The United States is behaving like a drug addict groping for another fix or an alcoholic reaching shakily for a hair of the dog. Our central bank, the Federal Reserve, keeps lowering interest rates and pumping liquidity into the financial system to fight the credit squeeze. The Fed will even take smelly mortgage-backed bonds off the banks’ hands and replace them with gilt-edged Treasury bonds. Last Friday, the Fed arranged a bailout of a gambling-crazed Wall Street house and Sunday financed a takeover of the firm, Bear Stearns, at a discount of 99 percent. The federal government, too, is advancing plans to bail out certain mortgage losers, including banks.

To accommodate such actions, the Fed has to create money out of thin air. Bingo: inflation rises. And the dollar keeps sinking to new lows. The buck has plunged more than 42 percent against key currencies since 2002.

The Fed and the federal government “are advocating and facilitating actions which will inevitably weaken the U.S. dollar for a long time to come,” says Arthur Lipper III of Del Mar, chairman of British Far East Holdings Ltd. and a veteran of Wall Street and international finance. The U.S. is letting the dollar slide “to save financial institutions which abandoned sound policy for the sake of competitive gain.” That’s a polite way of saying the bankers went bonkers and now want a bailout. Since last summer, the government and central bank have thrown more than $1 trillion at the credit crisis, which continues to get worse. When there’s a bailout, the stock market rejoices for a day or two, then falls again.

Perhaps investors are aware of a looming calamity. We are slowly losing our role as dominant international currency, and that plunge may well accelerate. What country wants to hold a currency that has lost more than 42 percent of its value? “International transactions are increasingly going to be settled in currency baskets,” says Lipper. (For example, a weighted average of currencies such as the euro, U.S. dollar, and Japanese yen could be used instead of the dollar alone.) “The world is tired of America borrowing to live the good life, and the unpopularity of the present administration and its policies increases the tendency to find alternatives to traditional reliance on the U.S. dollar as the world’s currency.”

The buck is a very special currency. Since the end of World War II, the dollar has been the center of the world’s financial system. Most international transactions take place in the dollar. Being the center of the financial universe gives us unique advantages: after selling their products, countries wind up with dollars. There is a natural tendency to invest those dollars back in the U.S. as a way to protect against currency risk. If those dollars are invested in our bonds, our interest rates may be lower than they otherwise would have been. If they go into our stocks, our citizens enjoy more paper prosperity. With the dollar as the world’s currency, our traders and financial institutions have an easier time: they can deal in their own currency rather than foreign ones. All these factors give us a big financial advantage.

Because of these many advantages we have, other countries complain of “dollar hegemony.” They argue that international trade is a game in which the U.S. cranks out dollars and the world makes things that dollars can buy. Also, their countries are forced to hold more dollar reserves than they would ordinarily, partly because of the need to defend against attacks on their currencies by global speculators, the modern equivalent of pirates.

Unfortunately for us, the dollar’s role in the world has been receding. In 2002, the U.S. dollar accounted for about 70 percent of the money used for financial transactions (and also used as reserves to fight pirates). Now that’s below 64 percent. This year, with the Fed aggressively dropping interest rates into the teeth of 4 to 5 percent inflation, the dollar will decline more swiftly in value. And its use as the international currency will no doubt also decline.

In days past, our currency was dominant because we were “economically competitive and politically stable,” says Lipper. “At the present time, we are no longer economically competitive in manufacturing, and our banking system is suspect. [Remember, it was Arab nations that bailed out Wall Street’s big firms not long ago.] The U.S. dollar will be less attractive to those having alternatives to using our currency as a safe haven.”

Our inflationary fixes are hastening the world’s move to other currencies. But there is one way we may try to keep our hegemony: through warfare. Many people, myself included, believe that one reason we attacked Iraq was that in the year 2000, Saddam Hussein decreed that Iraqi oil would be sold in euros, not dollars. We sent in troops to warn other oil-exporting nations not to do the same. Lipper doesn’t agree or disagree with that supposition: “I can accept the possible validity of a range of theories,” he hedges. In any case, it’s quite possible that oil will be denominated in something other than the dollar — perhaps a basket of currencies. “The oil-producing countries have their own self-interest, and we are presently dependent on their oil,” says Lipper.

Some folks think the only people immediately hurt by a weak dollar are those traveling or living abroad. ’Taint so. The price of oil zooms as the dollar plunges. Says Lipper, “My guess is that we are looking at over $5 and probably $6 per gallon gasoline, and only then will we, as a people, get serious about conservation and alternative energy sources.”

In the financial realm, American citizens have lost their ethical compass. For consumers, “bankruptcy is becoming destigmatized,” says Lipper. “The morality of the American credit consumer is changing, and not for the better.”

Ditto for the financial institutions. There is a scary $513 trillion of complex derivatives floating around the world. The risk “is far greater than presently recognized,” he says. In the financial industry, many of these instruments are off–balance sheet. Hence, banks and insurance companies have fewer reserves than prudent business requires. “The architects and marketers of these transactions earned enormous fees, and the executives and attorneys for the participants didn’t see reason for reflecting the liabilities on the books of the parent organizations,” says Lipper. “If it all becomes unwound, it would be nice to think that some of those who could have blown a whistle will be recognized and dealt with appropriately.”

Today, optimists acknowledge that the U.S. economy is slowing sharply, but they insist that if there is a recession, it will last only a couple of quarters, and then we will come roaring back. They concede that the dollar is weak and inflation is high, but the Fed will be able to raise interest rates, boosting the dollar and squashing inflation, once the economy recovers, say the Little Mary Sunshines.

But the optimists don’t see the global picture. “I believe it is perfectly possible and perhaps probable that we will suffer a depression or prolonged recession,” says Lipper. (A recession is an economic contraction lasting from half a year to a year or more. A depression is a massive decrease in economic activity spread over a longer period, accompanied by deflation.) Borrowers will remain more tight-fisted; companies and entrepreneurs will have a difficult time getting credit. “We are in for some tough times.”