Philosophical Conversations Public Opinion Junk for code
parliament house.gif
Think Tanks
Oz Blogs
Economic Blogs
Foreign Policy Blogs
International Blogs
Media Blogs
South Australian Weblogs
Economic Resources
Environment Links
Political Resources
South Australian Links
"...public opinion deserves to be respected as well as despised" G.W.F. Hegel, 'Philosophy of Right'

Will the US dollar decline? « Previous | |Next »
September 23, 2007

Are the central banks of some nation states starting to liquidate their dollar holdings? What is the possibility of a sharp fall in the dollar? We have a big picture here; one that needs to be placed in the context of liquidity crisis in the global financial system.

Steve Bell

The crisis needs to be put into the context of the the fault lines in American economy:—an overvalued housing market, high consumer debt and a huge trade deficit. Paul Krugman argues that the U.S. trade deficit is, fundamentally, not sustainable in the long run, which means that sooner or later the dollar has to decline a lot. But international investors have been buying U.S. bonds at real interest rates barely higher than those offered in euros or yen - in effect, they've been betting that the dollar won't ever decline.

Has the Federal Reserve's big interest rate cut sparked a flight from the US dollar and US assets generally that threatens to unravel the recycling of Asian and petrodollar surpluses that finance the gaping US budget and trade deficits? Are the Asian and Middle Eastern monetary authorities facing pressure to break their currency ties to the US dollar because of the greenback's weakness?

I don't know. I had always understood China to be the key because of the vastness of its dollar holdings arising from its trade surpluses.

| Posted by Gary Sauer-Thompson at 3:20 PM | | Comments (14)


no doubt the finance vultures are already circling the carcasses of those destroyed by the credit crunch.


Have you heard the rumour that the decision to invade Iraq was not about oil so much as Saddam Hussein's intention to start trading it in Euros?

I don't pretend to know anything about economic stuff, but wouldn't that have made the Euro and therefore Europe considerably more powerful?

Lyn, you are not wrong.
I once had it explained to me and can't for the life of me remember the exact details now, but it is something to do with the fixing of the value of the American dollar, including against other currencies and its international debt..
On another issue, every time I pass that cartoon I see my cat in a different light. Has to do with the Oriental restaurant up the road and the current value of the aussie dollar.

the economic stuff is best understood as a political economy---as about power relations as well as economic relations in the world of nation states. Because the US is an empire it is the world's de facto currency and the safest place to hold your reserves.

The US Treasury tries to rule the world to further the interests of the US--that was very explicit in the Asian financial crisis in the late 1990s.

the current value of the Australian dollar is rising because the US dollar is falling. The latter is falling because the Federal Reserve reduced interest rates in the US to bail out Wall Street.That means less money can be made by holding US securites so the loose money goes elsewhere-- to where interest rates are higher and the currency is safe.

The crucial point is whether this is a temporary blip or the start of a movement away from the US --a decline in teh US dollar because of the large twin deficits (trade and budget).

I used to trade futures on my own account on the Chicago exchange. For over two years it has appeared to me that the US economy is being set up for a hit.
Some time ago there was a progressive move to write the Middle East oil contracts in Euros.
At around the same time the Middle East oil producers stopped buying US paper and began investing in gold.
China and Japan are in simple terms lending their biggest customer the money to buy their goods. While many on this site believe that they cannot afford to cash in the paper, thus damaging the US economy, it is equally obvious that no business or country can for long lend money to a ‘customer’ to buy their goods — especially when there is no hope of that customer ever being in a position to meet its debts.
I recently read a long and learned piece expounding the theory that China could not sink the US economy as the US had only to devalue its paper, which would further hurt China.
True, the US could even declare the notes worthless, thus destroying the $US, which thereafter would have as much credibility as the Zimbabwe dollar (Z$).
Assume that the $US is put under real pressure. Assume that the flight to gold pushes the price to? Then assume that a rumour hits the markets that the Middle East oil producers, who hold whatever percent of the worlds gold, are dumping their holdings.
Because they hold the physical gold, it costs them nothing to sell on the future markets all the way down to something below $US 200 per ounce where they cover their positions.
The US is already reeling under a housing loan crisis, nobody is talking much about the major car manufacturers who are trying to get the US government to bail them out of pensions and health insurance commitments that they cannot pay, an ongoing war, and nothing to sell to the outside world.
The various countries that tolerate US bases for the ‘hard currency’ that they bring in will order you out, quick smart, once your currency is valueless, and the US has no friends.
Thirty or forty years ago the US could have closed its borders and lived fairly comfortably without contact with the outside world. This is no longer so.
Your massive military equipment stocks are just so much scrap iron, clutter from a bygone age.
The rest of the world can get along without the US. Certainly, economies will not grow as fast and the upheaval will cause some pain, but nothing like the pain of the adjustments that the US will have to make!


Thank you. Somebody tried to explain that to me last week, but I didn't get it. That conversation also mentioned gold, as does Peter Hindrup. People park money in gold when everything else looks to scary.

So Gary, where are rates higher and currency safer? If there's doubt about the US economy, biggest consumer in the world, it has to be somewhere that doesn't rely on exports to the US, doesn't it? Somewhere powerful and stable. Europe?


Get a dog. They're better.

To all posters here, particular the generous Peter Hindrup, much thanks.
Peter, wasn't the notorious "Playboy" article, "Lockheed stock and two smoking barrels"( not sure how to link ),
concerning the military industrial complex; Lockheed-Martin and so forth, suggesting America has moved to a mil-industrial mode of international dominance. Simply, America can "create" markets for its expensive but marvellous military equipment, maintaining its future through a dominance of "hi-tech".
Simply, others MUST buy US military/techno, which is constantly being upgraded anyway because of a natural obsolescence factor (paradoxically) guaranteeing the US's future. Including when harnessed with and through the complementary economic means you suggested in your great post.
Cornered, the US still has the military clout to hold the rest of the world to ransome, should its own demise become imminent.
Of course the US nation,in terms of Keynesian civil society risked its own ugly dismemberment, which is what we are now may be witnessing the beginningof, when it allowed itself to fall to the Bush Republicans; a freebooting nation within a nation. But might the global economy not (need to ) live on and need what's happened mean the end of "life as we know it"? After all the West, when it had the chance did nothing to add to global civilisation over the twentieth century, when it could and knew it should have.
So much for the Enlightenment?
( makes me glad am not twenty any more..yech! )

Paul since you mentioned weapons. Recently the U.S made a big noise about China's toy making problems and not being able to make things to specs. It was a bit over kill I thought. Perhaps there was a subliminal message there. "If they can't make toys. You can't trust them with weapons"
China has the capacity to go YOINK! We can make them cheaper and the U.S is worried about that.

Peter, some interesting scenarios there but I think it quite unlikely that the U.S would make their dollar worthless. Much more likely they would nuke the banker first and make their dollar worth more.

Since the Federal Reserve chiefs are, in reality, nothing but glorified salesman for the US financial services industry, we more or less watch what the Chinese central bank does. They are the key player, as they have so much money in reserve that has been earned from their massive trade surpluses vis-a-vis the US.

So what are they going to do with all that reserve money---and we are talking over a trillion---with a declining dollar; and the US engaged in the debasement of its own currency.

The US Treasury is really angry at what is happening--it points to the undervalued yuan, which is pegged rather than free floating like the Aussie dollar. Hence all the US attacks on the "selfish" Chinese to revalue their low value pegged yuan, which currently enables China to amass trade surpluses and foreign direct investment; and its central bank to mass a huge stock of foreign exchange reserves (around $US 1.5 trillion) most of which are held in the form of US government securities.

The US, in effect is living off `selling its government securities, and is dependent on the Chinese borrowing them so that it can fund its twin deficits. The US must borrow $2-3 billion from foreigners each and every day just to feed its overconsumption addiction and keep the party and the drunken bacchanalia on Wall Street going.

Greater trade, enmeshed financial markets and floating currencies have meant that the fortunes of the major industrial economies move together.

So how long can the US pay for goods with cheques it knows the other party --China- --will never cash? China could withdrew its dollar reserves slow and gradual and diversifying away from the depreciating US dollar. I suspect this happening.

It would be a safe bet to say that the Chinese would be buying up large stakes in mineral producers and shipping companies. Power technology would be of great interest. Apple would be a possibility.

Chinas exports have grown much faster than its imports, hence its economic surpluses. China's growth has benefited resource-rich Australia, which exports huge volumes of raw materials to feed China's rapid growth in infrastructure and manufacturing.

However, China's boom is a different story for the US, since China's low priced imports compete against the higher priced US domestically produced goods. Hence the current dislocation of the US 's manufacturing industry. So a protectionist Congress is talking in terms of tariffs erected against Chinese imports.

So much for free trade in the land of the free.

US dollar will decline to a point at which a level of unemployment nationally will still be met with routine government spending on welfare funded with taxes collected from importing goods and services.