The Fallen Dollar

Even a bastion of free-traders, open borders enthusiasts and hyper-Wilsonian interventionists as The Wall Street Journal occasionally sees the truth in front of everyone's eyes. Today's editorial bemoans the Bush administration's devaluing of the US dollar and the diminishing of US clout and prestige that the dollar's decline has wrought.

The Bernanke Fed has also been oblivious to the fact that it runs a global dollar bloc. Central banks in dozens of countries peg or otherwise link their own currencies to the world's reserve currency, which is the dollar. They do so for the sake of exchange-rate stability, which helps with trade and investment flows. They essentially subcontract their monetary policy to the U.S. central bank.

The Fed's dollar indifference has sent an inflation shock through those dollar-linked economies. This week alone, we've read about price riots in Vietnam; inflation hitting 10.1% in Kuwait; Abu Dhabi contemplating price or wage controls; South Korean and Indonesian central bankers considering rate hikes; and the Chinese letting the yuan rise ever higher to curb inflationary pressures imported from the U.S.

Many of these countries are now delinking from the greenback. Meanwhile, the dollar plunge has translated into a net transfer of trillions in wealth from the U.S. to the rest of the world. The result has been the largest decline in America's global economic influence since the 1970s.

Of course, the WSJ's editors carefully shift the blame from the president to Fed Chairman Bernanke and avoid mentioning the real causes of the dollar's decline - the loss of international confidence in the US government's financial situation. No mention is made of this administration's soaring deficits and foreign borrowing, failure to restrain congressional pork, newly added liabilities and, of course, of the ruinous deficit-spending prompted by the war in Iraq. That task has fallen to the former comptroller of the United States, David Walker, who has repeatedly warned that Washington's profligacy will inevitably lead to ruin. But no one in Washington, Democrat or Republican, wants to listen.