Dollar on the Edge
12-Jun-2006
Over the past two months a
strange and disturbing thing happened to the dollar: China and Japan
began to shift away from buying US Treasury debt (dollars) and into
the Euro market and other curriencies. Across April and May, the
Euro began to rise, moving from about $1.20 to the area of $1.30.
This has happened despite the fact that the US Treasury has been
signaling more and more aggressively that US interest rates will
continue to rise, making the dollar theoretically more appealing to
foreign purchasers. There is an extraordinary economic danger
associated with this: if the dollar collapses, the US economy is
going to suffer a catastrophic blow that could double gas prices and
send inflation soaring beyond anything Americans have ever known.
The weaker the dollar becomes, the higher US interest rates must
go, and the more pressure Americans will be under, at every level.
The Organization for Economic Cooperation and some elements of the
International Monetary Fund are predicting that the dollar will fall
from 35% to 50% to account for the gigantic debt that the Bush
Administration has created by the combination of tax cuts and
spending on the war in Iraq.
This will result in an increase in gasoline prices from the
region of $3.00 to the region of $6.00, and will cause all imports
to roughly double in price. This will mean that everything from
clothing to cars to many grocery items will shoot up in price. At
this point, the housing market will collapse, and there will be a
wave of bankruptcies. But the new bankruptcy act, forced through
congress by Tom DeLay last year after he received a half million
dollar contribution from the credit card industry, will insure that
debtors can never liquidate their indebtedness, meaning that they
can never re-enter the economy, and therefore that recovery, if it
occurs, will take at least a generation. This legislation had
languished for years, because it is so economically dangerous.
A 'run' on the dollar, caused by panicking foreign holders
attempting to sell into non-existent buying, could cause the dollar
to collapse very suddenly, even over a matter of days.
There is evidence that the US is attempting to manage the decline
by purchasing its own debt. As Asian purchasing of US paper declined
last month, the slack was taken up by Caribbean and UK banks that
would not normally have the liquidity to make such purchases.
Therefore, they are acting for a third party, and the only party
that would buy dollars when a loss in value is inevitable is the US
Treasury.
By doing this, the US is hoping to prevent a sudden collapse of
the dollar and the subsequent unwinding of the US and world
economies in a fiscal disaster so profound that it will eclipse the
Great Depression. It can work for a while, but inevitably if the US
becomes the only major customer for its own currency, the dollar
will go into freefall. Where it will stop, and what will happen to
the world economy then, are the looming unknowns that have made
world equity markets so uneasy over the past thirty days, and
promise to bring more trouble in the future.
Art credit: freeimages.co.UK
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