How is the U.S. Dollar Like an Airbus A380?

The Airbus A-380 sat on the runway at Sydney yesterday like an ocean liner that had lost its way in the harbour and beached itself on the tarmac. The plane is a curiosity to behold, like a bearded woman or a pregnant walrus. It can seat as many as 550 people and looks every bit like a marvel of modern engineering. But will it ever fulfill the strategic role Airbus' central planners and governments bureaucrats envisioned for it?

That's the thing with the A380. It is a flying icon of government-driven economic development. There is no doubt that more seats are needed for long-haul flights these days. But just because you need more seats for more customers doesn't mean you have to put all the seats on the same plane.

Boeing, for its part, thinks smaller planes that can fly point-to-point over longer distances are what customers actually want. Why go from Melbourne to Sydney to Los Angeles to Houston when all you really want to do is go from Melbourne to Houston to make a deal with a Texas oilman? Boeing also thinks the future of air travel is not the hub-and-spoke version of centralized and distributed travel you have now, but a larger number of direct routes without the need for connections. Its sleek 787 Dreamliner is its strategic reply to the bulky and bodacious A380.

Who is right and why does it matter? There will be room for both models. There some global travel routes-London to Mumbai for example-that would be perfectly suited for the size and scope of the Airbus' vision. But the main flaw with the Airbus plan is that is driven by the strategic needs of its government customers and not the ultimate customer, the air traveler. Government customers-the aerospace firms in Germany, England, France, and Italy that build the A380-need jobs and contracts. The A380, like all publics works projects, was designed to deliver both-along with a major chunk of tax-payer change to specific pseudo public companies.

This leaves everyone on the production end of things happy, but does not consider what really matters in capitalism, the customer. What does the customer want? He wants to fly quickly and cheaply to exactly where he's going. He doesn't care if a French welder kept his job or a German wiring specialist. He's got a meeting to go to and the plane and airline that get him there will win his business.

When a project-any project-is designed to meet the needs of the producers and not the consumers, it is doomed to fail. Many of the lunkheads at the recent anti G20 protests in Melbourne would fail to see this point: capitalism and free markets generally serve the interests of consumers. We say generally because between the idea of an efficient market and the reality of what we have is a lot of corporate theft, abuse, greed, and, inefficiency.

Generally speaking, though, unless it has a monopoly, a firm that produces inferior products which fail to meet the needs or solve the problems of a customer will find itself shortly out of business, replaced by a more competitive firm with a better product or better service. And that, indirectly, brings us to the U.S. dollar, which has enjoyed a virtual monopoly as the currency of world trade and business since the Bretton Woods agreement in 1944.

We won't say much more about it except that the U.S. dollar is an awful lot like the A380 in some ways. It is a government-designed program that exists to make things work for its producers, free-spending U.S. politicians and bankers.

Its consumers, American citizens and the rest of world alike, are left with an inferior product that, in the case of the buck, works less and less well with each passing day. If you noticed the rivets popping off the air-frame of a plane you were traveling in at 35,000 feet, would you be concerned?

The dollars rivets are popping off one at a time. Yet most passengers are ordering more merlot and peanuts. We suggest, instead, that you look for a golden parachute.

In local news, Australia needs Asian customers more than it needs American dollars. Australian trade exports increased 17% in 2005-2006 to around $200 billion total, according to Trade Minister Warren Truss. It's chief partners? Japan, Korea, and China. Those three countries together made up $61 billion worth of Aussie exports.

Iron ore, coal, and alumina all had big years. And frankly, even with an expected slow-down in American GDP, we don't see the boom ending next year. Only two things can derail it right now. The first is a total global financial collapse triggered by a crashing U.S. dollar and liquidity black hole. The second is China becoming a net exporter of the same commodities it is currently importing. The chance of the former happening is greater than the chance of the latter.

And what about a U.S. dollar crash? So much depends on interest rates, seemingly. With the OECD forecasting slower U.S. growth, it takes the pressure off the U.S. Federal reserve to raise interest rates. But the market sees this and what it hears is that the interest rate differential between U.S. bonds and other government bonds has reached its zenith. The yield difference no longer makes the buck a safe-haven of surplus capital. Whammo! You get a soaring euro on speculation by traders that the yield on the euro will rise while the yield on the dollar will not.

And even if the Fed and the U.S. Treasury wanted to defend the dollar (make it Hulk-strong) by raising the yield, there is that nasty little problem of debt. America must already roll over about $1 trillion in short-term financing each year just to sustain current levels of spending. Today, those 3-year notes the U.S. Treasury Department sells to Japanese and Chinese central bankers yield more than twice as much as they did three-years ago. It's getting more expensive for the American government to buy money.

It shouldn't surprise anyone. The price of money should go up as credit quality goes down. America, the world's deadbeat borrower, is going to find a tough time financing its consumption with borrowed money-and at the very least, it's going to pay dearly for it. It may try to ease that pain by inflating its own currency, making the dollar worth less. Inflation is the debtor's salvation.

But we are at a turning point in the world's monetary affairs. It is the end of one era and the dawn of the next. It's still pretty damn dark right now though. And the sun has not quite set on the U.S. dollar. Keep watching though. It could be over before you know it.

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