US Dollar Poses Grave Risk to World Economy

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“Allow me to point out the irony of this situation,” Guido Mantega, the Brazilian finance minister, told reporters at a recent global pow-wow. “Countries that were references of good governance, of standards and codes for the financial systems” were now the same countries where financial problems were threatening to wreck global prosperity.

Whoever could he have had in mind? Not the United States of America…the country that has been wagging its fingers for the last 20 years at every two-bit economy in the world? Americans might have to get used to it. Instead of giving advice to other countries, they may have to take some. There are bound to be plenty of economists in other countries who will want to offer it.

For the moment, they can toss it off. Stocks are still near record highs. Housing prices are only down a few percentage points. The economy still appears to be growing.

Neither investors nor the financial media have yet realised what is going on – the steady destruction of the US economy.

“I’m moving my money out of US assets,” our old friend Jim Rogers told an audience in Amsterdam.

All your money, Jim?

What he said was that he was getting ALL his assets out of the United States. And into what?

Jim Rogers likes commodities, the Chinese currency – yuan, the Swiss franc, and the Japanese yen.

As for commodities, he has spoken extensively on the subject. We have often repeated his comments here at The Daily Reckoning , because we agree with him. Central banks can create as much “money” as they want. But they have a hard time creating more tin, or more soybeans, or more oil. And every day that goes by, there are more people who want tin, soybeans and oil. The population is growing. But not only that, the worlds’ people – outside of Europe and North America – are making money. Now, they’re ready to spend some of that money to improve their standards of living. They’re bidding against us, in other words, not only for jobs…but for food, transportation, energy, shelter and luxuries too.

China’s growing demand is partly the reason for the bull market in commodities – the other reason is simple: people will always need these resources. The demand will always be strong for these everyday items, so the opportunity for profit is immense.

China’s economy is expected to grow this year by as much as 11.7% – or nearly four times as fast as the US economy. Naturally, real wages in China are going up. Rogers thinks you can’t go wrong by moving your wealth into the yuan. He expects it to double…or quadruple…in the years ahead. He likes the yen and Swiss franc, too, because he says they’ve been ‘pounded down’ by the carry trade. Those carry trades have to come to an end someday. When they do, both the yen and the franc will soar.

Argentina has gotten a lot of advice from America over the years. It needed lower taxes, said one bunch. It needed higher said another. It needed to peg its currency to the dollar, said one group of advisors. It needed to ‘dollarise’ completely, said another.

But look what is happening now! IMF chairman Rodrigo Rato told reporters that the US dollar posed grave risks to the entire world economy. “An abrupt fall of the greenback,” said he, ” could lead to a loss of confidence in all US dollar assets…” which could destabilise global markets.

“His words contrasted with those of US Treasury Secretary, Henry Paulson,” says the report in the Buenos Aires ECONOMICO, “who assured the group [of finance ministers] that the strength of the dollar was guaranteed and said he was optimistic about the future of the US currency.”

Who wants to dollarise? Even here in Argentina, the economy is booming. Industrial production is now increasing at an 8.8% annual rate, after registering a blistering increase of 9.8% in August – not too far behind the Chinese. And there are none of the wild excesses of the Chinese economy here. People do not line up to open brokerage accounts. Taxi drivers do not give stock tips. The economy does not depend on selling things to people who cannot afford them. Nor is there much credit in any form. If you want to buy a house – you practically have to have the entire amount in cash.

Guess what is leading the Argentine economy. Finance? Housing? Consumer spending? No… Making automobiles! Imagine that. How quaint. They make things.

And now, get this: employment is up. Working hours are up. And salaries are rising at a 20% annual rate.

Of course, you can’t have salaries rising that fast without some inflation. The rate of inflation is said to be running over 10%. Sunday is Election Day; there is a lot of argument about how bad inflation is. But it is good to see wages rising somewhere in the Western Hemisphere.

If Argentina keeps growing…it will soon be offering advice to the United States.

“But they’ll find some way to mess it up,” said a cab driver last night.

“I wonder what happened…I mean…where we went wrong. How did it come to this?”

We were standing in front of the US embassy in Buenos Aires, probably the ugliest building in the entire city. A monstrous thing, it looks at though it was designed by Josef Stalin – with massive, bombproof walls…brown concrete…and a forest of antennae rising from the roof.

Embassies are supposed to give foreigners a sense of what a country is…and what it is meant to be. If so, America is in trouble…the US embassy here looks like a prison.

Bill Bonner
The Daily Reckoning Australia

Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
Bill Bonner

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Comments

  1. Many Australian embassies also look like prisons on both the inside and the outside.

    Agreeing with Bill, what more can I add? If the Federal Reserve truly believes that a dumping of the dollar could wreck both the US economy, the Federal Reserve WILL NOT LOWER OFFICIAL INTEREST RATES AS THE MARKET EXPECTS.

    I also guess most Government economists view a significant equity market correction to be overdue in any case.

    Going back to what has been said by commentators previously, a primary Federal Reserve interest is stated to be the orderly operation of markets. Despite all the tongue and cheek rhetoric around here (I’m guilty of this as well) we all studied the same economic text and we all know that the coefficient of (negative) correlation between US dollar value and US interest rates is currently very very high. This is because other fundamental strengths that existed during the Greenspan era are no longer present (Bill, Dan & Adrian keep repeating themselves on this critical point).

    Very happy for the cast of characters here to criticise or support this angle of thinking.

    Coffee Addict
    October 26, 2007
    Reply

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