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Leo Panitch on the US dollar’s place in the global economy

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PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. Well, these days the American dollar is falling—some people say “sinking”, some people want to use the word “tanking”. And some people are cheering; other people are aren’t. If you hold a lot of American dollars, I suppose you’re not cheering so much, although some people see this as a decline of the American Empire and the possible move to another currency or reserve currency as the basis for world trade. Joining us to discuss all of this is Professor Leo Panitch. He teaches at York University in political economy. Thanks for joining us.


JAY: So where are you? Are you cheering the decline of the American dollar as some people on the left are? And also some people, the monetarists and people into gold, are also predicting the demise of the US dollar and some other reserve currency. What’s your take on all of this?

PANITCH: Well, the American dollar’s not going away as the global currency. There’s nothing that can possibly replace it. This kind of movement speculation around the dollar needs to be seen in context, and the context is that structurally, in order to be a world currency, you have to have very, very deep domestic financial markets, enormous financial capacity, institutional capacity, both through your banks—private banks and the central bank—to be able to manage the amount of flow that goes on around the world daily in the exchange of goods and services through a monetary unit. And the reason the American dollar is what it is in the world is precisely ’cause it has that structural capacity, where the Federal Reserve and the banks on Wall Street (which are not separate entities; they’re very integrated) have the deep institutional capacity to do that. And when the crisis occurred, you could see immediately, despite the fact that the crisis began in the United States, began on Wall Street, began in terms of the Federal Reserve not being prudential regulators, the world’s money came rushing in to American Treasury bills and the American dollar ’cause that is the safest monetary unit in the world. It’s the one where world capital knows that their property will be protected. The American state stands as the protector of property in the capitalist world. So the American dollar went up in the middle of this crisis, and it went up a lot. And what has happened in the last few weeks, really, is that it’s gone back down to where it was in 2007 when the crisis began.

JAY: Does this represent a loss of faith in the US dollar?

PANITCH: Not at all. Not at all. As the fundamental unit of currency, no. There’s no question that other states would like to have more control over this fluctuating currency. They are dependent on the American state in this sense and American markets on markets globally as they trade dollars. And if it goes up and down, they can lose or gain money. And therefore there is a lot of talk about trying to replace it. But it’s whistling in the dark. You know, the Chinese simply do not have the institutional capacity, the depth the financial markets do. Maybe they will in a generation or two, but right now they don’t.

JAY: Is this part of what’s happening is that China, Russia, and some of the countries that have articulated this position are preparing for 5, 10, or 15 years years from now?

PANITCH: Well, they can’t, really, this other kind of thing that you can simply pull out of the hat and build that way. And in order to play that kind of role in the world system, you’d have to have the renminbi not being a currency that is mainly oriented to getting exports into foreign markets. No, it’s not something that they [inaudible] I was at the St. Petersburg Economic Forum back in June where there was a lot of talk of this. And, you know, there’s even talk about the ruble becoming a global currency. And, you know, this is clearly trying to puff up your world standing. You know, these days you can’t be a communist power with an enormous military capacity, etcetera. You can pretend that you’re going to have a global currency. The whole thing’s a Potemkin village. You know that old story about bringing tourists to the old peasant villages, and they’re faked television or film fronts, and you think you’re in this wonderful old peasant village? Well, talking about the ruble as a global currency a decade after the Russians defaulted on their debt, whatever you bank, is practically tanking in Russia. It’s absurd. But they can talk this kind of line. And that’s what’s been going on, largely, in the world. No, I don’t think that anybody wants the American dollar to fall too far, and certainly not to fall off its perch in terms of the global responsibility the American state takes. You know, the Chinese don’t want the American dollar to fall too far, because it would mean a terrible effect in terms of all of the dollars they’re holding, all the Treasury bills they’re holding, and in terms of their ability to keep on exporting, keep on keeping their economy going as a exporting economy.

JAY: There’s different arguments on this. Let’s take up one of them, this sort of right libertarian argument. They talk about the US currency and they talk about this fiat currency and that the idea that having a currency as the world currency that isn’t related to things of real value like gold or something. What do you make of that whole argument?

PANITCH: Nothing, really. It’s an old myth and illusion. [inaudible] able to convert dollars since 1933 as an individual. Until 1971, the Americans said, “We will allow other banks, central banks, official government central banks, to come and exchange dollars for the gold we have in Fort Knox.” That was stopped in ’71. The whole world has been running effectively now for almost a century on a system that is based on fiat money. And anyways—.

JAY: Just explain for a second what that is.

PANITCH: Well, fiat money is, you know, the government currency that isn’t backed by gold or silver. But even back when, you know, the world was trading in gold and silver, back in the 19th century, or appeared to be, it was effectively trading through the British pound. It was the fact that the Bank of England was issuing dollars, pounds, issuing currency, and it maintained that they would be able to transfer funds from that to gold, the gold standard that kept the thing going. [inaudible] didn’t believe in gold; they believed in the British Empire, they believed in the guarantee that the bank Bank of England was giving in the value of its currency. So it was never—you know, people think that the only real thing in the world is this bar of gold. No. What matters a lot more is the strength of the American state and the strength of the British state and what it can call on in terms of taxation. It has far more resources, these states do, in terms of being able to tax its population, its corporations, its productive enterprises, its banks in order to back up its bonds.

JAY: Because there’s no shortage of wealth in the United States. They’re just not taxing it right now.

PANITCH: Exactly.

JAY: So if that isn’t the issue, the other issue that gets raised is the threat of hyperinflation, that the United States is essentially just printing money or borrowing so much for the stimulus package and the wars and everything else that that’s going to create a loss of faith in the US dollar.

PANITCH: Yeah. What’s going on here is a concern by those who are holding dollars and holding American Treasury bills, which they see as the safest place in the world, that they may get a devaluation of their capital, because if the dollar gets devalued by inflation or by it falling [inaudible] other currencies, and they go and eventually trade what they’re holding for another currency, they will lose money. And since interest rates are so low, that’s a concern. And what they essentially want—and this is what the pressure was on back in 1979 as well, during the last crisis, when that problem was solved by very high interest rates, which brought the world’s capital flowing into the United States and broke the back of inflation by throwing people out of work because companies couldn’t afford to pay for their debt. Lay people off and you have that massively induced crisis of the early 1980s. What’s going on today by those who are demanding that we need a strong dollar and therefore we need to deal with the fiscal deficit is a concern that the American state show that it’s not open to democratic pressures, that it’s open to capitalist pressures. It’s not the size of the deficit that matters. Under Reagan, under Bush, the deficit grew enormously. But so long as it’s on military expenditure, so long as it’s a product of tax cuts on the wealthy, then that’s okay. But at the moment when there’s a health-care debate going on in the United States, right, then you get enormous pressures to try to ensure, well, we don’t want government expenditures, we don’t want the fiscal deficit going toward social ends, right? In the middle of the debate about the Employee Free Choice Act, right, we don’t want the kind of expenditures that are going to strengthen the backs of labor and that are going to increase wage costs, right, for employers. So what you’re getting is a debate over substance behind this monetary debate, a debate over social substance, about what the nature of the American state is going to be. It was exactly similar in the late 1970s. And, of course, foreign governments that say they want a strong dollar, often they appear progressive, and often, you know, people who are progressive look to them as spokesman for the poor of the world. Right? So you’ve got the German Social Democrats in the late ’70s saying, “We want the Americans to fix their deficit and guarantee the strength of the dollar.” You get the Chinese, and even [Hugo] Chávez and the Venezuelans, saying today the American dollar is weak, it’s tanking. You know. And then the Americans think they’ve got to respond by strengthening it. Well, the effect of that is, sure, they strengthen it, but they strengthen it by breaking the backs of poor people through the way in which states’ expenditure is restructured. Or people in the south called for the American dollar to be stronger in the late 1970s, and you ended up with the debt crisis as American interest rates were raised through the roof. All of these Third World countries had been borrowing at enormous danger to themselves and interest rates through the roof. They couldn’t pay for their debt, and they ended up in hock to the IMF and the World Bank, which restructured their whole economies in an extremely reactionary neoliberal way. We have to be very careful when we have this, you know, happiness about seeing the American dollar tanking and calling for it either to prove that it’s strong or to get out of the way. Well, if they try to prove it’s strong, they prove it’s strong on the backs of the poor people in the United States and the poor people in the world.

JAY: In the next segment of the interview, let’s talk just a little bit more of the consequences of the dollar going down these last few weeks and what it means for working people in the US and around the world. Thanks for joining us on The Real News Network, and join us for part two of our interview with Professor Professor Leo Panitch.


Please note that TRNN transcripts are typed from a recording of the program; The Real News Network cannot guarantee their complete accuracy.

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