The Dollar and US Prestige

The current financial crisis will affect many aspects of the life of the average person in the foreseeable future.

Investors will see shrinking portfolios, job prospects will dim, and retirement funds will dwindle. Credit markets will freeze; small businesses will feel the pinch and many will see their net worth diminish.

The financial crisis may also have an unforeseen effect-the limitation of the US to exert a leadership role in world affairs. Since World War Two the US has been the most powerful nation militarily but just as important is the reputation of the US as a financial powerhouse. New York has long been considered the world's financial center. The status of the US dollar as the world's dominant currency gave it special powers and privileges. "The dollar's status as a reserve currency has given the U.S. a privileged measure of economic stability relative to its rivals," said journalist Sebastian Mallaby, of the Council on Foreign Relations. "It has allowed the U.S. to project power abroad, too."

The economic status of the US allowed the current Bush administration to run up unprecedented deficits because oil rich nations and China were willing to accept dollars even when the dollar slid in value. Because of the current financial crisis and the Bush administration's failure to recognize the recklessness and irresponsibility of Wall Street US prestige may be at stake.
The current situation in the US may well sabotage US power abroad in unforeseen ways. For decades the US enjoyed a reputation as an economic powerhouse with stable financial institutions and a thriving economy. There is now a growing skepticism of US economic competence abroad. Asian financial institutions bitterly remember US opposition to a bailout of Asian banks during a similar crisis in the late 90's. Many Asian banks failed with painful consequences for middle class Asians

US competence in both foreign affairs and economic affairs is being questioned. It has been said by many outside the US that the Bush administration has squandered any credibility the US had citing the wars In Afghanistan and Iraq and the recent financial crisis. It will be up to the next president to regain the credibility of the US in foreign and economic affairs.

Oil rich nations such as Russia and Middle Eastern states are flush with oil money and it is anybody's guess whether they will choose to invest in the US in the near future. The financial crisis could also cause the US to suspend its traditionally generous aid to less fortunate nations.
Right now the dollar has been holding its own on Forex markets but this could change fairly quickly limiting Forex opportunities for investors globally. World financial markets are waiting to see what actions the US will take to resolve the crisis. The prestige of the US and its currency will be decided in the very near future.

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