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Collapse of the US Dollar: too
Close or too Far?
Elsy Fors, Havana,
(Prensa Latina)
Most US citizens, and many
millions of others around the
world, have about as much idea
of what a collapse in the value
of the US dollar might really
mean, as they have about how the
dangers of global warming might
affect human life.
Maybe they have noticed the
price of fuel has gone through
the roof, or that favorite
imported products cost more than
they used to, but there is
nothing to throw them into panic
- yet.
Nevertheless, international
accounts indicate the US dollar
has lost 38 percent of its value
compared to the euro since
February 2002, 25 percent in
relation to the Canadian dollar,
and 23 percent facing the
Japanese yen. These are but
three examples.
Twenty years ago, the main US
allies signed the so-called
Plaza Agreement with Washington
in the New York Plaza Hotel, to
reduce the value of the US
dollar, in order to enable the
local market to balance its high
commercial deficit.
But the US consumer buys more
imported goods and services than
locally produced ones, so the
rise in exports generated by a
cheaper dollar diluted the
additional income with growing
imports, leading to increasingly
higher prices.
The other "twin", the budget
deficit, was likewise inflated
by tax reductions approved by
George W. Bush that gave most
benefit to the highest income
bracket, ie the rich, so less
contributions to the Treasury
were made.
Experts quoted by The Financial
Times, The New York Times and
other media are in agreement in
their predictions of a crisis in
the world economy, and
consequently, an ever-growing
debt for the US, now the
greatest debtor in history owing
in all between 70 and 100
trillion dollars.
Awareness of the coming
catastrophe has not entered the
minds of most US citizens, fed
only a diet of commercial radio
and television trash controlled
by five or six corporate media
outlets. Truth is a delicacy
alien to the palate of 99
percent of US citizens,
especially economic truth.
For instance, if the US dollar
falls 40 percent, and you had a
million dollars before the fall,
your million dollars will only
be able to buy goods and
services valued at 600,000 US
dollars. This means that you
will have lost 400,000 dollars
of your total buying power.
The US dollar is the main
international trade currency.
Most of the world monetary
reserves are expressed in US
dollars.
Entire countries and their
monetary reserves are tied to
the fate of the US dollar, so it
is easy to predict a generalized
crisis, because of the wide
interrelation joining the US
economy with the rest of the
world. Those who stand to lose
most, and who pay for the
financial forecasts, have
already moved their money
towards purchases of gold and
silver, which have been a
shelter against the vagaries of
currency for 5,000 years.
Warren Buffet, the richest US
citizen according to Forbes
magazine, owns 20 percent of all
the silver in existence, and has
stated he no longer trusts his
own country's currency.
Bill Gates, President of
Microsoft, is the owner of
between 10 to 20 percent of the
Pan American Silver Mine, and
multi-millionaire George Soros
also has abundant shares in gold
and silver.
Now, under the government of
George W. Bush, the budget
deficit has reached 500 billion
dollars, and the balance of
trade another 500 billion,
giving a joint deficit of more
than a trillion dollars.
So why is the crisis not here?
Because countries in the US
dollar's sphere of influence,
and mega economy investors, have
been financing a good part of US
debts. Another important amount
comes from cutting domestic
social programs and pensions,
and allocations to education and
environmental protection.
Renowned international economist
Barry Eichengreen assured that
according to the current
exchange rate, the US account
deficit is on an explosive
course, and will increase from
the current level of between 5
and 6 percent of the Gross
Domestic Product (GDP) to 8
percent by 2008, and up to 12
percent in 2010.
Eichengreen predicts that a
strong fall of the US dollar
would increase pressure on
interest rates, and lead to a
significant depression in US
consumption and investments,
followed by a recession.
Although markets do not yet
anticipate a recession,
foreigners who consider the
current deficit and balance of
payments unsustainable will
continue to sell their dollars
until interest rates go up
again.
Sung Won Sohn, Head Economist of
the Wells Fargo Bank, said that
depreciation of the US dollar
will not be enough to reduce the
US balance of payments deficit,
and that the main problems are
the budget deficit and the low
domestic saving rate.
Lehman Brothers senior economist
Ethan Harris warned there is a
limit to what foreign investors
can do to keep on financing the
US deficit, and said it is an
unsustainable way to run any
economy.
Economic commentator Kart
Richebacher stated the origin of
the commercial deficit was not
devaluation of the US dollar,
but the low domestic savings
rate and low investment, and
that in the 1989-1993 period,
when the balance of trade
deficit dropped, US total credit
grew by 819 billion dollars a
year.
However, in the four last years,
ending in 2004, it grew three
times faster, 2.4 trillion a
year. This was the result of the
expansionist policy of the US
Federal Reserve, which reduced
interest rates 13 times between
January 2001 and June 2003.
In conclusion, many analysts
consider that as a consequence
of the trade imbalance
restoration of the US economy is
impossible, given its
vulnerability to a sudden
downturn.
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