A brief note on the US Dollar. Is this like August 1914?

I strongly recommend attention to the US dollar, as it breaks down to multi decade lows — or record lows — vs. almost every other currency (except the Zimbabwe dollar).

It is almost impossible to exaggerate the seriousness of this situation. For Americans “currency crisis” and “currency flight” are things that happen to other, lesser nations. But our history as a well-managed nation, a tradition established by Alexander Hamilton in the difficult days following the US revolution, ended long ago. We have become the world’s greatest debtor — both in terms of annual borrowing (approx. 6% of our national income) and accumulated debts.

We have with no plans, perhaps no intention, of paying back the debt. That shows a moral weakness. For good reason Adam Smith wrote “A Theory of Moral Sentiments” before “Wealth of Nations.” Our behavior has been and is irresponsible, and now the bills are coming due.

We’ve been warned repeatedly over the past two decades. By both US and international agencies. By the major ratings agencies. By many of the global investment banks. By sages like Warren Buffett. By former high officials like Richard Rubin. By academics at our major universities. Perhaps the clearest analysis was by Paul Kennedy in his 1987 book The Rise and Fall of Great Powers.

It’s not knowable how this will play out. The factors are not just economic — what will private foreign holders of US debt do — but political. What will our creditors — Asian central banks and the oil exporting nations — do as irresistible forces push the dollar down?

An analysis of this is beyond the scope of a blog. There are many fine reports on the web. Here is one thought. In an age of nukes and 4GW, conventional war between major powers is unlikely — perhaps obsolete. But political stresses remain a fact of life and must be expressed. Perhaps money has replaced bullets as the new form of combat. WWII was as much a war between competing economies as between armies. Modern financial systems allow us to eliminate bombs as the intermediate step, for pure economic warfare.

If so, then the current situation looks much like Summer 1914. The situation is unstable on many levels. Massive accumulated tensions, waiting for the weak link to snap. It could be anything, something trivial.