The coming dollar crisis

“Panic is old hat on Wall Street,” but this “crisis” is something rare, says James Grant in The New York Sun. And it’s about more than credit—it also concerns “well-founded doubts” about “the nature and integrity of the dollar itself.” When the Federal Reserve bails out Bear Stearns, it finds the money by printing it, “despite abundant evidence” that “the world has just about all the dollar bills it cares to hold.” The “crux of the problem” is that the Fed sets monetary policy for the U.S. only, but the dollar is also “the world’s reserve currency.” Well, it may not be for long. Yes, “the formerly carefree credit markets are in tears,” but “the tears are all the more bitter today because the world is losing faith in the paper dollar.”

The risk of a dollar “rout” should be the Fed’s “major concern” at its meeting this week, says The Wall Street Journal in an editorial. The “conventional wisdom” is that the Fed needs to cut interest rates again, but the “main achievement” of this six-month-old policy has been “to stir a global lack of confidence in the greenback.” The resulting “flight from the dollar” is making our other economic problems worse, stifling foreign investment just when our financial system needs it most. The fate of the greenback, “as ever,” is in the Fed’s hands, and it shouldn’t further squander its tattered “anti-inflation credibility.” If it does, “today’s panic could be tomorrow’s crash.”