The Dollar’s Problems Haven’t Gone Away

Good-By to Marshall Auerback- and good luck.

...As net foreign debt balloons, the size of any future adjustment grows apace. One is invariably driven to the conclusion that at some point, as an addition or alternative to crude protectionism, exchange controls will be necessary in order to manage the rising tide of private sector dollar sales that grow ever larger, swamping the ability of even the largest economies such as Japan to absorb them. This would indeed be ironic as the American government has waged an increasingly aggressive stance against countries which have not fully liberalized their own capital accounts. One wonders whether the anticipation of this eventuality would trigger huge capital flight a la Asia in 1997/98. Less noticed, but equally apparent is that informal controls already exist in certain realms of the American economy (the difficulties created by both regulatory and tax authorities in the purchases and holding of physical gold is but one small instance of this; even the much-vaunted ESF has unresolved tax issues which have yet to be resolved definitively by the IRS and the SEC).

Ultimately, it would not surprise us to see various restrictions imposed in regard to the holding of foreign currencies and gold. As recently as the early 1970s, Arthur Burns, then Fed Chairman, railed against the “unsound practice” of Americans having foreign currency bank accounts. This notion may seem far-fetched in today’s high-tech financial world, but the story of the US, particularly post-9/11, has been a steady erosion of economic and political freedoms. As virtually every encroachment on personal liberty in the US these days is rationalized on the grounds that it constitutes a necessary measure in support of the “war on terror”, we have little doubt that any such future restrictions would likewise be justified in this manner....