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David Calleo calls for adjustments to current geopolitical realities to secure the future of the dollar

Posted on: 5/4/2007

On April 24, 2007, David Calleo, the Dean Acheson Professor and Director of European Studies of the Paul H. Nitze School of Advanced International Studies at John Hopkins University, presented a talk on “The return of the Twin Deficits and the Future of the dollar.” In his introductory remarks, Professor Nic van de Walle, Director of the Einaudi Center highlighted that Professor Calleo’s talk formed part of the Distinguished Speaker Series, sponsored by the Foreign Policy Initiative of the Mario Einaudi Center for International Studies.

During his talk, David Calleo analyzed the historical development of the dollar since World War II and established its intrinsic relationship to the geopolitical position of the United States. In a nutshell, periods of the dollar’s weakness reflected difficult periods for America’s political situation, and vice versa. By the 1980s, twin deficits, the combination of a fiscal deficit and an external deficit, became habitual for the U.S. These deficits implied that the U.S. government was spending more than its income and that the U.S. economy was consuming and investing more than it produced. At that time, declinists forecasted that the two deficits linked to geopolitical over-commitment would lead to disturbed capital markets and economic damage..

Instead, the end of the Cold War and the establishment of a new geopolitical balance of power offered the opportunity to establish a fiscal and monetary policy oriented toward real and sustainable growth. Accordingly, the Clinton administration succeeded in reducing the fiscal deficit. Large inflows of foreign direct investments financed the remaining huge external deficits which, consequently, were interpreted as a source of economic strength rather than vulnerability. In analyzing the reasons for which the dollar remained strong despite these deficits, Calleo points to U.S. leadership in new industries and services and its excellent universities and research centers.

In 2001, at the start of the Bush administration, came the widely expected stock market crash and a withdrawal of foreign direct investments and large tax cuts made the twin deficits reappear. Professor Calleo claims that the economic formula once highly successful for sustaining the dollar under Clinton has come to an end and under the current presidency, American foreign strength again depends heavily on geopolitics, as it did in the Cold War years. Today’s geopolitical framework, however, is different and the U.S. has lost two principal defenses, its Cold War strategy as well as the absence of a rival currency. “Today there is not a common overriding threat, but a multiplicity of local and regional struggles.” He argued that the attempt to gather these dispersed conflicts into a collective war against terror was not convincing for the rest of the world. “Since our affluent partners no longer depend on us for their security, they may grow tired of supporting our imperial lifestyle.” The unpopularity of the U.S. in the world should be a cause for deep concern, said Calleo.

In conclusion, Calleo made a strong plea to adapt to the new geopolitical reality of a plural world with several powers. He concluded that “the overriding challenge will be to take a world order that is plural, and make it collegial.” It is time to establish multilateral and rules-based structures - institutions that represent the interest of the different nations. “A plural world might continue with a single global currency, but not the unilateral management of it.” According to Calleo, it is more likely that the world will end up with several major currencies and currency blocs.

Contact Information
Heike Michelsen
Einaudi Center
255 8926
hm75@cornell.edu

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