What if confidence in the dollar runs out?

Things are already getting shakier in the House of Uncle Sam. The declining dollar reduces the necessary dollar inflows, so Greenspan needs to raise interest rates to maintain some attraction for the foreign dollars he needs to fill the trade gap. As a quid pro quo for being reappointed by President George W Bush, he promised to do that only after the election. That time has now arrived, but doing so threatens to collapse the housing bubble that was built on low interest and mortgage – and remortgage – rates.

But it is in their house values that most Americans have their savings, if they have any at all. They and this imaginary wealth effect supported over-consumption and the nearly as-high-as-GDP household debt, and a collapse of the housing price bubble with increased interest and mortgage rates would not only drastically undercut house prices, it would thereby have a domino effect on their owners’ enormous second and third remortgages and credit-card and other debt, their consumption, corporate debt and profit, and investment. In fact, these factors would be enough to plummet Uncle Sam into a deep recession, if not depression, and another Big Bear deflation on stock and de facto on other prices, rendering debt service even more onerous. (If the dollar declines, even domestic price inflation is de facto deflationary against other currencies, which Russians and Latin Americans discovered to their peril, and which we observe below.)

Still lower real US investment would reduce its industrial productivity and competitiveness even more – probably to a degree lower than can compensated for by further devaluing the dollar and making US exports cheaper, as is the confident hope of many, probably including the good Doctor. Until now, the apparent inflation of prices abroad in rubles and pesos and their consequent devaluations have been a de facto deflation in terms of the dollar world currency. Uncle Sam then printed dollars to buy up at bargain-basement fire-sale prices natural resources in Russia (whose economy was then run on $100 bills), and companies and even banks, as in South Korea. True, now Greenspan and Uncle Sam are trying again to get other central banks to raise their own interest rates and otherwise plunge their own people into even deeper depression.

But even if he can, thereby also canceling out the relative attractiveness of his own interest-rate hike, how could that save Uncle Sam? What remains the great unknown and perhaps still unknowable is how a more wounded, Ponzi-less Uncle Sam would react with more "Patriotic" acts at home and abroad with the weapons – including the now almost ready "small" nukes – he would still have, even if his foreign victims no longer paid for new ones. So, to compensate for less bread and civil rights at home, an even more patriotic, nay chauvinist, circus at the cost of others abroad is the real danger of the current policies to "defend freedom and civilization".

So, far beyond Osama bin Laden, al-Qaeda and all the terrorists put together, the greatest real-world threat to Uncle Sam is that the inflow of dollars dries up. For instance, foreign central banks and private investors (it is said that "overseas Chinese" have a tidy trillion dollars) could any day decide to place more of their money elsewhere than in the declining dollar and abandon poor ol’ Uncle Sam to his destiny. China could double its per capita income very quickly if it made real investments at home instead of financial ones with Uncle Sam. Central banks, European and others, can now put their reserves in (rising!) euros or even soon-to-be-revalued Chinese yuan. Not so far down the road, there may be an East Asian currency, e.g. a basket first of ASEAN + 3 (China, Japan, South Korea) – and then + 4 (India). While India’s total exports in the past five years rose by 73%, those to the Association of Southeast Asian Nations (ASEAN) rose at double that rate and sixfold to China. India has become an ASEAN summit partner, and its ambitions stretch still further to an economic zone stretching from India to Japan. Not for nothing, in the 1997 East Asian currency and then full economic crisis, Uncle Sam strong-armed Japan not to start a proposed East Asian currency fund that would have prevented at least the worst of the crisis. Uncle Sam then benefited from it by buying devalued East Asian currencies and using them to buy up East Asian real resources and in South Korea also banks, at bargain-basement reduced-price fire sales. But now, China is already taking steps toward such an arrangement, only on a much grander financial and now also economic scale.

A day after writing the above, I read in The Economist (December 11-17, 2004) a report on the previous week’s summit meeting of ASEAN + 3 in Malaysia. That country’s prime minister announced that this summit should lay the groundwork for an East Asian Community (EAC) that ‘should build a free-trade area, cooperate on finance, and sign a security pact ... that would transform East Asia into a cohesive economic block ... In fact, some of these schemes are already in motion ... China, as the region’s pre-eminent economic and military power, will doubtless dominate ... and host the second East Asia Summit.’ The report went on to recall that in 1990, Uncle Sam shot down a similar initiative for fear of losing influence in the region. Now it is a case of ‘Yankee Stay Home.’

Or what if, long before that comes to pass, exporters of oil simply cease to price it in ever-devaluing dollars, and instead make a mint by switching to the rising euro and/or a basket of East Asian currencies? That would at one stroke vastly diminish the world demand for and price of dollars by obliging anyone who wants to buy oil to purchase and increase the demand price of the euro or yen/yuan instead of the dollar. That would crash the dollar and tumble Uncle Sam in one fell swoop, as foreign – and even domestic – owners of dollars would sell off as many of them as fast as they could, and other countries’ central banks would switch their reserves out of dollars and away from Uncle Sam’s no-longer-safe haven. That would drive the dollar down even more, and of course halt any more dollar inflow to Uncle Sam from the foreigners who have been financing his consumption spree. Since selling oil for falling dollars instead of rising euros is evidently bad business, the world’s largest oil exporters in Russia and OPEC have been considering doing just that. In the meantime, they have only raised the dollar price of oil, so that in euro terms it has remained approximately stable since 2000. So far, many oil exporters and others still place their increased amount of dollars with Uncle Sam, even though he now offers an ever less attractive and less safe haven, but Russia is now buying more euros with some of its dollars.

So also many countries’ central banks have begun to put ever more of their reserves into the euro and currencies other than Uncle Sam’s dollar. Now even the Central Bank of China, the greatest friend of Uncle Sam in need, has begun to buy some euros. China itself has also begun to use some of its dollars – as long as they are still accepted by them – to buy real goods from other Asians and thousands of tons of iron ore and steel from Brazil, etc. (Brazil’s president recently took a huge business delegation to China, and a Chinese one just went to Argentina. They are going after South African minerals too.)

So what will happen to the rich on top of Uncle Sam’s Ponzi scheme when the confidence of poorer central banks and oil exporters in the middle runs out and the more destitute around the world, confident or not, can no longer make their in-payments at the bottom? The Uncle Sam Ponzi Scheme Confidence Racket would – or will? – come crashing down, like all other such schemes before, only this time with a worldwide bang. It would cut the present US consumer demand down to realistic size and hurt many exporters and producers elsewhere in the world. In fact, it may involve a wholesale fundamental reorganization of the world political economy now run by Uncle Sam.

Date: 2015-12-11; view: 762