Credit Crunch Turns into US Dollar Crunch

If you’re looking for signs of the credit crisis, take a look at BHP’s share price. Bank runs and back-door borrowing rates may have moved off the front pages, but the soaring prices for resource shares are directly connected to the series of events that became public in August.

Or, as Ambrose Evans Pritchard wrote, the credit crunch has turned into a dollar crunch. And in the dollar crunch, tangible assets are a “buy” while financial assets are a “sell”. That is one way of reading what Pritchard wrote. But take a look and decide for yourself…

 “The dominoes are toppling. What began as a credit crunch has turned into a dollar crunch. We are witnessing a run on the world's paramount reserve currency, an event that occurs twice a century or so, and never with a benign outcome. The US dollar has fallen through parity against the Canadian dollar and plummeted to all-time lows against a basket of currencies. This is dangerous. None of the mature economic blocs seems able to take the strain, let alone step in to restore order.”

So far so good. Well, not good. But you get the idea. The dollar crunch is a historic phenomenon. It’s not normal, routine, or mundane.

Pritchard goes on to describe the massive stress the dollar crunch is wreaking on other economies. “China is a leveraged play on US shopping malls. Japan is already buckling. Its economy contracted 0.3pc in Q2. Wages have fallen for eight months in a row. The Abe government has fallen — the first subprime victim, but not the last.”

He’s got the last part right. Describing China as a leveraged play on US shopping malls is a nice turn of phrase, but it might not be entirely accurate. The domino theory of global markets implies that what happens in the US will necessarily trigger real economic consequences in other countries, which it no doubt will. But those consequences don’t all have to be the same, or equally dire.

The current trendy “decoupling” school of thought tells us that the third great industrial revolution of the last 200 years in China is a fundamental structural shift in the global economy and that China is the main engine of growth in this brave new world. How exactly the “decoupling” is to supposed to take place without causing major financial trauma…that’s all a little hazy so far.

Dan Denning
The Daily Reckoning Australia

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