Dr.Thomas Palley is a Yale educated published economist. I’m just a guy who blogs about bikes. He’s evidently a smart guy, but I think Palley misses the point in his essay in Foreign Policy in which he reassures investors that the U.S. dollar will remain the reserve currency of choice around the world. In spite of a growing chorus of doubt around the world on the value of the dollar, Palley tells us that the falling dollar is merely a correction rather than a symptom of something fundamental about the world economy. Here’s what he writes:
- “With an annual GDP of more than $13 trillion and with efficient, liquid capital markets, the U.S. economy operates on a scale and with a vitality that is unmatched.” The U.S. economy runs on oil. With fossil fuel in permanent decline around the world, U.S. productivity will fall dramatically in the near future.
- “Many countries can’t generate enough domestic consumption to spur growth and full employment, forcing them to rely on exports [to the United States].” Our market economy is an economy of excess. We buy TVs from Malaysia and bikes from Taiwan because we have so much extra left over for consumer “stuff.” Again, this excess is driven completely by cheap energy inputs into our economy. Conservation and innovation may mitigate the damage (which is why I’m so gung ho about limiting inefficient transportation modes), but the fact is that our economy will stagnate. Permanently.
- I think Palley also ignores the fundamental fact that the US dollar is a fiat currency — the US Federal Reserve prints as much as it needs, and its value is underpinned by the requirement that almost all international oil sales are denominated in U.S. dollars. If enough oil producing nations are willing to sell their oil in euros or yuan or pesos, then that will be the end of the American dollar. Palley’s “buyer of last resort” theory won’t hold water when U.S. consumers can no longer afford to buy plasma TVs and plastic knick knacks.
I think every nation that depends heavily on imported oil has significant economic challenges, and these challenges are coming sooner rather than later. The mother of all paradigm shifts will soon be on us, but with increased awareness of our reliance on a scarce resource I’m hopeful we can rise to the challenge to soften the landing.