The dollar’s slump is of great and immediate concern because, while the dollar has been slipping only gradually in the recent past, the rate of decline has picked up momentum. A dollar crash will have disastrous implications for global financial markets. At the end of 2001, the euro was worth $ 0.8915, but it has been on a steady upward march since then. On the last trading day of the third quarter in 2007, the euro hit a high of 1.4282. A target of 1.50 is very much within range.
How do all of those surplus countries play into this falling dollar picture? Remember, former Fed chairman Alan Greenspan observed that in economics, the sum of all surpluses equals the sum of all deficits.
So when a surplus country stops investing that surplus in U.S. dollars, its currency will increase against the dollar. This realization has profound implications. Not only does the dollar continue to fall against other currencies; as it does so, it accelerates the undesirability of pegging currencies to U.S. currency or investing in Treasury bonds and other debt. In other words, it becomes less and less viable for foreign investors and central banks to fund ever – growing U.S. debt.
This is not just a problem of U.S. consumer debt trends. We may be the addicts, but we have codependents and enablers around the world. Just as the U.S. consumer is addicted to spending excesses, foreign exporters have become addicted to selling goods to Americans. The problem is with sellers, as well as buyers. The governments in those other markets are as concerned about the U.S. dollar’s fall as Americans are (or should be). Why? The fall of a dollar is the same thing as a rise in other currencies. So the competitiveness of the foreign export economy is damaged more and more as their own currencies increase in value. Just as a falling dollar hurts the buyer (Americans), a rising currency hurts the seller (foreign economies) in the same degree.
The United States is only one side of the problem. As the consumer, our dollars have tremendous influence throughout the world, if only because so many central banks (e.g., China’s) have pegged their currency to the dollar – and at the same time many exporting nations are seeing their currencies going up in value, making it untenable to continue exporting at the same rates as in the past. So we have, through trillions of dollars of debt accumulation, created a de facto dollar standard in much of the world economy.
The debt is based, however, on a worldwide bubble economy, perhaps the biggest bubble in world history. The whole theory behind this comprehensive “bubblization” (a new word for you, referring to the combination of federal deficit, trade, mortgage, housing, dollar, and credit bubbles all working together) has grown out of the economic theories of the Fed. Although Mr. Greenspan was the chief culprit behind the theory that spending is good, more spending is better, and the most spending is best, we can’t pin the whole thing on him. Like the U.S. consumer, he had enablers and codependents everywhere. His helpers include an array of bankers, corporate executives, and investors – all buying into the Greenspan version of the U.S. economy and how it just might work.
Now Mr. Bernanke, who happily puts himself out there as the leading economic forecaster and wise man, also contends that bubbles can’t be recognized until they burst. That’s like saying you can’t tell that your house is on fire just because smoke is billowing from the windows; you have to wait until it bursts into flame. The truth is, bubbles are easily recognizable well in advance of bursting, but we cannot know when they will burst. The dollar bubble is going to burst, and that is inevitable. The effects on the economy of that burst are going to be serious. As long as investors, consumers, and business managers continue to base our financial decisions on assets of inflated and unrealistic value, we are denying this inevitable outcome. The more we depend on those inflated values, the more damage we will suffer when the bubble bursts.
In the case of Japan in the recent past, its pattern was somewhat different from the U.S pattern of today. Japan’s deficit budget spending went into business investment, which in turn expands productivity and trade profits. Spending on business equipment and plans, commercial buildings, and other production – based infrastructure had a specific effect: When Japan’s economy slowed down, it merely came to a halt and has remained chronically slow ever since. In comparison, U.S. deficit spending is overwhelmingly going into consumer spending with very little business investment or consumer savings to offset that trend. Thus, the U.S. trend in GDP is led by consumption and not by investment. So the use of deficit spending has everything to do with the consequences of deficits, and ultimately with the effect of a dollar crash. Unlike Japan’s economy, which merely flattened out as a consequence of deficit spending, the U.S. economy is likely to see a more devastating change in the entire economic landscape – with the accompanying price inflation we have to expect as an outcome.
Addison Wiggin
for The Daily Reckoning Australia
P.S. to get The Daily Reckoning direct to your inbox sign up to our free e-mail newsletter or if you prefer to use RSS, subscribe to the Daily Reckoning RSS feed.
Related Articles:
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- US Dollar Declining as China’s Currency Rises
- The Greenback Dollar Decline
- Housing Market is Becoming More Affordable but That’s Not Necessarily a Good Thing
- Inflation: Ron Paul Explains How We Got Into This Mess
About the Author
Editorial director of The Daily Reckoning, Addison Wiggin is also the author, with Bill Bonner, of the international bestseller Financial Reckoning Day and a frequent guest on national US radio and television programs. Look for the sequel to Financial Reckoning Day, Empire of Debt (John Wiley & Sons) in October, 2005.
Comment by jim rickson on 25 May 2008:
Is it true, the plunging dollar is being engineered to a level exchange rate on par with the peso and the loone so as to achieve a seamless transition to the amero?Or is further tweeking of the currencies needed,just speculation on my part.After all ,the north american union is just around the corner.
Comment by Paul Douglas Renselle on 25 May 2008:
Dear DR editors,
If I recall well, in about mid-1970s to early-1980s several journal articles appeared, most memorably, in Harvard Business Review. Those articles offered some exegesis for what Wiggin is describing above on a national level, but articles were focused on business cycles.
An example is Karl Weick's extensive opus on cycles of order (several years duration), thence cycles of chaos (instability)... Those cycles are essentially non deterministic periodic flow (NDPF: essentially raw stochastics of wave patterns of system cycles) covered in depth by James Gleick in his renowned textbook 'Chaos.'
Even though Weick and perhaps Gleick were focusing on business vis-a-vis scientific cycles of chaos, it appears sensible to hoist their notions up to national levels.
I agree with Wiggin that USA has been durationally stable for far too long and a correction of locally catastrophic proportions appears in order. But globalization has made power houses of China, India, Russia, etc. Even Australia whom I am happy to see become an economic global power.
I would argue, though, that USA will have a much smaller impact than otherwise, due that globalization. China and India alone as consumers simply dwarf USA. Yes their standards of living are lower. But those standards are growing. So their value as consumers probably compensates massively for any temporary (chaotic) losses of US consumers.
Our national leadership in US is just incompetent, in almost all ways. It's obvious when VP's ejaculate "Deficits do not matter," and "spending is all there is..." Both in my mind are simply wrong and idiotic.
Our Congress spent all of our Social Security Trust funds. Almost none of us have any savings (I am an exception, in that regard.). Almost all of us have unsustainable debts. Almost all of us have interest rate burdens which are key disablers of sustained fiscal stability for any nation. This list is endless, especially when one observes irresponsible spending on 'the Iraq war.'
Trouble, right here, in River City.
However, my main point is that stability and chaos are at least partially cyclic (in an NDPF sense described above). We (US and other nations) have a huge opportunity here to learn from USA's national management failures.
My state of Indiana went bankrupt in 1800s. It learned a lesson of fiscal responsibility and debt management.
I would guess that most folk in Indiana compared to other 51 states and territories are better prepared for our imminent periods of chaos.
Thanks for your excellence in writing and publication!
I wish Australia and other nations as little harm as possible while we right our foundering ship of state.
Sincerely,
Doug Renselle
Carmel, INdiana, 46033
USA
Phone number on request.
Comment by Anup on 25 May 2008:
Good article. The reality may not be the big bang, like somebody prick a baloon but a slow deflation. The end result is going to be the same. The dollar loosing its prestige and value. As observed, the US GDP is based on consumer spending and in large part deficit spending by both the citizens and the Goverment. It had neglected infrstructure such as education/health of its people or building bridges, new factories etc. Buying consumables isn't going create a strong economy. It is like mortgaging the house to buy an SUV and going on a holiday. If this was the 70's then US could get back, albeit blackmail the Japs in the 80's to do so. I doubt they've the same leverage against the Chinease, Russians or Indians. So the comeback isn't going to be possible. We have now a different political map with new poles of power that doesn't yield to western pressure, political and military. This can be witnessed by increasingly sideling of the IMF and World bank, and increased militrisation of the aforementioned countries. Just as US replaced almost bankrupt British empire, a new multilateral world will rise to fill the void. This not going to happen by design but simply by the fact trade requires stability and re-assurance through prestige of the currency. Business, whether it is western or eastern runs under the same principle. It is ruthless in exploiting any opportunity and trying to survive, and it this primary principle that ensures bubbles can't last and everything in time must find its own value.
What it all means may be:
Because the multinationals are so intertwined, war is less likely to happen. This means the elite in US and in the other countries will become more rich and powerfull while the masses will suffer in the west in particular. In China and India living standards will rise, not to the level of western standards, but never the less rise while compensating this living standards in the west will gradually fall.
Comment by liz zaleski on 4 June 2008:
Please can you explain the effect on China's development of pegging its currency to the US dollar. What exactly is meant by 'pegging'? What is the result for Australia? Thank you and please forgive my ignorance.
Comment by C.J. Newnham on 16 August 2008:
The article is an interesting one. It is suggesting that we might even see one of the greatest global financial domino effects of all time. Hmm some drama. Alan Greenspan, Lyndon La Rouche and others think they might have some answers. The problem is that there is a threshold that I will term the "over the edge" threshold where nothing much will help. Not even a financial parachute will save the situation. Rather than bad news, this is excellent news. The Bible tells us that not only will there be Global financial conflict but there will be global military drama on a scale not seen before. Only one unthinkable necluear strike by a country so threatened by it's neighbours will send the entire world into an awsome tailspin. The Bible tells us that God will intervene and that eventually Christ will return to introduce His Government on earth. Good news!
Comment by Mandi on 28 November 2009:
Of course it is going to crash, it is nothing new. This will be one of the many events that will happen in order to bring about the NWO with a one-world leader. We WILL see this in our lifetime. I am 57.
Comment by Dan on 29 November 2009:
It won't happen before time.