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World Bank: decline of $US « Previous | |Next »
April 8, 2005

I've mentioned the Australian Financial Review's poor coverage of international economics and finance and international geopolitics before. Here is another example of the decline of quality journalism at Fairfax under Fred Hilmer.

The AFR missed the warning contained in the World Bank's 2005 Global Development Finance Report. This is more than a warning that, despite strong growth in China, global economic growth is slowing to the point of recession. The warning is about the growing threat of big losses from a sudden decline in the exchanage value of the greenback. In its overview of the Report the Bank remarks that:

"Countries that have accummulated large [US] dollar-denominated reserve holdings face acute pressures and large potential investment losses from the weakening dollar."

And there is more. The next paragraph indicates the fragile state of the current international financial system:
"If the dollar were to depreciate by more than projected, it would likely overshoot its long-run equilibrium level. Should it remain low for an extended period, this could induce a costly restructuring of world industry that would have to be undone in the following years as the dollar returned to its equilibrium level."

Personally I don't think that markets actually work so as to attain harmony or equilibrium (Pareto optimality).I'm an old fashioned contradiction man myself. But let's leave the metaphysics to one side and return to the World Bank.

The Bank says the grave risk is that a deep and disorderly US dollar decline would create financial market volatility and push up interest rates. The current situation is one in which dollar's value is largely dependent on a handful of Asian central banks, which between them control almost $2.5 trillion in reserves. These are now beginning to become more public in their desire to hold fewer greenbacks.

What that means is that Australia needs to manage the vulnerability inherent in global economic and financial imbalances. Now that is something the AFR should be reporting on, don't you think? How come it isn't? At $2.50 a copy you would expect to be kept informed of the global economic and financial imbalances would you not?

And shouldn't the AFR be doing some good economic analysis that connects the above risk to the following?

The US's debt loads caused by its huge balance of payments deficits; the decline in the US manufacturing base; the inability of the US to cope with large rises in interest rates; and the US's lack of a credible set of policies to reduce its need for external financing before it exhausts the world's central banks' willingness to keep adding to their dollar reserves.

Isn't Australia at risk if the U.S. economy is decaying at its core and becoming exceedingly vulnerable because of its indebtedness? Have not the Asian central banks already begun to lose confidence in the Greenspan-led Federal Reserve's ability to rein in U.S. financial and economic excess? Are not these central banks quietly shifting their substantial reserves into non-dollar holdings? Does this not mean in the absence of renewed foreign private sector inflows, the dollar will plunge? Of course, the US could always US repudiate some of its debt.

All this sugests that our leading economic policy makers should be discussing "global economic imbalances" and how to deal with the falling dollar. The whole tenor of the discussions should be focused on Australia, like Asia, taking defensive, pre-emptive action to safeguard its own interests. What we sould not be doing is advocating that Asia should continue to extend a further helping hand to the US.

| Posted by Gary Sauer-Thompson at 1:08 PM | | Comments (0)
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