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Dumping of US dollar could trigger 'economic September 11'
The Australian ^ | August 29, 2005

Posted on 08/31/2005 12:38:24 AM PDT by Travis McGee

There is a potentially fatal flaw at the heart of the global economy: the strong possibility of financial meltdown following a collapse of confidence in the greenback, Clyde Prestowitz tells Bruce Stannard

August 29, 2005

THE nightmare scenario that haunts global strategist Clyde Prestowitz is an economic September 11 -- a worldwide financial panic triggered by a sudden massive sell-off of US dollars that would lead inexorably to the collapse of economies around the world.

If that happens, Prestowitz predicts: "It would make the Great Depression of the 1930s look like a walk in the park."

Australia would be sucked into the vortex of such a recession, which would cause great hardship throughout the world, he warns.

Prestowitz is not a doomsayer, neither is he alone in his views. As president of the Economic Strategy Institute, a Washington think tank, he is in regular contact with the most influential US business leaders, several of whom -- Warren Buffet and George Soros included -- have taken steps to hedge their currency positions against the possibility of a cataclysmic plunge in the greenback.

"Right now," he says, "we have a situation in which the US is running huge trade deficits -- about $US650 billion ($766 billion) in 2004 -- which are financed by borrowings from the central banks of Asia -- mainly the Chinese and the Japanese. All the world's central banks are chock-full of US dollars -- they're holding many more dollars than they really want. They're holding those dollars because at the moment there's no great alternative and also because the global economy depends on US consumption. If they dump the dollar and the dollar collapses, then the whole global economy is in trouble.

"However, some countries have a bigger stake than others in maintaining the status quo. China and Japan have a big stake in maintaining the flow of their exports to the US and keeping the US economy humming. Russia, on the other hand, does not export much to the US. India doesn't export much to the US. Yet Russia and India are also big dollar-holders. They hold many more dollars than they really want or need.

"It doesn't take any great stretch of the imagination to see what could happen if one of these central bank managers decides to dump dollars. We had a situation recently when a mid-level official at the Central Bank of Korea used the word 'diversification'. It was a throwaway remark at some obscure lunch, but there was instantaneous overreaction. The US stock market fell by 100 points in 15 minutes because the implication was that South Korea might be shifting out of US dollars.

"So picture this: you have a quiet day in the market and maybe some smart MBA at the Central Bank of Chile or someplace looks at his portfolio and says, 'I got too many dollars here. I'm gonna dump $10 billion'. So he dumps his dollars and suddenly the market thinks, 'My god, this is it!' Of course, the first guy out is OK, but you sure as hell can't afford to be the last guy out.

"You would then see an immediate cascade effect -- a world financial panic on a scale that would dwarf the Great Depression of the 1930s."

Prestowitz says the panic could be started by something as simple as a hedge-fund miscalculation. "We had exactly that scenario in the US recently," he points out, "when a big hedge fund called Long Term Capital Management went belly-up. These guys were pros. They had two Nobel prize-winning economists writing their trading algorithms, and their traders were the creme de la creme among New York bond traders.

"They made a big bet -- a trillion dollars leveraged 20 to one, and they blew it. They went belly-up. That threatened to bring down the whole system so US Federal Reserve chairman Alan Greenspan had to organise a bail-out through the Federal Reserve Bank of New York.

"Now consider this: there are currently 8000 hedge funds in the US alone. Every day $6 trillion of derivative instruments trade on international markets. If there are four people in the world who understand those trades, I'd be surprised. So the potential for another disaster is not insignificant. This is why Warren Buffet, chairman of investment giant Berkshire Hathaway, is betting $US21 billion against the dollar. This is why currency speculator and hedge fund manager George Soros has also made a big bet against the dollar.

"Soros is one of the greatest currency speculators of all time. He was the guy who broke the British pound in the early 1990s by betting $US10 billion it would fall. He made a quick billion when it did. In 2002, he warned that the greenback was in danger of losing a third of its value. Of course, it could be argued that Soros is a professional hedge fund manager whose job is to play the ups and downs of currencies and his remarks could be seen more as manipulation than prophecy. And yet, in conversations with me, Soros has expressed concern about the market fundamentalist view that prevails in Washington and parts of Wall Street.

"This is the belief that markets are self-correcting and best left alone. Soros calls this a dangerous siren song. Far from being self-correcting, he emphasizes, markets tend to excess. They over-shoot. Anyone with any experience of markets knows this.

"When markets are going down, all the weaknesses get concentrated, and you need intervention at the right time to stop things from getting out of control. If the dollar started to melt down, the results could be really nasty. A 1930s-style global depression is not out of the question."

To underscore the point that he is not alone in this, Prestowitz cites Paul Volcker, head of the Federal Reserve before Greenspan, who has said publicly there is a 75 per cent chance of a dollar crash in the next five years.

"No wonder people look at this and say, 'Holy cow!'," he says. "No one knows for sure what will happen, but clearly the global markets could implode very quickly. The lack of an alternative to the dollar is the only reason it hasn't taken a big fall already."

Prestowitz, formerly a trade adviser and negotiator for former US president Ronald Reagan, believes the US will continue to be the world's most powerful economy for the foreseeable future. But he foreshadows an inexorable decline, a trend that is likely to continue "depending on the way we play our cards".

"Right now, we're playing them just about as badly as it's possible to play them, and that has geo-political implications." he says. "We've outsourced trying to deal with North Korea to China, we really can't deal with Iran, so we've outsourced that to the EU, which is struggling, and Iran is cozying up to China. Other bad actors like Zimbabwe's Robert Mugabe and Sudan are cozying up to China.

"America's global hegemony is already under challenge, and that challenge is going to become more and more evident as the extent of the relative US economic decline becomes evident. Right now, the US dollar is probably 40 per cent overvalued versus the Japanese yen or the Chinese renminbi. How's the US going to look as a global power when the dollar is at 50 per cent of its current value?"


TOPICS: Business/Economy; Foreign Affairs; Government; News/Current Events
KEYWORDS: 911analogyabuse; bob; cnim; depression; dollar; economy; federalreserve
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1 posted on 08/31/2005 12:38:26 AM PDT by Travis McGee
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To: Brilliant; A. Pole; ICE-FLYER; Southack; blam; Pikamax; neverdem; Eaker; Squantos; wardaddy; ...

For your perusal and comment.


2 posted on 08/31/2005 12:40:22 AM PDT by Travis McGee (--- www.EnemiesForeignAndDomestic.com ---)
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To: Travis McGee

Our "power" doesn't rest in our currency. Nor does our wealth.

Our power rests in our ability to create things, freely and defend ourselves. Something much of the world has forgotten how to do.


3 posted on 08/31/2005 12:48:17 AM PDT by DB ()
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To: Travis McGee
As president of the Economic Strategy Institute, a Washington think tank, he is in regular contact with the most influential US business leaders, several of whom -- Warren Buffet and George Soros included -- have taken steps to hedge their currency positions against the possibility of a cataclysmic plunge in the greenback.

This article is filled with ignorance, but this is the most telling sentence. Soros sold the dollar short because he wanted to cause an economic crisis to get Bush out of office--he admitted as much. IIRC, he's lost the equivalent of $500 million due to shorting the dollar.

I can't believe I delayed sleep just to read this crap.
4 posted on 08/31/2005 12:53:29 AM PDT by Terpfen (Liberals call the Constitution a living document because they enjoy torturing it.)
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To: Travis McGee

He's exactly right. However, if we go down, everyone goes down with us. Pretty stupid to try and crash our economy.


5 posted on 08/31/2005 12:59:32 AM PDT by Free Vulcan
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To: DB

By conducting free and open trade with a totalitarian country that pegs its currency to the USD, the United States is slowly but steadily eroding its power and ability to create things.


6 posted on 08/31/2005 1:01:13 AM PDT by overtaxed_canadian
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To: Travis McGee

The death of the dollar has been greatly exaggerated.

Are nations really going to dump the dollar to put their reserves into euros betting on the perpetual recession that is the eurozone to provide stability?


7 posted on 08/31/2005 1:02:43 AM PDT by RWR8189 ( Extremism in defense of liberty is no vice. Moderation in the pursuit of justice is no virtue.)
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To: Travis McGee
"This is the belief that markets are self-correcting and best left alone. Soros calls this a dangerous siren song. Far from being self-correcting, he emphasizes, markets tend to excess. They over-shoot. Anyone with any experience of markets knows this.

"When markets are going down, all the weaknesses get concentrated, and you need intervention at the right time to stop things from getting out of control. If the dollar started to melt down, the results could be really nasty. A 1930s-style global depression is not out of the question."

It matters little that it is Soros making the statement -- it is an obvious fact to anyone who reads. Markets are already more manipulated by the big players and governments, rather than by supply and demand.

Many of the self-anointed elites fared well enough through the Great Depression, and many of them will through this coming one. It was, and is, their bleeding off all the real people's operating capital through increasing taxes and decreasing real incomes that causes depressions.

What is worse this time is that they have dismantled so much of our manufacturing capability and sent it to our future enemies. Our elected politicians have joined the opposition in an economic war against American citizens.

8 posted on 08/31/2005 1:31:47 AM PDT by meadsjn
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To: Travis McGee

And furthermore, business owners get tax credits for hiring foreigners here on work visas, but none for hiring Americans. That's just a damn crime.


9 posted on 08/31/2005 1:35:13 AM PDT by meadsjn
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To: Travis McGee
I'm trying to remember a decade where I didn't hear this prediction. It shows up every 3 to five years. Plus the one where nations who tie their currency to the dollar are going to drop it for the Euro or some other less stable currency. I'd be more concerned if I didn't hear it.
10 posted on 08/31/2005 1:37:22 AM PDT by Hillarys Gate Cult ("Of the four wars in my lifetime, none came about because the U.S. was too strong." - Ronald Reagan)
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To: Travis McGee

Reads like one of those "buy gold" commercials.


11 posted on 08/31/2005 1:40:04 AM PDT by Pro-Bush (Liberty is the only thing you cannot have unless you are willing to give it to others.)
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To: Travis McGee
Oh yeah, run for the Euro, baby!

The Chinese yuan might be a threat though. That is if you trust China. It's undervalued significantly and there is pressure to float it on the market.

12 posted on 08/31/2005 1:47:57 AM PDT by Caipirabob (Democrats.. Socialists..Commies..Traitors...Who can tell the difference?)
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To: Travis McGee
I dont want think about this as another Bush's Fault! ...
13 posted on 08/31/2005 1:49:21 AM PDT by ChristianDefender (If you can't fight with M16/M4.. then use prayer, if not just choose whose side are You!)
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To: Travis McGee
This is idiocy.

The Dollar is headed for a gain against the Euro. Twin peaks.
14 posted on 08/31/2005 3:15:12 AM PDT by Jaysun (Democrats: We must become more effective at fooling people.)
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To: Terpfen

Propaganda works as well as terrorism.


15 posted on 08/31/2005 3:35:13 AM PDT by OldFriend (MAJ. TAMMY DUCKWORTH ~ A NATIONAL TREASURE)
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To: Travis McGee

WE'RE ALL GOING TO DIE!!!!!!!!!! WE'RE SCREWED!!!!!!!!


16 posted on 08/31/2005 3:35:16 AM PDT by rlmorel ("Innocence seldom utters outraged shrieks. Guilt does." Whittaker Chambers)
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To: Terpfen

It would please me very much to see Soros have to earn his living with a hand organ and a monkey on some busy streetcorner.


17 posted on 08/31/2005 4:14:40 AM PDT by Jimmy Valentine (DemocRATS - when they speak, they lie; when they are silent, they are stealing the American Dream)
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To: Travis McGee
And with the price of oil at four times what it was just a few years back, the muslim hordes have a ton of greenbacks to dump.

Invade Mexico take their oil and use our HEAVILY ARMED Military to secure our borders! All of our borders, north, south, east and west.

18 posted on 08/31/2005 4:23:07 AM PDT by newsgatherer
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To: Travis McGee
Soros is one of the greatest currency speculators of all time. He was the guy who broke the British pound in the early 1990s by betting $US10 billion it would fall. He made a quick billion when it did. In 2002

LOL, and he has lost about that same amount this year betting against the dollar....

19 posted on 08/31/2005 4:26:52 AM PDT by Always Right
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To: meadsjn

What is worse this time is that they have dismantled so much of our manufacturing capability and sent it to our future enemies.



A statement that has been said so often that it is believed. The manufacturing base in the US has been fairly constant over the years. It goes down during a recession (when all the statements are made about the manufacturing base leaving the US) and goes up in good times. But so does everything. It is just that manufacturing is singled out because of the higher pay for most of those jobs.

Plus, States that once had a large base are profiled (like Michigan) but others that have gone from zero (like Tennessee) are ignored.

Electronics are one area that the US, on purpose, let the Japanese after WWII have as their base. It helped the economy of Japan move from the feudal age into the 20th century. Japan is hurting more than us in this area because of Korea (Samsung).

The US will always have the edge and will not lose its manufacturing base as long as it stays mostly in the free market of capitalism. Other countries are more state managed and get into trouble because they bet on outmoded technologies.


20 posted on 08/31/2005 4:35:22 AM PDT by KeyWest
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