[lit-ideas] Re: lit-ideas Digest V1 #129
- From: Judy Evans <judithevans001@xxxxxxxxxxxxxx>
- To: lit-ideas@xxxxxxxxxxxxx
- Date: Tue, 16 Nov 2004 01:52:33 +0000
Tuesday, November 16, 2004, 1:05:57 AM, Andy Amago wrote:
JE> But no-one's going to be stupid enough to refuse to lend you money :D
AA> A.A. Just wondering. Why do you say that?
"When America sneezes, the world catches a cold"; the dollar's fallen badly=
against the euro which is bad for the euro countries; they/we will do what=
they/we did last time around, prop up the US market, because we need it.=
=20
That's a rather crude summary, here's a better one; a comment piece from t=
he Economics Editor (I think) of _The Observer_
When America sneezes ... =0B=0BAs things look less and less bullish for the=
dollar, Europe should start worrying =0B=0BWill Hutton=0BSunday November 1=
4, 2004=0BThe Observer <http://www.observer.co.uk> =0B=0BThere were two sto=
ries last week that will have world-shaping implications. The first was in =
a Paris hospital and a compound in Ramallah. The other, unfolding in the wo=
rld's foreign exchange dealing rooms, hardly made it beyond the business pa=
ges, but deserves to be taken just as seriously. We witnessed the storm war=
nings of what promises to be a financial crisis of epic proportions, threat=
ening both the US and the EU.=20
Europe and Asia have both been on the receiving end of massive foreign curr=
ency speculation for the past 20 years and the countries concerned have bee=
n left badly scarred. Italy, France and Britain have suffered currency cris=
es that have overshadowed their politics for years; the Tories never recove=
red their reputation for economic competence after the pound was forced out=
of the ERM in 1992. In Asia, the experiences of Indonesia and South Korea =
tell a similar story.=20
The one country to have blithely sailed on through all this turbulence has =
been the USA, but that is what is about to change. The political consequenc=
es for George W Bush promise to be every bit as difficult as they have been=
for other governments. The dollar has been insulated because it is the lin=
chpin of the international financial system. The US possesses the currency =
that is the everyday unit of account in international trade and finance; ev=
en al-Qaeda uses it to finance its terror network. The US has used this hap=
py fact to go on an international rake's progress, spending regularly more =
abroad every year than it earns by a massive $500 billion. Its cumulative i=
nternational debts stand at some $3 trillion. The rest of the world accepts=
the dollars because it needs and wants to; until the euro, there was no ot=
her choice.
So the endless supply of dollars has gone on, springing as if like a mile-h=
igh geyser from a burst financial water-main and building up a growing lake=
of currency, mopped by the world's central banks, principally those in Asi=
a, with Japan and China leading the pack.=20
The big question in international finance is whether this process can carry=
on indefinitely, because there are different rules for the US and the doll=
ar, or whether the dollar will fall like every other currency whose economy=
takes on debts that ultimately it cannot service.=20
Last week, the markets suggested the answer - the dollar is no different. I=
t touched record lows against the euro in what the president of the Europea=
n Central Bank called a brutal fall.=20
For more than a decade, the world economy has rested on a Faustian pact: th=
e rest of the world will soak up any amount of dollars the US wants to prov=
ide as it imports more than it exports, builds up its network of military b=
ases and fights its wars and invests in factories and offices worldwide to =
supply the US market with cheaply made goods and services. More than half o=
f America's imports come from overseas affiliates of American companies. Th=
e US lives beyond its means, but the rest of the world has the opportunity =
to ship goods into the globe's greatest market. China's growth has been pre=
dicated on this capacity; it, in turn, has sucked in imports from Japan and=
Europe and so the world economy has motored on.=20
Bush's re-election, though, has changed the fine calculus. He declares he h=
as a mandate to be radical and the markets are pricing the consequences. He=
will cut more taxes and be assertive abroad, spending billions in Iraq and=
elsewhere; the geyser of dollars will gush ever more powerfully. There is =
one inexorable economic truth; if there is too much supply and too little d=
emand, the price falls, and so it is with currencies. Bush doesn't really c=
are if the dollar falls and other currencies rise; like other American Pres=
idents, he sees it as the rest of the world's problem, just as in the past,=
when the dollar has fallen.=20
Indeed, he needs the dollar to drop to stimulate the growth of American exp=
orts and stem the inflow of imports. If the US can rig the price of the dol=
lar sufficiently low, it becomes as effective a deterrent as protectionist =
tariffs to importing into the US. What is different now is that because the=
re are so many dollars and the US is so indebted, the devaluation process w=
ill become uncontrollable and overshoot wildly, as it has for other currenc=
ies.=20
In that case, before it feels any benefits, the US will be dragged through =
the financial mill of rising interest rates, falling stock markets and mugg=
ed borrowers, with all the associated recessionary effects on its economy.=
=20
The world in general, and Europe in particular, doesn't want this. A fallin=
g dollar means a rising euro, giving a further knock to the European econom=
y. Last week, the distress noises from Europe began to mount. Italian Prime=
Minister Silvio Berlusconi called for currency intervention to try to driv=
e the euro down and the dollar up, even though intervention unsupported by =
big changes in economic policy is a proven failure. Economists of every per=
suasion predict up to a 40 per cent fall in the dollar, which means a 40 pe=
r cent rise in the euro.=20
Nobody can say when the fall will come or whether it will turn into a crash=
, but when even Alan Greenspan, the chairman of the US Federal Reserve, say=
s there is a 75 per cent chance of a dollar crisis in the next five years, =
be sure trouble lies ahead. What will be required is an international respo=
nse. The Europeans, through the IMF, will need to offer Bush stand-by credi=
ts running into hundreds of billions of euros to support the dollar and Bus=
h himself will have to reverse his tax cuts and cut back spending at home a=
nd abroad. He will be faced with an impossible choice: eat humble pie and u=
nderpin the dollar or let the dollar go and accept the economic consequence=
s.=20
But Europe, too, faces an impossible choice; further rises in the euro mean=
stagnation and even recession. Pressures for member states to break the eu=
ro's fragile rules and, at the limit, even give up their member ship, will =
become intense. This is the drama set to unfold. The markets may yet steady=
; this round of storm warnings could pass. But if the underlying economic r=
ealities go unaddressed, then the risk of crisis will deepen. We need polit=
icians in mainland Europe and America who understand what is happening and =
central bankers prepared to act. We neither have them nor any shared philos=
ophy and analysis that could underpin their action.=20
Chancellor Brown, an exception to the general rule, has only limited influe=
nce outside the euro zone. John Kerry's election might have reduced the ris=
k, but he would have faced similar choices.=20
The Democrats may come to agree, as do Labour about 1992, that it was an el=
ection to lose. But picking up the pieces may take a very long time.=0B
=20
--=20
Judy Evans, Cardiff, UK =20
mailto:judithevans001@xxxxxxxxxxxxxx
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