Brinksmanship and the Dollar

Besides the fact that he may be offering a security-blanket to the psyches of his fellow citizens and at the same time pumping up public confidence in order to strengthen the dollar, Wall Street Journal analyst David Wessel is not far off track when he refuses to predict the imminent fall of the “greenback,” this because the impression that the U.S. is in decline has not become sufficiently widespread.

However, he is particularly wise to note that his analysis doesn’t rule out the fear factor, given that the dollar has already “come down a lot, probably enough to bring the trade deficit to sustainable levels. But once markets start moving, they often overshoot.” A country that is so dependent on international credit, even in its own currency, is susceptible to every fluctuation of market sentiment. 

For this reason, even though it may not be at the brink it’s getting rather near, don’t you think?  As the Mexican daily La Jornada points out, the importance of the dollar has declined so much that between 2001 and 2007 official central bank reserves went from 71.5% to 64.1%. And by 2010 they were down to 61.3%.  That is to say that the greater part of this decline actually occurred before the current crisis began, and was linked to the emergence of the Euro and other contingencies.  

Yet, gone is the era of those “happy” times that sprang into being with the Bretton Woods accords (1944), thanks to which Uncle Sam’s currency pulled itself up by its own bootstraps to become the world’s recognized reserve currency, its value guaranteed by a huge gold reserve. It even hung on after president Richard Nixon disconnected it from the precious metal and started to flood the planet with paper bearing the pictures of the “Founding Fathers,” but without the backing of the issuing country’s riches. 

Worries about the weakness and future prospects of the U.S. currency come from the foreign alternate creditors of the American debt who have bought it up and who place their ever more shaky confidence in it. It was not for nothing that a number of specialists have suggested we need to adopt a new world currency system upheld by strong economies and backed by gold (a return to the so-called “gold standard”), a position supported “sotto voce” by governments and individuals who prefer to forget about “the details,” such as the fact that the Pound Sterling, which dominated world commerce during the 18th, 19th and early part of the 20th centuries, fell due to the debt run up by the British Empire in the two World Wars plus the rise of the United States as leading world power.

Thus the problem turns out to be structural in nature. As has been noted, the American economy’s frequent cycles of crisis have left it with enormous fiscal and trade deficits plus a public debt of more than 14 trillion dollars, the equivalent of 92.8 percent of GDP.  As a result, the country has fallen to sixth place among the top twenty in innovation and competitiveness.  

To all these misfortunes now toss in an unsustainable level of unemployment (over nine percent), a growing level of poverty, and deteriorating educational standards. What you get is an inevitable witches’ brew for precisely what Wessel is worried about, in spite of his circumlocutions: the definitive downfall of the dollar, something that is being brought ever closer by the cost of the wars in Iraq and Afghanistan plus the burden of a $13 trillion foreign debt to support the greediest consumer nation on the face of the planet.

It is not for nothing that China now allows neighboring countries to carry on trade in its currency in order to avoid foreign exchange fluctuations. The Asian giant’s multimillion-dollar contracts with Brazil and Argentina are now in Yuan Renminbi [Chinese currency], something that they are planning to extend to Peru, Chile, South Korea, Malaysia, Belarus and Indonesia  It was not simply for the fun of it that Beijing and Moscow decided to use their own currencies for bilateral trade. And it was not “for love of art” that the ALBA carries out part of its transactions in “Sucres,” a still-virtual currency. Iran is now selling its oil in Euros, something that is expanding inexorably like an epidemic to Syria, the United Arab Emirates, Venezuela, Sweden and Russia.

Yet a skeptic still might respond, “Okay, if this is all true then why hasn’t China given up completely on the damned greenback?” The answer isn’t rocket science. With $2.7 trillion worth of U.S. currency in its reserves, more than 35 percent of the world total, including $1 trillion in U.S. Treasury obligations, China doesn’t have the luxury of being able to suddenly stop buying these bonds, given the catastrophic consequences this would cause to an ever more closely intertwined worldwide financial system and economy

For the moment, China exports the majority of its products to the USA. But things are changing. Beijing has already replaced Washington as Brazil’s largest trade partner, and since 2010 China has been that country’s largest investor as well. Is this no more than a sign of what is to come?  Perhaps, but these signs already seem to be paving the dollar’s road toward the brink, driven by a fatal economic attraction.

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