of “economics” (in reality a profoundly social question) has in fact cadenced 45 years of world history, erupting into view in key years such as 1968 (dollar convertibility crisis), 1973 (end of the Bretton Woods System), 1979 (runaway global inflation, gold at $850 an ounce) 1990 (Japanese deflation) or 1997-98 (Asia crisis, Russian default, “hedge fund” crisis).

We are clearly today at another key turning point, and perhaps (over the next few years) at the long-delayed culmination of the whole story, when that mass of dollars, now grown to gargantuan proportions — the $30 billion of 1958 have become at least $11 trillion today — will be deflated, one way or another.

With the election safely behind it, the Bush administration in the United States can now get on with the world economic crisis that has been stalking it ever since it came to power, in the wake of the stock market crash of spring 2000. Bush and his people must move as quickly as possible to get the “worst” over with, in their own terms (terms distorted by their own illusions of being in control of events) before they have to face new elections or other political challenges.

Had Kerry won, his incoming government might well be facing a worse crisis, compounded by international “uncertainty” over various policies.

In recent weeks, the “dollar” crisis, which is really the immediate visible face of a profound social and economic crisis in progress for decades, has moved (once again) from technical discussions of a handful of specialists to center stage in the media.

Prominent pro-capitalist economists such as Steve Roach and Paul Krugman are now saying that a major crisis is almost inevitable. This is particularly revealing in light of the fact that in eight or nine months of almost constant media huffing and puffing about the election, this reality and the issues it raises were precisely nowhere in the discussion.Ever since the 1960s, when the problematic international status of the dollar became an ongoing “policy” question (with its ebbs and flows), no mainstream American politician has ever gone anywhere near it. It is more of a political “third rail” than Social Security or Medicare.(1) Unfortunately, the same thing can be said, with some honorable exceptions, about the radical left in the United States.

Dynamics of Devaluation

A capitalist crisis like the current one resembles a poker game where the table is swept clean and all cards and chips must be redistributed for the game to continue at all.

This could happen as an “orderly bankruptcy proceeding” but it will most likely develop (as has always happened in the past) chaotically, through economic blowout, class confrontation and war. Only these latter options create the momentum and the “constituency” for the necessary changes.

This crisis in all likelihood will not come in a “pure,” 1929-style form of abrupt deflation, stock market crash and sudden mass unemployment, though some combination of these is a distinct possibility. What somehow has to happen, from a capitalist point of view, is a serious devaluation of the approximately $11 trillion dollars currently held by foreigners, and a simultaneous adjustment of major currencies to reflect new world economic realities.

The dollar must be dethroned from its global reserve currency status—about 63% of all central bank reserves are currently denominated in dollars, down from 69% a year ago—or reduced to one among many alongside the euro, the yen, or possibly some basket of major currencies.

The United States must stop running $600 billion in annual balance-of-payments deficits and drawing in 80% of the world’s savings to finance them. It must deflate the approximately (outstanding) $33 trillion of Federal, state, municipal, corporate and personal debt (three times the dubious Gross Domestic Product figure) that has kept the economy going for decades.

This will entail, among other things, a collapse of the huge mortgage bubble and the subsequent bankruptcy of untold millions of families and individuals. The United States must figure out a way to balance imports and exports, which, given the vast hollowing out of U.S. industry over the past 35 years, will above all entail a vast reduction of imports, and hence stringent austerity for American working people.

Bursting the Bubble

The basic problem of every major crisis in capitalism’s history has been (as rapidly sketched here) that of destroying or deflating a “bubble” of fictitious or speculative claims on wealth (stocks, bonds, property titles).

Using my previous analogy, “clearing the poker table” entails bringing those claims back into rough correspondence with the “real” rate of profit available from production (speaking very schematically) and from “free inputs” available elsewhere, e.g. the looting of peasant labor and nature.

Unfortunately, seeing this process at work today is greatly complicated by decades in which the United States has been fashioned into a rentier economy far beyond anything achieved by its predecessor, the British empire of 1815-1945.

The story of how that came about cannot meaningfully be sketched here.(2) But what has differentiated American world empire from the British since World War II has been America’s ability to force the rest of the world to hold its own debts as the major portion of international reserves in central banks (whereas the British, who could do this with their colonial empire, were globally constrained by serious rivals and the gold standard).

Particularly after 1973, the United States succeeded in placing the rest of the world on a fiat dollar standard based on nothing but the financial credibility of the U.S. government.

At the same time, the U.S. economy was dramatically de-industrializing, while pundits of the status quo hailed the proliferation of the “FIRE” (finance, insurance, real estate) economy as the coming of a new “service post-industrial economy” that would replace the old smokestack economy and the jobs lost through plant closings, restructuring and downsizing. (These experts did not then foresee the outsourcing of such service jobs to such places as China and India.)

Because the domestic U.S. economy depends less on international trade than that of most other major capitalist countries, scant attention was paid except by a few specialists to the fact that already by the 1960s, this U.S. “service” economy was dependent on the willingness of foreigners to recycle American balance-of-payment deficits back into U.S. government paper (Treasury bills) and capital markets (stocks, bonds).

Foreign governments and private capitalists had to tolerate this situation because the alternative — the collapse of the huge American market for their exports — would have pulled them into the abyss as well. As U.S. Treasury Secretary John Connally in 1971 told Europe and Japan “it’s our currency, but it’s your problem.”

During the Cold War, military pressure on Europe and Japan also helped make foreigners more pliable. With the Cold War over, nothing in this economic arrangement has changed, and things have only gotten far worse, like a small tumor turning into elephantiasis.

Implications of Collapse

Without the recycling of dollars by foreigners with (to date) little alternative back into the U.S. economy, the driving pillars of the U.S. domestic economy, the consumer financing of auto and housing sales, would collapse overnight.

Worse still, the apparent (and very relative, compared to world population) booms in such places as China and Latin America (currently led by Brazil) are directly dependent on the global circulation of the “dollar bubble.”

There is no question that the swelling of the mass of “nomad dollars” has led to some real economic development in Asia. The World Bank and International Monetary Fund like to trumpet the fact that the percentage of people living on $1 a day or less has fallen below 20%. It is necessary, however, to locate the “demand” driving that development in the global dollar debt pyramid.

Without massive Chinese exports to the United States, made possible by China’s as well as Japan’s willingness to hold hundreds of billions of dollar reserves, the Chinese boom would collapse — as would the current Latin American expansion, made possible by the export of raw materials to China to produce consumer goods for the U.S. market.

But enough of this “technical economic” discussion, which causes most people’s eyes to glaze over. The truly interesting question behind all this is its meaning for a radical anti-capitalist left. The simple fact of the matter is that neither we, nor the vast majority of American working people, are prepared for the depths of the catastrophe now unfolding.

The levels of austerity the capitalists will demand have been unknown since the 1930s — and in the 1930s the United States was becoming the uncontested hegemon of world credit and industrial production, not the world’s biggest debtor nation and industrial has-been it is now.

Obscure as the above economic dynamic is, both in the mainstream and in the radical left, it will be even more obscured by the clear capitalist determination to avoid a “purely economic crisis,” much as Adolf Hitler chose to go to war in 1938 when his Finance Minister, Schacht, told him that the German debt pyramid and war production was on the verge of complete bankruptcy.

The post-1979 U.S. strategy on the perimeter of Russia and China, as illustrated in Afghanistan, Yugoslavia, Iraq, most recently in Ukraine(3) and tomorrow most probably in Iran and North Korea, aims at preventing any serious challenge (economic and military) from coalescing on the Eurasian land mass.

Europe, Russia, China, Japan and India must all be kept at loggerheads and on the defensive, and hence incapable of challenging the increasingly obvious bankruptcy of the U.S. dominated system.

This American offensive — there are as many U.S. armaments today in the Gulf state of Qatar as in Germany — not to mention further brewing crises (Sudan, Venezuela, Colombia) and “perennials” (e.g. Palestine) will never lack fires to put out, if and when the “war on terror” loses its mobilizing edge.

The American capitalists understand that their decline requires keeping not only all potential rivals, but American working people themselves, permanently off balance. Everything will be done to make the consequences of decades of American decline appear instead as the work of terrorists, or China, or (as in the unbelievable French-bashing in the run-up to the Iraq war) even of Europe.

An Anti-Capitalist Agenda

Remote as the prospect of political and social power for a radical anti-capitalist left might seem today, we must begin to popularize an understanding of the real forces at work in shaping today’s political agenda. It is imperative to cut through the weight of ideology that is fueling the current U.S. unilateralism, and which might soon fuel a large protectionist backlash as another mass diversionary response to the crisis.

No less a figure than Warren Buffett has been saying for years that America’s vast, highly paid army of “financial engineers,” media CEOs, lawyers, HMO bureaucrats and myriad others populating the FIRE economy is collectively “kicking society in the shins.” There is no lack of alienation of ordinary working people from the spectacle of business-as-usual politics and the media promoting them.

Our problem is rather to re-target the populist impulse (of the right or of the left) articulated by Buffett, or Nader, or Buchanan, or Tom Frank away from the widely despised “elites” to a truly radical, Marxist analysis of the dynamic of a global system of social relations.


  1. Who can seriously imagine a mainstream politician saying the “we must abolish the global dollar standard and accept a major devaluation of our currency, in light of new world economic realities; recognize our declining status as the world’s largest debtor nation; accept a further major fall in our living standards on top of the 20% fall since 1973; cut social services to the bone, and bring exports into surplus over exports to begin repaying our huge outstanding debts”?
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  2. The masterpiece on the subject is Michael Hudson, Super-Imperialism (1972; reprint 2002).
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  3. As Emmanuel Todd pointed out in his excellent After Empire (English translation Columbia UP 2003) the aim of U.S. foreign policy since 1991 has been to roll Russian influence back to its 17th century borders. A successful, U.S.-financed “democratic revolution” in Ukraine, following the dress rehearsals in Serbia and Georgia, will be a giant step in that direction, as Putin is all too aware.
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ATC 114, January-February 2005