U.S. foreign aid won't go as far. It will be more expensive to maintain our armed forces overseas. As European and, ultimately, Asian bases become more expensive and budgetary pressures continue to grow, there will be increasing pressure on the United States to reduce its commitments overseas--whether or not those commitments make sense.
Ultimately, the United States will begin to lose control over both the international and domestic economy. Countries with strong currencies often set the economic agenda for countries with weak ones. Thirty years ago, the Federal Reserve Board set interest rates around the world. Ten years from now, the German Bundesbank may set interest rates in the United States. This won't be good for us; the U.S. economy--entrepreneurial, small-business oriented and historically dependent on cheap credit--needs lower interest rates than most European economies to prosper. The Bundesbank won't care.
The Germans and the Japanese will enjoy the new buying power their strong currencies give them, but the collapse of the dollar doesn't make either country happy. Both countries depend on their exports, and neither wants to take on America's global financial responsibilities. The collapse of the dollar and the strains on the international financial system are bad news for almost everyone. As the ripple effects from the dollar crisis spread throughout the world, more and more countries will suffer painful and expensive side effects.
In the first place, the Mexican crisis moved like wildfire into other emerging markets around the globe, as panicked local and foreign investors dumped stocks in fear of the "tequila effect." While markets throughout Asia were hit, the worst effects have been felt in the Western Hemisphere. Brazil and Argentina have been plunged into economic crises as a result of the Mexico shock. Even Chile, which many consider the best-managed economy in the hemisphere, has seen a massive selloff in its stock market.
But the effects of the crisis were not limited to developing countries. The Japanese stock market swooned at the thought of what the falling dollar meant for the profits of Japanese exporters. Germany shuddered as the monetary turmoil spread to Europe. Spain and Portugal were forced to devalue their currencies; France and Italy faced new economic strains as they attempted to keep order in their currency markets. The result was another setback for the European Union's hopes for monetary union before 2000.
Almost nobody wants a weak dollar. Almost nobody wants the United States to fail. Latin America and East Asia need a strong United States so that they can grow; Western Europe needs a strong United States to preserve the stability and order that the development of the European Union requires. Russia and other former communist countries need a healthy global economy that can absorb their exports and help them finance their transition and growth.
All these good things depend to some degree on the strength of the dollar. And the dollar depends, more than ever, on the confidence that U.S. leadership inspires around the world.
The United States must get its act together. That is the message--more in sorrow than in anger--that the world's money markets are sending the U.S. government and the American people. The question is, will we listen?*