Skip to comments.US Dollar plunge could lead to full-blown financial crisis
Posted on 01/18/2004 12:45:18 PM PST by Beck_isright
If confidence goes, lenders will pull loans and cause dollar to crash
By William Choong
YEARS before the Asian financial crisis of 1997, many Asian countries had become hooked on a dangerous concept - credit.
Economic growth was chugging along nicely, and in countries such as Thailand, the middle-class was indulging in a consumer frenzy, buying branded goods, holidaying abroad and sending their children to overseas schools.
But Thailand's trade deficit - the amount by which imports exceed exports - was growing, financed by massive short-term loans from foreigners.
When investors lost confidence, however, a sudden flight of capital brought the kingdom to its knees.
The odd thing is, this year, the United States - once the world's biggest creditor nation - is also experiencing a credit- fuelled consumer spending spree.
There are fears the American appetite for Japanese cars, Chinese clothing and Malaysian electronics could cause a global financial crisis sparked by a run on the US dollar.
This has led to a massive current account deficit of more than US$500 billion (S$850 billion) - a far cry from 10 years ago, when the US enjoyed a trade surplus of US$82 billion.
Its budget deficit could hit US$450 billion this year - another record, and a dramatic turnaround from 2001, when government coffers were in the black.
This has led commentators to lament how America's twin deficits could grow into a 'full-blown, Third World-style financial crisis'.
The logic is simple.
Like Thailand, America's deficits are financed largely by foreigners, particularly Asian central banks that want to keep their currencies weak against the greenback to boost their country's exports.
Any crisis of confidence would see them withdrawing their loans, triggering a fall in American financial markets and then a run on the greenback.
The writing is already on the wall.
In the past year, the greenback has racked up losses of more than 20 per cent against the euro - falling to a seven-year low of around 80 US cents to the euro. Against the yen, it has shed 11 per cent to hit a three-year low of 105 yen to the dollar.
'On a scale of one to 10, for (the chances of) a dollar rout against the euro, I'd say we are at eight,' Mr Peter Morici, a business don at the University of Maryland, told Dow Jones.
A weaker dollar reduces America's debt, gives a leg-up to US exporters and slashes the current account deficit.
But a weaker dollar is a double-edged sword: It could lead to dearer imports and raise inflation - the bugbear of industrial economies.
This would hamper the world economy's preeminent engine of growth - the average American's propensity to spend.
Abroad, a weaker dollar would lead to competitive devaluations as other countries find their US-bound exports relatively expensive.
There is a growing chorus of voices stressing the possibility of a greenback plunge.
The International Monetary Fund has lashed out at the US, arguing that its massive debt could wreak havoc on the US dollar and global exchange rates.
In a paper presented earlier this month, three analysts - including former US treasury secretary Robert Rubin - argued that Washington's twin deficits could amount to what some have termed a 'full-blown, Third World-style financial crisis'.
Mr Paul Krugman, a prominent economist who foresaw the 1997 Asian financial crisis, drew the conclusion as early as last October.
In a New York Times column, he said the US economy was approaching a 'Wile E. Coyote' moment - when the coyote in the famous Road Runner cartoon runs off a cliff, only to realise at the last minute - too late - that it is about to plunge to the bottom.
'What will the plunge look like? It will certainly involve a sharp fall in the dollar and sharp rise in interest rates,' he wrote.
'In the worst-case scenario, the government's access to borrowing will be cut off, creating a cash crisis that throws the nation into chaos.'
Such views, however, have been derided by members of the Bush administration, who have pledged to halve America's budget deficit in five years.
What is probably high on their minds is how, in the 1980s, the world's largest economy under former president Ronald Reagan managed to grow despite similar deficits.
That was thanks - again - to a weak dollar and booming demand in Germany and Japan.
But the raising of US interest rates will affect Europe, the exports of which have become more expensive, just when the region is showing signs of faster growth.
Compared to Europe, Asia looks set to be hit harder - simply because the region is more dependent on exports to the US.
There have been calls for the Chinese yuan, which has been pegged, or fixed, at a constant rate to the US dollar, to be revalued to a stronger level, perhaps by as much as 20 per cent.
For a long time, market watchers said the unit was undervalued at around 8.3 to the US dollar, leading to a massive US$100 billion trade surplus with America - a quarter of the US' total trade deficit.
'It's not a question of if, but when,' Mr Craig Chan, head of Asian research at Forecast, a London-based research firm, told The Straits Times.
The effects of a yuan appreciation, however, would be fairly significant.
Close to 200,000 state-owned enterprises, which are less efficient at producing exports than private firms, would suffer, leading to heavy job losses.
Its financial sector - still in the midst of reform - would also take a hit, said analysts.
In Japan, a falling dollar would derail a recovery that only started kicking in last year.
For the rest of Asia, a plunge in the US dollar would spell trouble.
In the second half of the 1980s and the late 1990s, the greenback's strength fuelled exports from Thailand, Malaysia and Singapore.
A weak dollar, however, would affect American purchasing power and slam the brakes on Asian exports, lowering growth all round.
This can be seen in Japan's experience in the early 1990s, when the economy tanked after the Plaza Accord of 1985.
Under the accord, a group of developed countries engineered a sustained fall in the greenback along with rises in the German mark and Japanese yen.
Speaking at a regional conference in Singapore last week, respected Malaysian economist K.S. Jomo noted that there have been calls for a second Plaza Accord.
The world's three currency blocs - Europe, Japan and the US - were carrying out competitive devaluations, he said.
'This would lead to an inability to coordinate exchange rates and monetary instability at a global level.'
There is, however, not much hope going forward that there will be enough global coordination.
Last September, the G-7 group of developed countries called for 'more flexibility' in exchange rates. This, however, was interpreted by markets to be telling the Japanese and Chinese to let their currencies rise, thus allowing the US dollar to fall.
Ultimately, whether the US dollar would, in Mr Krugman's words, suffer a Wile E. Coyote moment depends on investor confidence.
For a long time, Asian central banks had, through the purchase of low-yield US Treasury bonds, been the key financiers of America's deficits.
Currently, the US Federal Reserve holds US$1.1 trillion of such debt for foreign central banks, many of them Asian.
Therein lies what could be called the Harvey Norman effect - whereby a seller makes credit readily available to a buyer so the latter can buy more.
As French economist Jacques Rueff said: 'If I had an agreement with my tailor that whatever money I pay him returns to me the very same day as a loan, I would have no objection at all to ordering more suits from him.'
The key: When another crisis of confidence hits US markets, foreign lenders - particularly Asian lenders to the US - might pull the plug on their US loans.
And that would be the crucial tipping point which brings the whole house of cards that is the world economy crashing down, just like the unsuspecting coyote.
... or for faith-based initiatives, expeditions to the Moon, Iraq costs and many other things. It would be imperial overreach were it not for Bush's moral strength and spine of steel as Zell Miller said. If anything can save us, that will. Bush can't help if he doesn't get reelected, though ... so the spending continues.
Wait, it could get better. There are rumors floating around that the government will now actively become involved to providing new homes to those who can't afford them. This is a wonderful idea especially now that we are about to make citizens out of 10-20 million illegals who could all become new first time homeowners at taxpayer expense. I'll tell you, that GW is some kinda conservative. Socialism at it best.
Let's see if Bush has nerve enough to launch another big government socialist spending program as part of his state of the union speech on Tue.
What else can he offer after what he's already done. Free diapers to all new babies?
More or less an open declaration of Economic War. All else is just mumbling for the benefit of the CATO clowns...who strangely enough, see no 'Government Intervention' in these foreign state's refusals to let 'the market' decide...
He's the one promoting this foolish spending. He looks more and more like Carter everyday!
There is hope. In 2000, the Boomers and older silents had a combined total of 122,627,672 eligible voters. Their numbers will only get less as they die off.
In 2000, the Gen-X and Gen-Y population had a combined total of 71,551,276 eligible voters.
In 2004, the Gen-X and Gen-Y population will have a combined total of 87,643,964 eligible voters.
In 2008, the Gen-X and Gen-Y population will have a combined total of 104,119,805 eligible voters. This will probably be the pivot point where the Boomer elite will lose influence over public policy, forever.
In 2012, the Gen-X and Gen-y population will have a combined total of 120,704,207 eligible voters, and will be very unlikely to share any power with the older generations that totally shredded the economy and the culture, and sacrificed the sovereignty of the US for political points and campaign cash.
Younger voters today are more conservative and nationalistic than any generation we have known since WW-II, and they will get more so as the crisis deepens. The oldest Gen-Xers have been in the workforce since 1982 or 1983. The oldest Gen-Y citizens started entering the workforce in 2002 or 2003. What these younger people have seen is that the policies of business and government has been anti-merit, anti-American, counter-productive, overly complex and under-effective, and they have watched as the fabric of our culture and economy has been unraveled. They have watched as the boomers wasted millions after millions on technology projects that failed because complexity and process were favored over success.
When the crisis settles in solidly, with little room left to debate that it really is a crisis, we can expect these two younger generations to strongly exert their growing influence to pull the nation out of the hole. It will be a repeat of the two Generations that pulled the nation through the Great Depression and World War II.
It will be interesting times.
Ping list for the discussion of the politics and social aspects that directly effects Generation-X (Those born from 1965-1982) including all the spending previous generations (i.e. The Baby Boomers) are doing that Gen-X and Y will end up paying for.
Freep mail me to be added or dropped. See my home page for details.
Though the only thing is older people tend to vote more and this will probably be true of the baby boomers and since many of them haven't saved they will be demanding more and more to keep their life style so I don't think the baby boomers will start to lose power until Gen-X and more specifically Gen-Y ages a little more.
Also, I'm not to enamored of a bunch of Sh*tsack Feds and Bankers deciding that I or other Americans should arbitrarily lose 25% of our purchasing power over X amount of time. It might be a little more appealing if, when TSHTF, the average sheeple were sure to go burn politicians at the stake rather than their neighbors who had a little more foresight...
Younger voters tend to sit out elections until events and peers energize them. These sit outs will be offset by older conservatives who feel dispossessed by both major parties, and a few liberals who can no longer look themselves in the mirror.
A few renegade younger voters will not rebel against their socialist indoctrination or will continue to take their Ritalin, and they will be unreliable or dysfunctional. Their peers will ostracize them or encourage them to vote along the lines of national survival.
When significant numbers of the younger voters become energized, their participation will increase at a record rate. They will more effectively use available technology to activate and persuade their age groups than any previous voting generations. Jesse Ventura's election was the first example of this scenario; future examples will be much more impressive, provided that the Internet continues to work.
As the crisis deepens, and the younger voters get more active in politics and society, their message and determination will convince many of the older voters to relinquish their grip. The liberal Boomers will hang on the tightest because (1) they are inherently the most selfish, and (2) fewer of them have offspring (surviving) whose future they might care about.
It is my belief and hope that liberals will enjoy a crushing defeat in 2004, such that they never raise their voices again. In such a case, the Republicans in 2008 could be facing off against a new party of young conservatives backed by all the Boomer conservatives that the Republicans abandoned.
It might not be a bad idea to get one branch of the government back in the hands of the 'rats to get gridlock back in Washington. Look at how much spending has skyrocketed under a Republican President, a Republican Senate and a Republican House of Representatives.
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