Skip to comments.Dumping of US dollar could trigger 'economic September 11'
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?"
For your perusal and comment.
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.
He's exactly right. However, if we go down, everyone goes down with us. Pretty stupid to try and crash our economy.
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.
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?
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.
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.
Reads like one of those "buy gold" commercials.
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.
Propaganda works as well as terrorism.
WE'RE ALL GOING TO DIE!!!!!!!!!! WE'RE SCREWED!!!!!!!!
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.
Invade Mexico take their oil and use our HEAVILY ARMED Military to secure our borders! All of our borders, north, south, east and west.
LOL, and he has lost about that same amount this year betting against the dollar....
What is worse this time is that they have dismantled so much of our manufacturing capability and sent it to our future enemies.
While I find no argument with our ability to defend ourselves, I do question our government's will to do so, using our open borders as an example.
how stupid of an article is that !
The dollar depreciating is good for the economy as long as its not too sudden. This is how it works: the dollar looses value implies imports become expensive and exports cheaper. There have been instances of sooo many industries rampin up production in the last 2 years cos the dollar slid against euro smoothly. If the dollar is cheaper then american goods cost less in the world. If you need anymore convincing compare the number of tourists coming down into U.S from europe the last few years from historical averages.
I would say a orderly depreciation in dollar is exactly what we need.
I agree foreign vacations will become expensive for us but who the heck wants to go abroad when we got so many beautiful places worth checking out here in USA !!
But we aren't in economic decline. In fact, we just led the entire world out of a recession.
I can't tell from this article whether the writer is proposing that this would just happen, or whether he's proposing that it would be an intentional effort by some foreign nation to nuke the US economy. If he's proposing the latter, then I think that's a pretty dumb idea. First, I don't think it will work. Second, it would probably take down the guy who tried it.
Suppose, for example, that China decided to dump a trillion dollars on the foreign exchange (which is purely fictional since they don't even have that many dollars). Well, that would probably cause the dollar to decline. On the other hand, they would not get much for those dollars, and they'd end up taking a bath, while we and others bought those dollars cheaply. In effect, it would be a transfer of wealth by the Chinese to the rest of the world.
Where did you get that notion? Vdare, or Stormfront?
anyone that credits Soros and Buffett as the basis of their premise on the future of the dollar needs to look and the losses they have sustained in the last year. Soros was wrong on elections and the dollar, Buffett was wrong on Insurance and the dollar. He has allowed some very shady stuff to go on at Geico and General Re.
What do we create anymore that others are willing to buy?
No, no, no! There is no other god but Free Market, and Adam Smith is his prophet ! Bazaar Akbar!
Including oil. The dollar has lost 30% of its value against the Euro and some other major currencies in recent so it is not surprising that oil producers are demanding more of our less valuable dollars for their oil that is just as good as it ever was.
For years the world has used dollars as the reserve currency and has trusted in the faith and good credit of our government. I think we may be moving into a period where that faith wanes and where oil replaces gold as the underlying commodity that gives currency value.
In the meantime, if oil gets too expensive, it is going to choke off that recovery in our manufacturing sector that was driven by the cheap dollar.
Crashing dollar? No problem. The GOPbots will cite that as a benefit of free-trade and the evolutionists will cheer that as proof Darwin was right about survival. The war party will say we got to atom bomb the arabs before they take over the world. The President who is hit with this hurricane will find a lot of places under water.
Aren't we glad that China was made a permanent favored trading partner and we can swap jobs, factories and U.S. securities for cheap consumer goods. Beam me up.
bump for later
I take it that you work in marketing or the financial field. No one who works in manufacturing or engineering would make such a erroneous comment.
It lost against non-major currencies as well - it lost 30% against Polish zloty.
Someone will have something to lose if the dollar crashes. Someone will have something to gain. That said, which someone is more powerful says who will win.
"Our power rests in our ability to create things, freely and defend ourselves. Something much of the world has forgotten how to do."
Unfortunately, so have we to a great extent.
...anyone that credits Soros and Buffett as the basis of their premise on the future of the dollar needs to look and the losses they have sustained in the last year. Soros was wrong on elections and the dollar, Buffett was wrong on Insurance and the dollar.
I am not comfortable about it, by I must respect Mr. Soros expertise on instability of the markets. After all this is how he made his fortune.
Why the discomfort? He's promoting socialism; just like you.
You're quoting George Soros - a viciously anti-American currency speculator who funds radical left-wing causes, including organizations with known links to terrorists.
That man does not deserve attention - he deserves jail - at best.
Not the Polish zloty! NOT THE POLISH ZLOTY!!! NOOOO!
Thats it... I'm converting all my dollars to beer.
Beer does not last very long. Convert them into vodka - it is a very durable and attractive mean of exchange. During WWII in Europe it could buy you more stuff than gold could. Even hungry people were willing to part with their food. :)
Do all that... and there would be untold prosperity for generations to come. Keep going the way we are going and those doomsday scenarios become certainties. Half measures are better than nothing, but are only stop gap at best.
That is not a good thing.
"By conducting free and open trade with a totalitarian country that pegs its currency to the USD"
not to quibble but i believe China floated its currency recently. Here take a looksie
Growth diverges across EU economies (Euro Zone)
The Business Online ^ | August 28, 2005 | Allister Heath
THE performance of the euro zone's 15 economies is continuing to diverge, fuelling fresh fears for the future of the single currency, a top French bank will warn this week.
There are still no signs of the convergence in economic growth long forecast by advocates of the single currency, according to a report by Societe Generale's Paris economists. Instead, the growth differentials among euro-zone members continue to widen, putting intense pressure on the European Central Bank's one-size-fits-all interest rates.
Since 2001, the gap in private consumption between member countries has surged to almost 15% between the best and worst performers, according to Societe Generale. Greece and Spain have had robust private consumption, whereas Germany and the Netherlands have seen consumer spending stagnate during the past four years.
Only five euro-zone members will have run out of spare capacity this year, led by Greece, Finland, Spain, Belgium and Ireland. The others are all underperforming and still have unused resources such as labour and capital.
The five best performing countries are at increasing risk of overheating, the bank said, because interest rates are below the appropriate level for these economies.
Veronique Riches-Flores, economist at Societe Generale, said: "This situation raises obvious concerns over the potential impact of such discrepancies on economic developments. The exceptional spread in output gaps between the different euro-zone partners is not sustainable without creating, at some point, some inevitable distortions."
Growth in the euro zone should be confirmed at 0.3% quarter-on-quarter and 1.2% year-on-year for the second quarter, down from 0.5% and 1.4% in the first, and back to its lowest since end-2003.
And Soros believes he is the only person who knows how to correct this "overshoot", right? What is an "overshoot" anyway?
Not just the rest of the world, but the neo-cons. Most of these guys are just playing games with money, they don't create anything or generate any wealth.
Having a hard enough time wrapping my brain around our current catastrophe, Katrina. I just can't get worked up about anymore gloom & doom right now or I'll have to go do something constructive like suicide bomb some terrorists.