GOING DOWN.(The Talk of the Town)

Americans long ago became accustomed to the pleasing notion that there is nothing quite so sound as the dollar. During the nineteen-twenties and thirties, when Pound, Hemingway, and Stein were in Paris, they lived on modest remittances from home which, translated into francs, bankrolled lazy afternoons in the Jardin du Luxembourg and giddy evenings on the Boulevard Montparnasse. "Two people, then, could live comfortably and well in Europe on five dollars a day and could travel," Hemingway wrote. Near the end of the Second World War, an international conference in Bretton Woods, New Hampshire, confirmed the American currency's role as the linchpin of the global economy, setting up a system of fixed exchange rates that survived for almost thirty years, and ushering in an age of unprecedented international prosperity. John Maynard Keynes, the leader of the British delegation, acknowledged the new economic reality. He and his fellow-Brits might have the brains, he is said to have commented, but the Americans had the money.

Not anymore, as anybody who has visited Europe recently will confirm. Five dollars for a cup of coffee, a hundred dollars for a mediocre meal, three hundred dollars for a modest hotel room--if Hemingway had been forced to pay such prices, Paris would loom less large in the history of American letters.

Since the nineteen-seventies, the dollar's value has been determined in the financial markets, where traders buy and sell currencies like any other commodity. In the past few weeks, the dollar has fallen sharply. The depreciation reflects two intractable, and related, problems. First, as manufacturing and production have shifted to countries with low labor costs, the trade balance has declined alarmingly: America cannot sell as much abroad as it buys. Second, the United States has emerged as the world's biggest debtor. Ten years ago, the country ran a modest trade deficit (less than a hundred billion dollars), and, as a consequence of investments that Americans made overseas, the rest of the world owed us trillions of dollars. Today, the trade deficit is about five per cent of the gross domestic product--bigger than it has ever been--and we owe the rest of the world about three and a quarter trillion dollars.

Running a trade deficit and borrowing from abroad, even borrowing heavily, aren't necessarily bad things. Many developing nations do so because they don't have enough capital to invest in industrial equipment, education, and infrastructure. But the United States isn't a developing nation, and it isn't borrowing to finance investment: it is taking on debt to finance the government's day-to-day expenses, and to pay for imported consumer goods, such as autos, toys, and electronics.

The dollar's fall, along with the trade and budget deficits, is a classic symptom of a country living beyond its means. Twenty years ago, American households saved about nine cents of every dollar they earned; today, they save less than a penny. The federal government is spending about four hundred billion dollars a year more than it raises in taxes, which means that the Treasury has to sell about thirty-four billion dollars' worth of bonds every month to remain solvent. By far the biggest purchasers of Treasury bonds are the central banks of China and Japan, which, last year alone, accumulated some four hundred billion dollars' worth of ...