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"...public opinion deserves to be respected as well as despised" G.W.F. Hegel, 'Philosophy of Right'

just a thought... « Previous | |Next »
March 29, 2005

As it is a slow news day I have some space to play a little 'what if.' This kind of speculation is much loved by philosophers as it helps to concentrate the mind on the essential order of things. The 'what if' below has been gleaned from reading the US economic blogs, such as General Glut's Globblog and Brad Setser, over the Easter break.

I wonder if anyone in the Australian Treasury has given any thought to a future scenario in which the declining US dollar reduces the necessary dollar inflows needed to prop up the US trade deficit and finance the US consumption binge.

What if the dollar inflow dried up from East Asia? What if central banks, European or East Asian, started putting their reserves in (rising) euros instead of (declining) dollars? Is that beginning to happen?

What if the exporters of oil (Russia say) cease to price it in ever-devaluing dollars, and instead make some money by switching to the rising euro? Isn't that the economic rational thing to do in the long run? Isn't this already beginning to happen? Isn't East Asia already begining to shift to developing its own reserve basket?

If that gains some traction, would not that mean that the owners of dollars would cut their losses by selling off as many dollars as fast as they could? Would that not mean that other countries' central banks would switch their reserves out of dollars and away from Uncle Sam's no-longer-safe haven?

Would not that drive the dollar down even more, and reduce the dollar inflow to US from those East Asian countries running trade surpluses with the US? Does that not mean that the US dollar is no longer a safe haven? What happens if the United States lose its monopoly privilege of being the world's reserve currency?

I know it's only a what if. But it seems to me that the US is delicately balanced on a tightrope over an abyss and there is no safety net. However, this is no circus even though the Republicians run Washington.

Methinks, in the light of this 'what if,' that Australia's economic future lies with China and East Asia not with a heavily indebted US.

For those interested, you can find a debate in the econoblog of the Wall Sreet Journal Online and some background (left click on 'International Financial System', then on 'Is the US Current Account Sustainable',then right click on 'Will the Bretton Woods 2 Regime Unravel Soon? The Risk of a Hard Landing in 2005-2006'.)

| Posted by Gary Sauer-Thompson at 1:54 PM | | Comments (2)


So you're talking about either preventively investing in China and East Asia, or later doing so out of necessity.

What if....

Forward thinking economies will be better off than the ones that react after the fact.

It sounds as though you're predicting another Great Depression for the US, in which case the "what if" takes on all kinds of nuances here in the States. (I think ours was a far more friendly society back in the 30s. Not so sure we'd take it very well today.)

But for you folks, it's a matter of survival - do you want your future over an abyss, on a tightrope (greased by the way) with no safety net? Or would you rather read the writing on the wall and get out while you still can?

Great "what if" Gary...wish it wasn't so sobering.

re the US: probably more of a tough squeeze than a depression.

re Australia: we will sign a free Trade Agreement with China.