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In the fall of 2008, European politicians were pointing to the bad finance in America as putting the entire world at risk financially.  In May, 2010,  however, the E.U. had its own financial crisis and bailout. The added problem in arriving at a coordinated response given the relative power held by the state governments meant that the debt crisis in the E.U. could have been the contagion more likely to spread.  Whereas in the U.S., the U.S. Government’s treasury secretary and the Federal Reserve Chairman orchastrated the bailout at a dizzying pace, the more balanced federalism of the E.U. meant that the leaders of the state governments were the active players. In other words, even though the E.U. evinces a more balanced division of power between the union and state governments than is is the case in the decentralized-consolidated modern incarnation of American "federalism," the ability of the Europeans to tackle the problem of several of its states hemmoraging in public debt attests to the messiness that is inherent in a well-balanced federal system.  Even so, the consolidated condition of American government meant that states in trouble such as Florida, Illinois and California had to fend for themselves because neither the U.S. Government nor the Federal Reserve was under pressure to come to their aid. The Federal Reserve, for example, had printing hundreds of billions of dollars to assuage the U.S. Government's growing appetite for debt. However, when U.S. Senators asked Chairman Bernanke about doing likewise for the trouble state governments, he replied that the Fed was not autorized to do it. This asymmetry itself pushes the system even closer to the consolidated end of the political spectrum. As some of the U.S. Constitutional Convention delegates warned in 1787 even when the U.S. consisted of just thirteen republics, it is difficult for a central government to have sufficient energy throughout an empire-scale "extended republic."  The E.U. following its first fifty years was better able to cover the inherent diversity there, yet not yet sufficient to support its unified aims (such as a common currency backed up by coordinated fiscal policy).

In short, the financial problems that occasioned the huge financial bailouts is hardly an American quagmire.  Just as the E.U. and U.S. have different divisions of power in their applications of modern federalism, the processes and solutions themselves must undoubtedly differ as well. In the end, hard choices irrespective of the federal systems involved will need to be made at the expense of instant gratification in order for a sustainable (i.e., real) fiscal trajectory in the West to be realized.  The struggle is perhaps against expediency in a time of apparent plenty.

Given the $13 tillion amassed in US Treasury debt plus all the debt amassed by the American states, the US dollar was losing out in percentage terms to other currencies as the global reserve currency in 2010. To be sure, in absolute terms, there were still more dollars being held abroad than twenty or thirty years ago, but as a report from Emma Lawson of Morgan Stanley shows, other currencies were taking on more of a relative presence.

The Euro had been making the greatest strides in percentage terms, particularly in 2002. The slight downturn in 2009 might have reflected the impact of the financial crisis of 2008 in Europe, though the Greek debt issue had not yet reached a boil (it would be interesting to see the figures from 2010).  In any case, the dramatic drop in the dollar’s percentage terms also came in 2002, before the Iraq war and the bank bailout spending (i.e., the $13 tillion dollar debt). The drop could have been in reaction to September 11, 2001, though it would seem an exaggeration even then to say that the US financial system would be undone by the attack.  Even so, as we know from 2008, irrational exuberance can take hold in even a global market. We ought nevertheless not lose sight of the fact that the number of dollars held in reserves around the world increased. The pie got bigger, and even though the dollar piece became larger, it was a smaller proportion of the pie in 2010.  Even so, the $13 tillion in US Treasury debt, the decision of the Chinese to allow their currency to appreciate to a limited extent, Russia’s call for a mix of global reserve currencies, and the EU’s bailout of the Greek bonds all pointed to trouble for the US dollar as “the” reserve currency. Also troubling was the UN report at the end of June, 2010, which urged that the US dollar is no longer stable enough to be the world’s reserve currency. Ouch! The dollar slid %5 in June. Fortune reports that central banks had been preferring gold to the greenback.

Lawson believed that  ”over time we anticipate that reserve managers may reduce their holdings further.” She is looking at the significance of small percent changes over a short time—and this I see as perhaps susceptable to overblowing small trends. For example, she found that central banks had dropped their allocation to U.S. dollars by nearly a full percentage point to 57.3% from 58.1%, and calls this “unexpected given the global environment.” But was such a change, relative to those shown in the chart, really significant? She argued that other dollars - the kind that come from Australia and Canada - had been benefiting from skiddishness on the dollar. The allocation to those currencies, which fall under “other” in the data, rose by a full percentage point to 8.5%, accounting almost exactly for the drop in the U.S. dollar allocation. She was undoubtedly assuming that the trend would continue, but a look at the chart can demonstrate that even the dramatic changes in 2002 had not continued at such a rate (e.g., for the euro and the US dollar). 

Even so, Treasury’s huge debt could not but undermine the US dollar over the long term. This point ought not to be minimized or ignored under the fiscal pressure to push the US economy out of recession. Even if the US did not admit that the debtload was too high to be paid down one day (the debt then approaching the annual GNP of the US), the market rendered its verdict. Relative the huge debt facing the US dollar (and remember there are huge state debts, such as in California, Illinois and Florida!), the “crisis” facing the euro in 2010 paled in comparison.  As of mid 2010, the euro was still over $1.20. Years earlier, it had been at parity. The media frenzy on Greece's debt in 2010 ought therefore to be put into some kind of perspective, and the impact of the dollar’s public debt not be lost. 

It’s not clear to me that the human mind can conceptualize a trillion, not to mention thirteen of them. Yet we glide over the public debts in the US as though they were sustainable. If the US falls, it will be from within--from consolidation at the empire-level.  Such a fall will likely come as a surprise to most Americans, who in being oriented to external threats tend to miss the gravity of the black hole amassing under our very noses.  To be sure, the additional debt enables us to live beyond our means as a society, and such a condition can be very addictive.  Perhaps the parallel question for us to reflect on is whether Rome fell from within or simply from the Goths.

Sources:
 http://www.businessinsider.com/morgan-stanley-dollar-euro-reserve-holdings-2010-7#ixzz0tBDYFjMd
 http://wallstreet.blogs.fortune.cnn.com/2010/07/09/central-banks-start-to-abandon-the-u-s-dollar/

Washington’s seeming willingness to print money rather than tackle tough debt-cutting measures is in sharp contrast to the approaches to relieving the public debts in Europe.  Ireland, for example, plans to nearly double its package of spending cuts and tax increases to try rein in its huge deficit.  Even so, borrowing costs in Spain, Portugal and Greece spiked upward again in late 2010 as investor concern re-emerged that those EU states would be hard-pressed to bring their deficits under control and avoid defaulting on their bonds. In short, the public deficits on both sides of the Atlantic are intractable problems—they being so deep.  Perhaps the only thing that can be said is that relying solely on tax increases or spending cuts is insufficient, and that beginning or continuing tax cuts is foolhardy.  It has been shown that Reagan’s tax cuts did not make produce more revenue for the US Government than it lost from the cuts themselves.  Some combination of tax increases and spending cuts seems inevitable in the West.  The trouble is, the problem is not just economic. “The scale of the deficits are just so big,” said Philip R. Lane, a professor of international economics at Trinity College in Dublin. “The issues are political as much as they are economic.”

See: http://www.nytimes.com/2010/11/08/business/global/08debt.html?_r=1&hp