Ever know someone with a self-destructive habit, like cigarettes or drugs? Often they understand they're destroying themselves but no amount of persuasion—no recitation of grim statistics—will get them to stop. That's pretty much the rut that the global currency system is in today. Ruled by the dollar, it's doomed to be unstable, bad for all parties—including the United States—and yet no one is seriously considering an alternative.
On the contrary, we seem to be in a deeper rut than ever. With the euro zone in crisis over weak sisters like Greece, and the Chinese continuing to suppress their currency against the dollar, the greenback is once again becoming a kind of safe haven. U.S. officials say they're just fine with that. At a Senate hearing last week, Treasury Secretary Tim Geithner said that "of course" he still favors a strong dollar and displayed some pride that global investors were still flocking to the currency. Geithner even boasted that the now-ritualistic statement of U.S. support for a strong dollar "was first written in my office at the Treasury Department in 1995," when he was an assistant secretary.
Geithner has to repeat those avowals, of course; the markets have come to expect them, especially now that size of the federal deficit has raised questions about the dollar. But such words sidestep the bigger chronic problem of the strong dollar. Let's start with what it is doing to us at home. What used to be known as America's industrial middle class has been pauperized over the last several decades by the flight of good jobs overseas. Our policymakers in Washington managed to avert their eyes from this reality by inducing Americans to pile on debt, thereby maintaining the illusion of middle-class wealth. Now, since the crash, that illusion is gone, too. The '00s were a lost decade in which basically no jobs were created. The devastated middle class—the average consumer—can't recover without a globally competitive economy. But as long as the dollar is kept artificially strong, it's going to be very hard to grow a competitive economy.
Little is being done about this. On the contrary: after repeated financial crises of the global system—more than a hundred in the last three decades, by one count—countries are hunkering down with larger and larger reserves of dollars. We saw this phenomenon most dramatically on display with all those Asian reserves, built up after Asia's '97–'98 crisis, flooding into dollar-denominated investments in the last decade, especially T-bills. That trend both exacerbated the easy-credit environment that contributed to the subprime bubble and stunted the global economy. The growing reserves represent more and more money tucked away for future rainy days that could be generating worldwide growth instead.
To get dollars for their reserves, other countries must export goods and services that we have to buy. Yet the only way these days for Americans to play this role—consumer of last resort—is to take on enormous debt, as we did before. Do we, and the rest of the world, really want to set that cycle in motion all over again now? If things remain as they are, economically it has to happen; it's baked into the cake. All those dollars we export overseas—they are our biggest export—have to come back to us, and they will arrive again in the form of cheap credit and poor investments, as we saw in the recent crisis. U.S. officials have steadfastly defended the dollar's role as chief reserve currency, happy that America in effect gets low-cost funding from the rest of the world when they hold dollars. But that advantage is now outweighed by the cost of the overvalued dollar to our decimated industrial base—costs made plain by the so-called jobless recovery—and by the global instability it constantly causes.
To continue to resort to this system—a dollar-denominated world sustained only by new waves of American indebtedness—is to knowingly perpetuate a pathology. One suggested way out would be to create a new pool of "special drawing rights" overseen by the International Monetary Fund. That is unlikely in the extreme to happen; the White House is not likely to cede dollar supremacy to the helpmate agency down Pennsylvania Avenue. Nor are the rest of the advanced countries, which see the IMF as a fixer to the developing world; witness the resistance to IMF help in the current crisis embroiling Greece and the euro.
A better way is one suggested by economist Joseph Stiglitz as head of a U.N. commission: the creation of a global reserve currency he calls "global greenbacks." The concept is fairly simple: each year countries that are part of the new global reserve system contribute a certain amount to a global reserve fund; in return, that fund issues global greenbacks of equivalent value to the countries to hold in their reserves. This way, no one country—like the U.S.—has to become increasingly in debt. A chronically overvalued dollar would not be a problem. The resurrection of the U.S. middle class could become conceivable again.
It's radical but less so than you might think: John Maynard Keynes advocated something very like it at Bretton Woods; he called his global currency the "bancor." The head of the American delegation at the postwar economic conference, Harry Dexter White, also proposed a global currency, the "unitas," but the Americans later backed away from the idea. Sadly, Nobel-winning economist Robert Mundell later said, the idea might have prevented the Bretton Woods system, based on the dollar, from breaking down.
Now, with the benefit of hindsight, it seems clear we need something new and perhaps it ought to be along these lines. Other countries, especially China, have begun to gingerly endorse the idea (Beijing must be careful, so as not to devalue its trillions in dollar-denominated holdings). But the Obama administration seems unalterably opposed. Force of habit rules, I guess, no matter how destructive it might be.