You are on page 1of 5

The Almighty Dollar?

By Bruce Dyer
(Sept 2003, PNA) - In the face of the underlying weakness of the American economy,
there is a growing sense of inevitability that sooner or later the dollar will be forced
to depreciate, an event that will have significant repercussions for the USA and the
world economy.

The US dollar accounts for almost 70% of global currency reserves - the money that
nations use to finance international trade and hold to protect their own currencies
against financial speculators. Because it is so dominant any marked shift in its value
would inevitably have major repercussions around the world.

The global demand for dollars has enabled the US to pay for considerably more than
it earns from its domestic production with 1991 being the only year in the past 20 in
which the US supplied more goods and services to the rest of the world than it took
in. In the other 19 years, the US has run a deficit on its import-export account to the
point where it has become the leading debtor nation with a mind boggling $6.3
trillion dollar deficit (60% of GDP).

Other structural imbalances in the US’s economy include the recent return to annual
budget deficits in the hundreds of billions due to unaffordable 2001 tax cuts,
unsustainable credit expansion, corporate accounting abuses, near zero personal
savings, record personal indebtedness, and reliance on and over consumption of
Middle Eastern oil. 1

These together with the build-up of military spending, the Iraq war and the new Bush
doctrine of pre-emptive attacks on any country deemed to threaten the US’s future
national security, have led global investors and currency speculators to unload dollars
and US assets which in turn, has contributed to a rapid deterioration in the US’s
financial position. 2

According to William Grieder, the national editor of The Rolling Stone, the US’s
ambitions to run the world, are heavily mortgaged. Fifteen years ago, its net foreign
indebtedness was zero. Before the US’s net balance of foreign assets turned negative
in 1988, it was a creditor nation itself, investing and lending vast capital to others,
always more than it borrowed. Now Greider sees the trend line as most alarming.
“Like any debtor who borrows more year after year with no plausible way to reverse
the trend, a nation sinking deeper into debt enters into an adverse power
relationship with its creditors - greater and greater dependency.” 3

The Euro meanwhile, is moving closer to being a competing world currency. It suffers
from none of the major underlying crises afflicting the US economy and has
appreciated by one third against the dollar since early 2002, when it traded at 84
cents. This is remarkable in view of the fact that the European Union’s economy is
neither booming nor absorbing huge investment funds from around the world.
Moreover when next year the European Union acquires 10 new members, its GDP will
be roughly the same as that of the US, and its population 60% bigger. If adopted by
all the members of the union, the Euro will begin to look like a more stable and more
attractive investment than the dollar. 4

Despite these developments Japan holds more than 90% of its reserves, and China
the bulk of her reserves in US dollars. While agreeing with the need for the dollar to
depreciate, Brendan O’Donovan chief economist with Westpac in New Zealand
expects that because the US remains the powerhouse of the world economy and
Asia’s main trade is with the US, the US dollar will maintain its importance as a
reserve currency.

An article in the Financial Times on the 30th July 2003 by Chen Zhao notes that
China and Hong Kong have been buying more US Treasury securities than any other
creditor nation, with combined annual purchases of $290bn. Also bigger than with
any other country, is the US's bilateral trade deficit with China which has reached
$110bn.

With their reserves accumulating rapidly, buying dollars is helping the Chinese keep
their own currency steady. It has also allowed US interest rates to remain low, which
in turn has encouraged American consumers to buy more Chinese goods.

While this game serves the purposes of Chinese and US policy makers alike, Zhao
believes it also creates economic and financial distortions that are both self-limiting
and self-defeating. With a collapse in interest rates fueling consumer spending, it is
conceivable that the US current account deficit will increase rapidly. Zhao warns that
“there is no magic number the current account deficit must reach to signal an
impending crisis – but there has never been a nation that has been able to increase
its reliance on foreign savings without eventually hitting a brick wall”. (Emphasis
added.)

In response to his question “When will the game playing come to an end?” he says
“When the Chinese have had enough.” 5

Some economists are concerned that a collapse in US living standards might be


imminent because they believe the US current account deficit is reaching
unsustainable levels. In 1999, Professor Catherine L. Mann of Vanderbilt University,
investigated [6] previous current account corrections in industrialised countries in the
past twenty years. She concluded that a current account deficit of over 4.2% was
unsustainable and that a correction in the US was likely in two or three years.

“The US cannot live beyond its long-term means forever, nor will US assets always be
so favoured by global investors” Mann wrote [7] in an article ‘Is the US Current
Account Deficit Sustainable?’ published by the IMF in March 2000. “When a change in
investor sentiment comes, it could be dramatic. Were the dollar to be depreciated by
a significant amount of say 25 percent, she believes “US consumers would shift from
buying imported goods and services to buying those made domestically and US
labour markets would tighten further. The combination of rising wages and a falling
dollar likely would drive up prices.” Then, she believes, the Federal Reserve would try
to choke the developing inflation by raising interest rates, thus disrupting financial
markets around the world.

Caroline Freund of the Federal Reserve researched the same ground as Mann and
also found that the US deficit was unsustainable except that she reckoned that the
markets normally bring about these corrections when the deficit rises above 5% of
GDP rather than 4.2%. [8] With US deficit being expected to exceed 5% by the end
of 2002, Mann and Freund’s work led economists employed by stockbrokers and
merchant banks to alert their clients to the dollar’s potential fall.
Morgan Stanley is one of the world’s leading financial investor firms. Steven Roach,
Morgan Stanley’s chief economist, warned [9] several times early in 2002 of ‘a US
balance of payments crisis by 2003’ and ‘America’s looming current-account
adjustment’ while his colleague, Eric Chaney, talked of ‘a massive devaluation’. Their
predictions will certainly help bring about [10] the crisis they warn of since they will
be used by Morgan Stanley’s 61,000 employees around the world to encourage
clients to switch out of the dollar into sterling or the euro. In short, the present
system of world money creation is clearly unstable.

Roach again - "Can a saving-short US economy continue to finance an ever-widening


expansion of its military superiority? My answer is a resounding 'no.'" What will
therefore happen? The prices of dollar-denominated assets compared to those of
non-dollar-denominated assets" must fall, and fall drastically soon. Roach estimates:
"a 20% drop in real exchange rates and nearly double that in nominal terms, higher
real interest rates, reduced growth in domestic demand, and faster growth
overseas." 11

Opposition to US policies growing

Unprecedented global demonstrations


On 15 February 2003 in an unprecedented display of solidarity more than 10 million
people in 600 places around the world delivered a clear NO! to the impending attack
on Iraq by the US and UK. Writing in the UK’s Guardian, George Monbiot has called
for those opposing the US to switch to Euro as a means of curbing American power.
12

Brand-power starting to sink


A report completed in late July by the New York consulting firm RoperASW, has
shown that the value of America’s favourite brands has slipped. Based on hour-long
interviews with 30,000 consumers in 30 major economies around the world, the
report saw only one of the top 10 global US-based firms increase its brand-power
compared with a year earlier. This is the 5th year that the survey has been carried
out and the first time that American companies have seen their brand-power start to
sink.

Professor John Quelch, dean of the Harvard Business School believes that "Never
before have global concerns about American foreign policy so threatened to change
consumer behaviour. We are not speaking here of the frivolous grandstanding
associated with temporary boycotts by a student minority. We are witnessing the
emergence of a consumer lifestyle with broad international appeal that is grounded
in a rejection of American capitalism, American foreign policy and Brand America."
13

While the survey was not about the standing of the dollar, given the decline in the
brand-power of US-based firms, the prospect of a dramatic decline in the value of
the dollar as the brand that underpins them all, will come as no surprise.

Warning signals coming from within the American establishment


Writing in Morgan Stanley’s Global Economic Forum, Stephen Roach asserts that a
“US-centric world” is unsustainable for the world-economy and bad in particular for
the United States. He argues that the US will be unable to remake the world in its
image and that the attempt to do so is distinctly negative from the point of view of
large US investors. He believes the global economy is lopsided and “a weaker dollar
may be the only way out.” 14

The likely outcome

Immanuel Wallerstein, one of America’s foremost scholars expects the dollar’s


collapse and everything to change geopolitically. “The U.S. will no longer be able to
live far beyond its means, to consume at the rest of the world's expense. Americans
may begin to feel what countries in the Third World feel when faced by IMF-imposed
structural readjustment - a sharp downward thrust of their standard of living. 15

The rest of the globe could topple the United States from its hegemonic status
whenever they so choose with a concerted abandonment of the dollar standard. This
is America's pre-eminent, inescapable Achilles Heel for now and the foreseeable
future. At the same time because Asian countries – the US’s main creditors - are so
heavily invested in the US and while the US remains dependent on their investments,
the dollar’s reserve currency standing is unlikely to be superseded in the near future.

In theory, the problems facing the US economy might still be corrected, but only in
theory, because it is impossible to imagine such a dramatic policy reversal from
Washington without some great crisis to provoke it. According to Greider, American
leadership has instead become blind to the adverse balance of power accumulating
against it.

---

Footnotes

1 The Real Reasons for the Upcoming War With Iraq - A Macroeconomic and
Geostrategic Analysis of the Unspoken Truth by W. Clark 6 March 2003
www.indymedia.org
2 Iraq, The Dollar and the Euro by Hazel Henderson April 2003
http://www.hazelhenderson.com/
Iraq,%20the%20Dollar%20and%20the%20Euro.htm
3 The End of Empire by William Greider
http://www.thenation.com/doc.mhtml?i=20020923&s=greider
4 The bottom dollar - There is only one way to check American power and that is to
support the euro
George Monbiot, Monday April 21 2003, The Guardian
5 The Fed is in a Dangerous Game with China by Chen Zhao
Financial Times, July 30, 2003
6 Is the US Trade Deficit Sustainable? Institute for International Economics,
Washington DC, 1999.
7 See Finance & Development, Vol. 37, No. 1, March 2000. Can be downloaded from
www.imf.org/external/pubs/ft/fandd/2000/03/mann.htm
8 ‘Current Account Adjustment in Industrialized Countries, ’ International Finance
Discussion Paper No. 692, Board of Governors, Federal Reserve Board, Washington
DC, December 2000. Available at
http://www.federalreserve.gov/pubs/ifdp/2000/692/ifdp692.pdf
9 ‘When the Tide Goes Out’, European Investment Perspectives, Morgan Stanley,
13th February 2002. Also ‘Global Decoupling’ Global Economic Forum, Morgan
Stanley, 30th January, 2002.
10 Europe Economics: Global Decoupling: Chaotic or Orderly?, Global Strategy
Bulletin, Morgan Stanley, 17 February, 2002.
11 Empire and the Capitalists by Immanuel Wallerstein May 15, 2003
http://fbc.binghamton.edu/113en.htm
12 The bottom dollar - There is only one way to check American power and that is to
support the Euro
George Monbiot, Monday April 21 2003, The Guardian
13 BRAND AMERICA: IRAQ'S CORPORATE COLLATERAL DAMAGE
THE AGRIBUSINESS EXAMINER July 21, 2003, Issue #271
14 Empire and the Capitalists by Immanuel Wallerstein
15 ibid

Copyright The author 2003

You might also like