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diluting the dollar.

Byline: The Register-Guard

The United States enjoys what Charles de Gaulle once called the "exorbitant privilege" of being able to pay its debts in its own currency. That privilege is weakening, as the sliding value of the dollar and $80-a-barrel oil attest. Those with their hands on the levers of U.S. economic policy must strive to avoid the day when suppliers of imported goods and commodities begin to reject dollars, thevalue of which is eroding, and demand payment in some other currency instead.

De Gaulle's economic adviser, Jacques Rueff, explained the United States' economic advantage in 1965: The U.S. pays for its imports in dollars, which "are of no use in Bonn, or in Tokyo, or in Paris. The very same day, they are all re-lent to the New York money market, so that they return to their place of origin. If I had an agreement with my tailor that whatever money I pay him he returns to me the very same day as a loan, I would have no objection at all to ordering more suits from him."

The tailor would have been willing to accept such an arrangement if an IOU from Reuff were the soundest store of value available, as was long the case with the U.S. dollar. The dollar replaced the British pound as the world's reserve currency in the period following World War II, meaning that most countries were willing to accept payment in dollars, knowing that they were universally accepted as a secure store of value. Confidence in the dollar's stability continued as long as the United States maintained its position as a net exporter of capital, goods and services.

That position has been weakening - slowly at first, more rapidly in recent years. U.S. imports began to exceed exports in the late 1970s, partly as a result of an increasing reliance on imported oil. The deficits could be ignored for a time, because they were offset by income from American investments abroad. The United States' net surplus in all categories of trade peaked at $360 billion in 1980.

Since then U.S. trade deficits have ballooned, totaling $850 billion in 2006 - 7 percent of the nation's gross domestic product. After flowing abroad, many of those dollars have been reinvested in U.S. bonds and in such assets as property and stocks, resulting in a net outflow of interest, dividends and other income.

It's as though Rueff's tailor, having provided suits for many years, acquired a mortgage on Rueff's house and began contemplating a demand for payment in some form other than IOUs. The United States' privilege of being able to print currency to pay its debts depends on its creditors' willingness to accept dollars, and that willingness may be reaching its limits.

One sign is the rising value of the euro relative to the dollar. When the euro debuted in 1999, it was worth about 89 cents. It's now worth more than $1.40. A quarter of the world's currency reserves are held in euros, up from 18 percent in 1999.

The dollar is still the dominant reserve currency at 66 percent - but that's down from 71 percent in 1999. The rising price of oil and other dollar-denominated commodities is another sign that the United States, with its massive debts and deficits, is overtaxing the world's willingness to stuff its accounts with dollars.

Restoring the dollar's strength will require restoring a balance of imports and exports, and of borrowing and lending. It will mean saving more and spending less, producing more and consuming less. A failure to move toward such a balance will invite a day when the bill for Americans' consumption will be presented in some currency other than the dollar. This is an enormous challenge, one that no leading presidential candidate has addressed.
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Title Annotation:Editorials; Trade deficits erode our `exorbitant privilege'
Publication:The Register-Guard (Eugene, OR)
Article Type:Editorial
Date:Oct 4, 2007
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