Completely agree that it’s circular now! There’s a wide consensus that large economies keeping the USD as their almost exclusive reserve and pegging to the USD can’t go on doing so.

But the circumstances under which they made the decision to peg the USD and keep it as their primary reserve were very different from today. It wasn’t *always* circular.

There’s now at least 1 and possibly 2 other currencies that are externally stable enough to serve that purpose, and this is the first time that’s been the case since the decline of the British Empire. The reasons people use the USD as a primary reserve have declined. The shocking resilience of the USD is not a sign of the health of the currency. It’s a sign of the rest of the world kicking and screaming to avoid an upset in the global financial system. It won’t go on forever. Just as long as change can profitably be avoided.

The truth is that there is something else that is anchoring the stability. It’s arguable what that is, but I don’t swallow the official fancy explanations. Under normal circumstances (a free market, if such thing exists), the value of the USD would be much lower, but something is forcing it to have an inflated value.

If that something is gone, those countries would switch the backup currency as fast as possible before they loose any more “money”. It’s only a matter of time.

It’s all about “trust”, if the world economy suddenly stops “trusting” the US dollar. it gets deprecated.

But “trust” is not exactly the right word, perhaps you don’t have any other option. Perhaps the US is strategically controlling a commodity that the rest of the world needs, like oil.

The US forces oil produces to denominate in USD, and so it forces most of the rest of the world to use their currency. If you try to sell in another denomination, well, look at Irak, Iran and Venezuela. (http://en.wikipedia.org/wiki/Petrodollar_warfare).

This is probably what allows the US to have as much debt as they wish.

Your comment contains a lot of ideas – I’d like to respond to all of them but it’s probably too much for an exchange in the comments of a weblog.

Anyway I think you are absolutely right that it’s about trust. It’s not like the organizations bailed out this weekend were insolvent – they were paying their bills. But they got bailed out anyway because nobody believed they’d continue to be able to, and the lack of faith in their future finances was making their current finances worse. The bailout averted a potentially vicious cycle.

However I think to extend that problem to the entire government of the USA is probably premature. The government’s asset to debt ratio, while not good, is nowhere near as bad yet. It *does* have to get cleaned up eventually, but “eventually” is not “now”. And even if it were “now”, it’s actually quite abile to do so, again because the scale of the problem is historically smaller than many nations, including our own, have dealt with.

One thing that bothers me about all this pessimism is that we’ve tended to become myopic. But look, not 8 years ago we were in historic surplus and much better loved in most of the rest of the world. That’s not that far back, and doom-saying aside, not that much has changed here. In terms of international reputation, I think it’s largely the same, and you’ve already made my point for me. Viet-Nam happened, Afghanistan happened, Iraq happened, a lot of other shitty things in between happened. So, you know, how’d it work out for us and Europe? We got over it and got better. We’re all still here. The reason we all got better – the entire West – is that our way of life works better than everyone else’. We fuck up because we’re humans, but our systems deal with it, so we get over the Viet-Nams and Iraqs. Budgets get re-balanced when they have to. Wars can end when they have to. Everybody goes back to work and eventually the bad times are lost in history. This stuff from the last 8 years is not going to tank the country even if it *should*. There’s no morality in causality.

If the non-US portion of the planet no longer trusts the United States, and, therefore, no longer invests their energy in it, then the United States and its economy will destroy itself inside out.

The question a lot of Europeans have on their mind is: for how much longer?

It’s quite unique that two rather large super-powers are increasingly becoming more and more important: China and Russia. It’s getting quite hard to ignore this, too.

Also Europe is increasingly depending on those nations for its own wealth and supplies. Also this is rather new (although not entirely unique).

And now after so many years the World Wars are over, two/three generations have emerged, most of our youth doesn’t know about the details of WOII anymore. Both youth in the US and in Europe. And the speed at which people are forgetting the events is just *amazing* too. Both in the US and in Europe. After a failure in Vietnam, after a failure in Iraq two. After a failure in Afghanistan. After a failure on that so-called “war on terror” (whatever that was about, and especially Europeans are not buying it). After economic collapses. Mostly in the US and also in Europe. And note about the economic ‘troubles’ that most of the European media and experts put the blame on the US’s economy (so with prices for food and oil increasing a lot, here in Europe, that adds to anti-US feelings among Europeans too).

How much longer can this go on? Really?

Only thing the guys in charge at the US seem to think is that having more nukes and a larger war-machine is going to safe us all.

Europeans don’t buy that, at all. They *know* that if this situation worsens to the point of a WOIII, which is increasingly likely, that Europe will *again* be the battlefield.

Why would Europeans buy it? You’ll really have to give the most awesome reason imaginable. The false reason of “because … freedom this, freedom that” is no longer accepted. For example. People here are quite aware that big wars go together with massive raping, mass murdering, destruction and other unpleasant “side effects” of “collateral damage”.

It’s either finding a way to make this planet of humans work, or continuing towards some sort of military solution (which wont be a real solution for Europeans).

Actually, I’m embarrassed that I didn’t think of this before, but a much better example (for this weblog anyway) would have been all the Europe-bashing that a lot of Americans did in the last decade or so. With the US booming on and off since the 90s, all while France and Germany stagnated, many a triumphant op-ed was written about the failings of their systems. Don’t hear much of that these days, do we?

I wholeheartedly agree. In fact, it reminds me of the Japan-bashing of the 1980’s.

I used the words “wish fulfillment” earlier for this exact reason. I did not mean to accuse anyone here of doing it, so please nobody take it that way. Everybody but that gold standard guy here seems very reasonable to me.

But certainly it’s a very common issue in the press. A whole industry exists around the idea that America is finally going to fall apart for reason X, where X just happens to correspond to whatever peeve of the author’s that America violates. Sometimes their peeves are nonsense, sometimes they aren’t. But if there’s a pattern at all it’s that they all – every single one of them – were wrong in the long run.

Incidentally I find it extremely irritating to see this behavior mimicked by Americans (who ought to know better) when talking about China. It’s more and more common to see Americans irrationally predicting the end of China, frequently by the same arguments that our cousins across the Atlantic make about us. It’s wish-fulfillment at its worst and utter nonsense. America works to the extent it focuses on what works. China is doing the same now. Neither is going away as long as that focus exists.

Actually, wait.

This is going to turn into one of those gold standard arguments, isn’t it?

There isn’t enough time in the world to talk about the gold standard on the internet. Save it for some other sucker.