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Urgent Stock Market Message

U.S. Dollar Collapse Hysteria 

Currencies / US Dollar Oct 06, 2009 - 12:18 PM GMT

By: Mike_Whitney


Best Financial Markets Analysis ArticleRobert Fisk lit the fuse with his hyperventilating narrative which appeared in Tuesday's UK Independent titled, "The Demise of the Dollar".  The article went viral overnight spreading to every musty corner of the Internet and sending gold skyrocketing to $1,026 per oz.  Now every doomsday website in cyber-world has headlined Fisk's "shocker" and the blogs are clogged with the frenzied commentary of bunker-dwelling survivalists and goldbugs who're certain that the world as we know it is about to end.

From Fisk's article:

"In the most profound financial change in recent Middle East history, Gulf Arabs are planning – along with China, Russia, Japan and France – to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar.

Secret meetings have already been held by finance ministers and central bank governors in Russia, China, Japan and Brazil to work on the scheme, which will mean that oil will no longer be priced in dollars.

The Americans, who are aware the meetings have taken place – although they have not discovered the details – are sure to fight this international cabal which will include hitherto loyal allies Japan and the Gulf Arabs. Against the background to these currency meetings, Sun Bigan, China's former special envoy to the Middle East, has warned there is a risk of deepening divisions between China and the US over influence and oil in the Middle East. "Bilateral quarrels and clashes are unavoidable," he told the Asia and Africa Review. "We cannot lower vigilance against hostility in the Middle East over energy interests and security." (UK Telegraph)

"International cabal"? C'mon, Bob, you're better than that.

  Reports of the dollar's demise are greatly exaggerated. The dollar may fall, but it won't crash. And, in the short-term, it's bound to strengthen as the equities market reenters the earth's gravitational field after a 6 month-long ride through outer-space. The relationship between falling stocks and a stronger buck is well established and, when the market corrects, the dollar will bounce back once again. Bet on it. So why all this bilge about Middle Eastern men huddled in "secret meetings" stroking their beards while plotting against the empire?

Isn't that the gist of Fisk's article?

 Yes, the dollar will fall, (eventually) but not for the reasons that most people think. It's true that the surge in deficit spending has foreign dollar-holders worried. But they're more concerned about the Fed's quantitative easing (QE) program which adds to the money supply by purchasing mortgage-backed securities and US Treasuries. Bernanke is simply printing money and pouring it into the financial system to keep rigamortis from setting in. Naturally, the Fed has had to quantify exactly how much money it intends to "create from thin air" to placate its creditors. And, it has. (The program is scheduled to end by the beginning of 2010) That said, China and Japan are still buying US Treasuries, which indicates they have not yet "jumped ship".

The real reason the dollar will lose its favored role as the world's reserve currency is because US markets, which until recently provided up to 25 percent of global demand, are in sharp decline. Export-dependent nations--like Japan, China, Germany, South Korea--already see the handwriting on the wall. The US consumer is buried under a mountain of debt, which means that his spending-spree won't resume anytime soon.  On top of that, unemployment is soaring, personal wealth is falling, savings are rising, and Washington's anti-labor bias assures that wages will continue to stagnate for the foreseeable future. Thus, the American middle class will no longer be the driving force behind global consumption/demand that it was before the crisis.  Once consumers are less able to buy new Toyota Prius's or load up on the latest China-made widgets at Walmart, there will be less incentive for foreign governments and central banks to stockpile greenbacks or trade exclusively in dollars.

Here's a clip from the Globe and Mail cited on Washington's Blog:

     "A UBS Investment Research report says that while it would be wrong to write off the U.S. dollar as the global reserve currency, its roughly 90-year iron grip on that position is loosening. “The use of the U.S. dollar as an international reserve currency is in decline,” said UBS economist Paul Donovan.

    “The market share of the dollar in international transactions is likely to decline over the coming months and years, but only persistent policy error – or considerable fiscal strain – is likely to cause the dollar to lose reserve currency status entirely.”

    The UBS report maintains that the gradual slide of the U.S. dollar is being driven not by the world’s central banks, but by the private sector, as individual companies increasingly abandon the greenback as their international currency of choice.

    “The private sector’s use of reserves is more important than official, central bank reserves – anything up to 20 times the significance, depending on interpretation,” Mr. Donovan said. “There is evidence that the move away from the dollar as a private-sector reserve currency has been accelerating since 2000.”

 As private industry veers away from the dollar, governments, investors and central banks will follow. The soft tyranny of dollar dominance will erode and parity between currencies and governments will grow. This will be create better opportunities for consensus on issues of mutual interest. One nation will no longer be able to dictate international policy.

 So-called "dollar hegemony" has added greatly to the gross imbalance of power in the world today. It has put global decision-making in the hands of a handful of Washington warlords whose narrow vision never extends beyond the material interests of themselves and their constituents. As the dollar weakens and consumer demand declines, the United States will be forced to curtail its wars and adjust its behavior to conform to international standards. Either that, or be banished into the political wilderness.

So, what exactly is the downside?

Superpower status rests on the flimsy foundation of the dollar, and the dollar is beginning to crack. Fisk is right; big changes are on the way. Only not just yet.

By Mike Whitney


Mike is a well respected freelance writer living in Washington state, interested in politics and economics from a libertarian perspective.

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