Furthermore, the UK was in many respects busted by the Great War. Their debts were huge; their industry was already behind and never caught up. But the US dollar was not an international currency of account prior to the war, the Federal Reserve was very new and had only just begun to permanently stabilize the notoriously bust-prone US financial system, and politically the US was not minded to fund ‘furriners.’ So the US propped up the UK through the Twenties, really. But the pound was already in deep trouble from 1915 on.

The present situation for the US is different, however. Yes, the EU and China will suffer greatly in the American economy tanks, but they are far more in a position to ‘hold market share’ and otherwise make trade and currency gains if the US is flat on its arse in the gutter. On the other hand, if when and as the US economy recovers, it is and will still be the largest unified and liquid economy in the world, which is a great fulcrum. Unless the EU gets itself together in the interim with a unified regulatory regime and tightly controlled sovereign bond market. It would take extraordinarily shrewd management by the US to regain reserve status if it is lost for a time, but a weighted basket is a straw opponent: nobody will or really can defend it. I don’t think the US has that kind of leadership, though. Rather, we are likely to pander to domestic constituencies in financially irresponsible ways which will hurt our debt and currency, giving our sovereign financial authorities too weak a hand to play. But they may yet make a game of it. The US as a major economy is not going to go away even if we kill our currency. What will go away is much of our geopolitical cred and leverage. We’ll be a player, just not the player. —And if we try to fight our way back to the top with military means, look out.

A) Save the housing market
B) Prevent a dollar collapse

Because the housing market is a here-and-now problem, especially in an election year, a dispassionate choice is not being made. The unseemly haste with which the GSE’s are being propped up and housing stimulus packages slammed together is shameful. And to what end? To prevent housing returning to 2002 levels? To bail out foreign investors in MBS? Yes. There are some good points here. But at what cost? The huge increase in national debt and negative real interest rates will decimate the value of the dollar – particularly its world reserve currency status. This is a disaster. The British pound was the world’s reserve currency for 150 years until 1940. Allowing that country to punch well above its weight. The dollar superceded it from the 1940s. The transition was quick. The hasty housing bailout, negative interest rates deflationary combination will destroy the dollars reserve currency status from 2010. It will be replaced by an informal basket of other currencies – an even to be regretted long after house prices have returned and passed the 2006 peak.