As the U. S. economy continues to head - in my view - towards a recession of as yet unknown severity, nations around the world are shifting investments in and exchange rates tied to the U. S. Dollar. Obviously, this is not good for the country with its huge federal deficit run up by the Chimperator and his out of control spending. It likewise is not promising for the high consumer debt of the average citizen either. Here are highlights from Bloomberg.com (http://www.bloomberg.com/apps/news?pid=20601109&sid=azto7U.TmGX0&refer=exclusive):(Bloomberg) -- ``It may be our currency, but it's your problem'' was Treasury Secretary John Connally's taunt when the U.S. unhooked the dollar from the gold standard in 1971, unilaterally rewriting the rules of world business in America's favor. Now the world is taunting back. Almost four decades after the U.S. tore up the monetary arrangements that governed the post-World War II international economy, the dollar's fall from grace amounts to a tectonic shift in the global hierarchy. This time, the U.S. currency is on the losing side.
Whoever wins the White House next year will confront two unpopular choices: Accept the fall in U.S. clout and the rise of new rivals, or rein in record public and consumer debt that the rest of the world no longer wants to bankroll. ``What we're seeing is a very broad rebalancing of economic and political power in the world,'' says Jeffrey Garten, a Yale School of Business professor who was the Commerce Department's undersecretary for international trade in the Clinton administration. ``The scales are moving, and they're moving quite fast.''
The latest tailspin was triggered by the ascendance of China and India, growing confidence in Europe's common currency, record American debt and trade gaps, London's challenge to New York as a financial center and a two-year housing recession in the U.S. For the first time, economists are raising the once-improbable specter that the dollar's monopoly as the world's dominant reserve currency is under threat.
``Part of the depreciation is permanent,'' says Harvard University professor Kenneth Froot, who has been a consultant to the Fed. ``There is no doubt that the dollar must sink against periphery currencies to reflect their increase in competitiveness and productivity.'' The Fed's trade-weighted major currency index bottomed at 71.11 on Nov. 7, the lowest since the era of free-floating currencies started in 1971. Against the yen and European currencies, the dollar is now worth about a third of what it was in the days of fixed rates.
``There is a loss of confidence in both the dollar and the U.S.,'' said Riordan Roett, a professor at Johns Hopkins University in Baltimore. ``It may only reflect the widespread dismay with the Bush administration, but it is obvious that the next administration, of either party, will have a steep uphill struggle.''
1 comment:
Americans tend to forget that the dollar is accepted as legal tender in other countries because of the cold war; our currency was accepted world wide because we stood up to totalitarian governments and backed it with military strength.
Grateful free world central bankers accepted the dollar as legal tender in their economy because this was the way of creating a united front against totalitarian forces,
Totalitarian forces are no longer a threat to freedom but our spend thrift ways are a threat to economic dislocations. Our government is using debt to finance the unjust war in Iraq, using debt to finance ongoing government operations, and using debt to finance one time disaster relief.
It would be OK if the debt financing came from American savers, but it is coming from the saving of foreign investors, foreign institutions and central bankers. When Treasury Secretary John Connally said “It may be our currency, but it's your problem'' he was speaking at the height of the cold war. Central Bankers had no recourse but to accept the dollar as legal tender.
Now we are in a different era, where responsibility for currency control is paramount to working effectively in a globalize economy. Our government acts as if we are still in a cold war economy, where central bankers will accept the dollar as legal tender no matter how badly we debase our currency.
In order to function effectively in a globalize economy the first thing our government will have to do is eliminate deficit financing; this means closing overseas military bases, raising taxes, focus on domestic problems and implementing other unpopular measures that will allow our country to act appropriately in a word community
Post a Comment