lulldapull

A very interesting article by a former treasury Secretary that INMO truly god-damn laid out why the dollar is declining and why we ain't being told the truth!

November 16, 2004
The Coming Currency Shock
Declining Superpower Act

By PAUL CRAIG ROBERTS

China's currency peg to the US dollar prevents correction of the US trade imbalace and imperils the US dollar's role as reserve currency.

In the post World War II period, the dollar took over the reserve currency role from the British pound, because the supremacy of US manufacturing guaranteed US trade surpluses. The British pound lost its role due to debts of two world wars, loss of empire, a run down industrial base, and socialist attack on UK business.

The reserve currency conveys unique advantages on the favored country. As the reserve currency, the US dollar is guaranteed a high level of demand. Foreign central banks hold their reserves in dollars, and countries are billed in dollars for their oil imports, which requires other countries to buy dollars with their currencies.

As a reserve currency fulfills world needs in addition to the functions of a domestic currency, the favored country can hemorrhage debt for a protracted period on a scale that would promptly wreck any other country's currency.

This advantage is a two-edged sword, because it permits the reserve country to behave irresponsibly by running large trade and budget deficits. When the tide turns against the reserve currency, its exchange value collapses.

The reason for the collapse is the huge stock of reserve currency held by foreigners. When other countries conclude that their hoards of dollars represent claims that the US cannot meet, dollar dumping begins. Financing for US debt dries up; interest rates rise; imported goods become unaffordable and living standards fall.

Flight from the dollar is already underway. During the past two years, the US dollar has declined 52% against the new European currency, the Euro. This decline is striking in view of the sluggish European economy and the fact that many analysts regard the Euro as merely a political currency.

Indeed, the dollar is declining against all currencies that have any international standing: the British pound, the Canadian dollar, the Australian dollar, and even against the Japanese yen despite Tokyo's intervention to support the dollar.

Overcome by hubris and superpower delusion, US policymakers are unaware of America's peril. Economists and pundits are equally in the dark.

Economists believe that decline in the dollar's exchange value will correct the US trade deficit by reducing imports and increasing exports. Once upon a time a case could be argued for this logic. But that was a time before US corporations took to outsourcing jobs and locating production for US markets offshore.

US imports of goods and services rise each time a US factory moves offshore or a US job is outsourced. Goods and services produced offshore by US corporations for US customers count as imports and worsen the trade deficit. The US cannot reduce its trade deficit by increasing sales to China of goods made by US firms in China. As Charles McMillion, president of MBG Information Services, concisely summarizes: "Outsourcing is export substitution."

It is amazing that US policymakers and economists do not understand that dollar devaluation is meaningless as long as China keeps its currency pegged to the dollar.

America's greatest trade imbalance is with China. In 2000 the US merchandise trade deficit with China became larger than the chronic US trade deficit with Japan. By 2003 the US trade deficit with China was almost twice as large as the US deficit with Japan: $124 billion versus $66 billion. This year the US trade deficit with China is expected to be $160, a 29% increase from last year.

This imbalance cannot be corrected as long as China maintains the peg. As the dollar falls against the Euro and other currencies, the Chinese currency falls with it, thus maintaining China's advantage over US goods in world markets.

Both the Clinton and Bush administrations are guilty of permitting China to maintain a grossly undervalued currency that sucks productive capacity out of the US. The combination of cheap Chinese labor and an undervalued currency are destroying US middle class living standards.

As America's industrial base erodes, so does its competitiveness and ability to close its trade deficit through exports.

Currency markets cannot correct the undervalued Chinese currency, because China does not permit its currency to be traded and there are insufficient stocks of Chinese currency in foreign hands with which to form a currency market.

Sooner or later the peg will come to an end--perhaps when China fulfills its WTO obligation to let its currency float. When the peg ends, it will deliver a severe shock to US living standards. Suddenly, Chinese manufactured goods--including advanced technology products--on which the US is now dependent will cost much more. Overnight, shopping at Wal-Mart will be like shopping in high-end department stores.

China accounts for a quarter of the US trade deficit and for one-third of the US deficit in manufactured goods, is the second largest source of US imports after Canada, and is America's third largest trading partner as conventionally measured. Despite these facts, the US government does not publish full current account data for China, instead lumping China in with "Other Countries in Asia and Africa." This keeps the magnitude of the problem out of sight.

Canada and Mexico rank as the US's two largest "trading partners" because of double counting in the measure of imports and exports. For example, the full value of auto bodies shipped across the borders to Canada and Mexico for assembly operations are counted as "exports" when they leave the US and as "imports" when they return.

In contrast US "trade" with China involves almost no double counting of component parts.

Recently, Goodyear Tire and Rubber Company declared its intention to close all US plants and to manufacture offshore for US markets. Each time the US loses an industry, America's export potential declines and America's imports rise. This scenario guarantees a rising trade deficit and the end of the dollar's reserve currency role.

Dr. Paul Craig Roberts was Assistant Secretary of the Treasury for Economic Policy during 1981-82.

dalem

Jesus Lull.

Don't you get tired of being such a wet-diapered baby? Since when have any of these classic liberal-lefty predictions come true?

-dale

Julie

It's hard for me to sympathize with anything in the US right now with the catastrophe going on in Asia. I mean, 9/11 seems like a Sunday picnic compared to what the Asians are experiencing. So what if that dollar prediction comes true? The US has endured worse, and survived....we will again. Chin up Lull.....and change that wet diaper.

Ray

Julie,

9/11 was by a scoundrel and his rotten network.

Tsunami is an act of God. I am sure we will get over this. But all the same, thanks for your concern. It does makes one feel that the world cares.

Julie

I realize the differences in the origins of the catastrophes, but the fatalities are uncomparable. And, we do care Ray....Americans are very giving people....you will see.

lulldapull

Guys I have been really thinking about buyin up some Euros! ......Our money is worthless right now, and as the article rightly predicts it ain't gonna get any better. I got a lot sittin in the bank at God-damn 2.5% interest! thats rubbish! And assomeone from Australia pointed out that over there theintersts rates are 6%

The Euro has already experienced a 52% increase in value since last year. The exchange rate is so pathetic right now, that I even shelved my plans to order some christmas (scale modeling) related goodies from Hannants of England! The things are about 50% more expensive now out in europe.

Hell even Australian dollars are more expensive.

I am talking to Citi Bank, and thinking about just buying up Aussie dollars, cuz I might be moving there next spring.......Before this Dollar slumps again!

antelope

The U.S. is following the same path that the nations of Argentina and Brazil went down. The difference is that as the "world" currency people have been willing to hold U.S. debt securities to finance our massive deficit.

In time as the article writes faith in the dollar will decline. Once it is not the "world" standard currency we will see a massive devaluation in our currency (which may have started) and ultimately a massive rise in dollar inflation as the government prints the money it can no longer borrow. Whether this happens tomorrow or decades from now however is hard to predict.

It is in China's interest today to slow the collapse of the dollar since their export market and economy are based on a vibrant American economy. In time of war however China is fully capable now of collapsing the dollar.

Officer of Engineers

In time of war, the last thing anyone would be worried about is China collapsing the American dollar.

__________________
Chimo

Leader

Buy low. Sell high. Just a tip from your friendly Finance major.

__________________

Leader

God! You people do live in a dream world. First, America's economy is so vastly different then a developing third world country's economy it is not even worth a comparison. Second, if the US defaulted on its debts it would be the biggest disaster by for the world has known. I don't think you true realize what this would cause.

antelope

I am an economics major.

The people that live in a dream world are the people that believe America can indefinitely run such massive deficits and run up such a huge debt and not have it affect anything.

I understand exactly what this would cause which is why the issue concerns me.

It is not that America's economy is so different from Latin America's that makes the situation different. It is the fact that by the dollars status as the world's leading currency we can finance our own debt by borrowing our own currency back from foreigners who gain dollars from our massive trade deficits. This was not true in the case of South American countries. They had to borrow money based on other nations currencies.

If at some point in the future the dollar is no longer considered the world standard currency our government will no longer be able to borrow its own currency back at reasonable interest rates. When this happens the government will be forced to print money to cover its obligations or go under a Latin American style austerity plan. Since normally governments will print money before they cut spending America will be racked with hyperinflation.

As much as manpower and the draft issue is limiting America's ability to win the current war we are also faced with the fact that the American people are in no way prepared to accept the financial impact and sacrifice entailed to win this war. The government had no idea what this war would cost when it was launched and the reality of its cost are becoming a sobering reality of the situation.

antelope

It does however give China a lot of political leverage with America in the event China wants to do something militarily that the U.S. opposes.

We are in a time of war today and a key goal of Al-quaida is to collapse the U.S. economy. If our economy collapsed in a time of war it would affect our ability to prosecute the war and as a free people people it would impact the populations willingness to continue such a war.

Officer of Engineers

Given the fact that we're talking about two nuclear powers rattling sabres, money is the furthest thing from my mind.

Leader

I'm a double major in mathematics and finance.

Nice straw man.

Why don't you start with Europe? They are in far worse shape then we are. Double digit unemployment. Stagnant economies.

The only problem is that this isn't going to happen. In 1995, the dollar was at the same level against the European currencies that now make up the Euro as it is today. Yet, no hyperinflation.

It's worth the cost.

Leader

China can't "collapse" our economy. Is this your hope to end "America's unjust-illegal-evil war?" If so, keep hoping.