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Descending Broke Buck Mountain

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I never cease to be amazed by those who claim to know what is going on when their perspective is severely limited by their crania being firmly inserted in their dorsal orifices.

Let’s have them try accepting as evidence an opinion that the Dollar certainly is tanking from people whose economic expertise I readily admit is much greater than my own, the staff of The Economist of Britain, who say, “Indeed, there are good reasons to expect [the dollar's] slide to continue, dragging it below the record low of $1.36 against the Euro that it hit in December 2004.”

Now if that comment is a bit too offshore for you, you might try listening to former Federal Reserve Chairman Paul Volker, another person whose economic knowledge is much greater than my own, who said two years ago, “the odds of a dollar crash [are] 75 percent within five years.”

That time may now be upon us.

Robert Kuttner, co-editor of The American Prospect, wrote in The Boston Globe, “The dollar dilemma is the Republicans’ economic Iraq.”

What does Kuttner mean by this? That there are no good choices available to repair the damage done to the dollar by the misguided actions of the Bush Administration.

We can’t take the steps any other country would when in our stead, because it would affect the confidence of those foreign investors who are keeping our economy afloat. Thus, Treasury Secretary Henry Paulson grandstands for the hometown crowds to boost slipping consumer confidence by publicly demanding that China revalue the Ruan relative to the Dollar while doing almost nothing behind the scenes to bring this about.

As American Manufacturing Trade Action Coalition (AMTAC) Executive Director Auggie Tantillo puts it, “By refusing to level the playing field, the U.S. government is allowing China to seize our market share by subsidizing U.S. importers at the expense of domestic American manufacturing.”

[Hal Pawluk wrote about American outsourcing subsidies here on blogcritics.org back on November 15, 2004.]

Why? Because the moment the ruan rises against the dollar, nations around the world will dump Dollars faster than US Republicans scraped off their Bush/Cheney-04 bumper stickers. We depend on foreign financing of our trade imbalance, and the confidence of other nations’ central banks that they won’t be left holding less-valuable Dollars is critical to that situation.

It doesn’t stop with our government letting us down over this problem. We are also being betrayed by our own business community.

American economic interests don’t want any real reform in the dollar-ruan exchange rate. Former Clinton Administration Treasury Secretary and current Citigroup senior executive Robert Rubin told Kuttner in an interview that Wall Street wants only the most modest Dollar adjustment in order to maintain the practice of U.S. manufacturers off-shoring production to China to take advantage of the much cheaper labor force, Chinese and American government subsidies, and favorable exchange rates.

Secretary Paulson wants even more tax cuts and more financial deregulation, which will result in bigger federal budget deficits and reduce the stability of the dollar in forex markets by limiting the ability of the government to control the hedge funds’ exaggeration of normal swings in currency markets.

Those who benefit from this arrangement — and their fellow travelers — loudly deny that there is anything to fear, but the later the correction, the harder the fall.

This would leave the Fed with two bad (for most of us) choices: raise interest rates to restore foreign confidence in the dollar and create a domestic recession, or continue manipulating interest rates to stimulate a domestic recovery and scare off the foreign lenders.

At that point, they could foreclose on our loans.

The good news, according to James K. Galbraith writing in the Guardian on December 4, 2006, is that “the world is unprepared to replace the dollar with anything else” and “it’s not in anyone’s interest to bring it down.”

But, he admits that this replacement of the Dollar as the trusted currency of the world with, for example, the Euro, could happen – and it’s directly connected to how Iraq turns out. Galbraith explains:

“As far back as 2002, we understood – as the economically illiterate neo-imperialists did not – that a world system very favorable to America was on the line. As the “Pax Americana” goes to hell in Iraq – producing a nervous breakdown among the pro-war elites – let’s remember that security and finance are linked.

“Typically, the country that provides global economic security enjoys the use of its financial assets in world trade. And when the security situation changes, that privilege can be revoked. The consequences are unpleasant. Ask the British: after the sterling area folded, it took a generation for the UK to come all the way back.

“Four years in, and with no end in sight, that risk may finally be catching up to the almighty dollar.”

Economic observer Wolfgang Muenchau, writing for Financial Times Deutschland in Germany sees this as well: “The deterioration of the U.S. currency is part of a tectonic realignment that we will have to confront for years to come.”

Muenchau’s article covers a study authored by American economists Maurice Obstfeld and Kenneth Rogoff, which theorized that the current global imbalances would adjust through a decline in the US housing market (currently underway), which would produce a recession, which would cause a much weaker dollar. Obstfeld and Rogoff calculated that the potential for a dollar-devaluation is between 20 to 49 percent.

Muenchau notes, “It seems now that the two had written a script for the U.S. and world economy for the years 2006 and 2007.”

What needs to happen if the dollar crashes and burns? A lot, and the time to do so is already too short to achieve the necessary changes before the economic effects are felt.

The moribund US domestic manufacturing sector would have to revive and produce products that foreign markets would be willing to buy. But with most of our consumer production already off-shored, we don’t have much to offer anymore. But even if we did, it would take time we don’t have to bring this reversal of economic course about.

Even this reversal could itself bring about a recession even if the foreign exchange imbalance didn’t, and this time a recession will not pass as quickly as it did in 2001. The U.S. Federal Reserve Board ameliorated the first Bush recession with a near-elimination of the prime rate and an enormous increase in the federal budget deficit brought about by rash slashing of tax receipts to stimulate the economy.

We already know from comments posted above that foreign investors aren’t as tolerant of such moves anymore.

This leaves the US with only one other possible course of action to minimize the looming recession: a more assertive trade policy. If we exported more and imported less, foreign borrowing would not be as necessary to finance the trade deficit.

But that would itself take time we don’t have to work, and would go against the public position of the Bush Administration regarding “free” trade.

It just goes to show that even “free” trade has a dear price.

Got any Euros you want to part with? How about yen? Rupees? Dinar? I need to get something for these dollars!

About pessimist

  • Ruvy in Jerusalem

    Like old uncle Ruvy has been saying for some time – get “realistic” and buy gold coins and a troy scale. Forget the banks, forget the euro, forget sterling. When the sawbuck is sawed up and people start putting up signs, “the buck definitely does not stop here”, those gold coins will stand you in good stead.

  • http://handyfilm.blogspot.com handyguy

    If anyone ever manages to convince China to adjust their currency’s value, it might not be such a bad thing for the dollar to slide a bit more. If it really crashes, however, and China continues to dig in its heels, watch out. It’s not solely the Republicans’ problem, though. Democrats had better step up with some ideas and responsibility as well.

  • troll

    Ruvy – your idea of buying gold might actually stabilize the situation were it legal for Americans to buy gold at its monetary value

  • http://ruvysroost.blogspot.com Ruvy in Jerusalem

    Troll,

    You mean there is as ban on buying gold coins again? Boy, your government is a lot more thorough than I thought it was in restricting economic freedom.

  • Bliffle

    I don’t think most americans realize the extent to which this republican cabal has chained us citizens to bad economics, whether it’s pharma monopolies, no medicare negotiatins in part D, no bid Iraq contracts, unending future indebtedness, etc., all the while spouting propaganda about Economic Freedom.

  • Maurice

    Realist

    your lack of understanding of currency trading shows in this post. The dollar drop is very beneficial to trade imbalances. Having a low dollar value allows more trade with other nations especially big ticket items. Having a ‘valuable’ currency like the euro can cause economic problems.

    Here is a quote from a related Economist article.

    American policymakers seem happy to let the dollar slide. Europeans, however, complain that the burden of adjustment has fallen disproportionately on their currency, the euro. As the euro has soared against the dollar, central banks in Japan, China and other Asian countries have bought dollars to hold down the value of their own currencies.

  • http://ruvysroost.blogspot.com Ruvy in Jerusalem

    Maurice,

    Exchanging one worthless piece of paper for another is fine just so long as the ones exchanging the paper agree that the worthless paper they trade has value. So for now, even the New Israeli shekel, a dubious currency printed and minted in merry olde England, is rising against the dollar. The pathetically dependent Israeli economy is a temporary shelter from the fears of a a falling dollar.

    But gold has intrinsic value. At some point a five dollar bill will become nothing more than a nice painting of Abraham Lincoln. The imbalances in America’s economy and the unwillingness to do anything to rectify those imbalances, brings that day closer and closer. And the guy with the gold coins will have money and everybody else will be trading different colored toilet paper.

  • Bliffle

    “But gold has intrinsic value.”

    But it’s been a poor investment for many years. And it’s clumsy to deal with. Friend of mine inherited a lot of gold from an eccentric uncle. Had to pay rent to store it in a Dallas bank; had to pay armored trucks to haul it around; big brokerage fees to sell the stuff. he dollars per pound is not good, and that’s why modern high-level crooks prefer diamonds and other gems for ransom payoffs, etc.

  • http://Butgoldhasintrinsicvalue. Bliffle

    Actually, an economist can argue that gold doesn’t have intrinsic value since you can’t use it for anything useful. Can’t eat it, for example. Gold has the value that society wills it to have, which is extrinsic value. It has perceived value.

  • http://www.didonline.com Dennis Francis

    The falling dollar is great for some. The middle class have not seen a real pay raise. Small business has been screwed by Big Government while feeding their big corporate buddies. Politicians screw the poor and middle class while insisting that they are our only hope for the future.
    The investment class fool the middle class into thinking that they are investing for eventual wealth. They forgot to tell them that the Wall Street Ponzi scheme is in full effect.
    I love this country, there is never a dull moment.
    Much love to my right, left and middle-of-the-roaders.

  • http://aol.com Teri Motley

    Does anyone know if gold coins are actually being used in places like Iraq, Somalia, and other government-free zones?