[Peace-discuss] decline of the dollar

[E. Wayne Johnson]

A few months ago I made the statement in one AWARE meeting that we 
should expect the dollar to lose half its value in 2009. / It's only 
down about 25% so far/.  Not sure if I was wrong yet or not.

The classic piece on the decline of the dollar that everyone should see 
is Max Keiser's Death of the Dollar (from 2006), which can be seen here:
http://www.liberty4urbana.com/drupal-6.8/node/57

Now it appears that the Fed and Cenex and the Treasury are fixing to 
roll out the wheels of good-old-fashioned Inflation, and they are 
releasing the news to the Mainstream Media (MSM) to prepare the hearts 
and minds of the American Sheeple for the inevitable double-digit 
inflation holocaust to come. I hope that people are waking up to the 
fact that this dollar crisis actually has little to do with any 
(imaginary) differences between Mr. Obama or Mr. Bush, and if McCain has 
been elected, it likely would be just as bad if not worse.

this article (following) was in USA Today --- (just today)

The article is pretty much pap and nonsense as I read it, but I do take 
it as a signal that the PTB (powers that be) are starting to release the 
general message into the Great American Subconscious that the dollar is 
about to take a huge dump, and they are gently preparing the people 
through vacuous releases into the MSM.

They want us to think this is good for exports even though bad for 
expats.  The sad truth is that the manufacturing sector of the US 
economy has been so hollowed out by outsourcing that most stuff we buy 
is made somewhere else.  The Chinese and others are about to take a huge 
haircut on the bag of worms they bought from the Treasury some time 
back.  Once bitten twice shy.  "Sei jit"  (suddenly fallen flat utterly 
dead), as the Cantonese like to say about a business dead gone bad.

Max Keiser recommended the purchase of oxygen futures.  Good advice I 
think.  Buckle your seat belts.  Let all of the Air out of your shoes, 
and get ready for a moment of simulated exhilaration.

*****

Weak dollar raises talk of alternative world currency

By David J. Lynch, USA TODAY
Just about every day seems to bring more bad news for the dollar.

Recent months have witnessed a steady erosion in the greenback's value, 
down 16% since March against the currencies of the top U.S. trading 
partners. On Wednesday, the euro broke through the symbolically 
important $1.50 barrier for the first time in 14 months.

Depending on whom you believe, a dollar hovering near its 52-week low 
represents either the market's devastating verdict on the Obama 
administration's profligacy or a salutary rediscovery of risk by newly 
emboldened investors.

Maybe it's a bit of both. But the downbeat drumbeat bangs on. Chinese 
officials openly worry about taking a bath on their enormous U.S. 
Treasury 
<http://content.usatoday.com/topics/topic/Organizations/Government+Bodies/United+States+Department+of+the+Treasury> 
holdings. Foreign bankers talk of promoting an alternative global 
currency, such as the euro, yuan or a new synthetic medium of exchange 
cooked up by the International Monetary Fund 
<http://content.usatoday.com/topics/topic/Organizations/International+Agencies,+Alliances,+Cartels/International+Monetary+Fund>.

In the U.S., some voices on the right, such as Rep. Michele Bachmann 
<http://content.usatoday.com/topics/topic/People/Politicians,+Government+Officials,+Strategists/U.S.+Representatives/Michele+Bachmann>, 
R-Minn., detect an anti-American conspiracy to scuttle the dollar. But 
the roster of those opining on the dollar's woes includes 
establishmentarians such as Robert Zoellick 
<http://content.usatoday.com/topics/topic/People/Politicians,+Government+Officials,+Strategists/World+Leaders/Robert+Zoellick>, 
president of the World Bank 
<http://content.usatoday.com/topics/topic/Organizations/International+Agencies,+Alliances,+Cartels/World+Bank> 
and a former top official in Republican 
<http://content.usatoday.com/topics/topic/Organizations/Political+Bodies/Republican+Party> 
administrations. "Looking forward, there will increasingly be other 
options to the dollar," he warned last month.

As the U.S. tries to repair its crisis-battered economy, is the end of 
dollar supremacy about to make a tough job even tougher?

Not any time soon. There are "lots of reasons to be concerned about the 
dollar. ... (But) a weaker dollar is a fantastic boost for the United 
States, and it's a problem for the rest of the world," says Kenneth 
Rogoff <http://content.usatoday.com/topics/topic/Kenneth+Rogoff>, former 
IMF chief economist.

*A natural monopoly *

Since supplanting the British pound more than 60 years ago, the dollar 
has reigned supreme in global markets. As of the end of June, the most 
recent data available, 62.8% of foreign exchange reserves worldwide were 
held in the form of U.S. dollars. An additional 27.5% were stockpiled in 
euros, according to the IMF.

The dollar's position has eroded in the past five years. In mid-2004, it 
made up 67.9% of world reserves. "A lot of people get excited about 
this. But in the 1970s and 1980s, there was even bigger volatility in 
the dollar share of reserves," says Stephen Jen, managing director of 
BlueGold Capital Management, a London-based hedge fund.

In March, Chinese Central Bank chief Zhou Xiaochuan 
<http://content.usatoday.com/topics/topic/Zhou+Xiaochuan> proposed 
shifting global finance to a reliance on a new international reserve 
currency rather than the dollar or any other national unit. The aim 
would be to avoid the periodic crises that have characterized recent 
decades. But Zhou acknowledged that any such change would take "a long 
time."

The instability of a world economy so dependent on any single national 
currency is prompting even some leading American figures to argue for a 
gradual move away from the dollar. Fred Bergsten, former assistant 
Treasury secretary in the Carter administration, says a major cause of 
the current crisis was the destabilizing linkage between the U.S. trade 
deficit, enormous capital flows from abroad that financed it and the 
global dominance of the U.S. dollar. He argues in a new /Foreign 
Affairs/ article that, to avoid a repeat episode, the U.S. should 
promote a move to a "multi-currency system" involving the euro and the yuan.

For now, the dollar's fundamental standing remains what it's been for 
decades: a convenient medium of exchange for buyers and sellers around 
the world. Just as Chinese merchants speak the global language of 
English when trading with Saudi oil barons, they use the global currency 
to buy the oil. "The reserve currency is a natural monopoly. It's so 
convenient to list prices in a single currency," says Harvard University 
<http://content.usatoday.com/topics/topic/Organizations/Schools/Harvard+University>'s 
Rogoff, co-author of /This Time Is Different/, a study of financial crises.

The U.S. benefits from the dollar's unique role, enjoying what French 
President Valery Giscard d'Estaing memorably labeled the "exorbitant 
privilege" of being able to borrow abroad in its own currency. That 
insulates Americans from the danger of seeing their debts skyrocket in 
response to a sharp decline in the dollar's value.

The dollar doesn't owe its global role to international affection for 
Americans. Investors relying on the cold logic of the marketplace are 
drawn to the greenback by specific advantages that make the rise of a 
dollar rival inherently difficult. "There's no equally attractive 
alternative," says economist Barry Eichengreen 
<http://content.usatoday.com/topics/topic/Barry+Eichengreen> of the 
University of California-Berkeley 
<http://content.usatoday.com/topics/topic/Organizations/Schools/University+of+California+Berkeley>.

In the short run, the only currency that could challenge the dollar is 
the euro. It, too, has a continental-size economy behind it, and a 
decade after its introduction, the European currency has established 
itself as a fully convertible, stable store of value.

But for all its attractions, the euro lacks some essential attributes. 
Although the European Union 
<http://content.usatoday.com/topics/topic/Organizations/International+Agencies,+Alliances,+Cartels/European+Union> 
has a central bank, comparable to the Federal Reserve 
<http://content.usatoday.com/topics/topic/Organizations/Government+Bodies/Federal+Reserve>, 
there is no European treasury. Instead, there are 27 European 
treasuries. Investors can't easily track or influence fiscal policy on 
the continent.

The dollar is also buoyed by the existence of a massive government bond 
market. There's roughly $4 trillion worth of U.S. Treasuries floating 
around, and almost $100 billion changes hands each day, according to 
investment management firm Pimco. Trading that's carried on almost 24 
hours a day, rolling east to west from Tokyo to London to New York, 
makes it easy to move into and out of dollar positions in a hurry.

Europe, by contrast, has no analogue to the U.S. Treasury market. 
Instead there is a fragmented scene with individual sovereign debt from 
Germany, Italy, France and other EU members. No individual market enjoys 
anything like Treasuries' liquidity and size.

There's another potential dollar rival on the horizon, though its day 
likely lies a decade or more in the future. Just as the United States 
overtook the British empire, China's economy one day is likely to pass 
the U.S.'s. When it does, the yuan would be in position to fill the 
dollar's global role.

But before it does, China will have to thoroughly overhaul its existing 
financial system. Today, the yuan isn't freely convertible into other 
currencies, and there are strict limits on the cross-border movement of 
the Chinese currency. Chinese officials publicly have committed 
themselves to freeing the yuan to float alongside the dollar, euro, yen 
and other major currencies. That change, however, won't happen overnight.

Even if foreign investors have concerns about having so much of their 
national wealth tied up in dollars, there is a limit to what they can do 
about it in the short run. The Chinese, for example, have little choice 
but to keep recycling into Treasury purchases their dollar surpluses 
from trading with the United States. Beijing wants to prevent the yuan 
from appreciating against the dollar, to protect employment in its 
export sector. Even as it worries about the long-term prospects for its 
dollar-denominated investments, it has to keep buying dollars to do so.

"There's a gap between what's feasible and what central banks would like 
to do," said Steven Englander, chief foreign exchange strategist for 
Barclays Capital 
<http://content.usatoday.com/topics/topic/Barclays+Capital> in New York.

*Further to fall *

The dollar's long-run prognosis is negative. In the wake of the crisis, 
a retrenchment in cross-border financial flows will mean less demand for 
dollar-denominated assets. And with Uncle Sam's printing press running 
overtime to cover the government's trillion-dollar budget deficits, the 
currency is expected to be further cheapened, says Eichengreen.

The decline in the dollar's value in the past seven months largely 
reflects an unwinding of the "flight to quality" that occurred during 
the most panicked crisis phase. Amid unprecedented levels of uncertainty 
late last year, investors flocked to assets denominated in the largest, 
most liquid currency. That drove the dollar's value against the euro, 
for example, up about 13% over the three months ended in March.

Since then, the euro has regained the lost ground and then some. A euro, 
which settled at $1.50 Wednesday, was at $1.43 in December.

In the political realm, the dollar's weakness is interpreted as a 
referendum on American decline. But its steady slippage this year is in 
line with economic fundamentals --- that is, near-zero U.S. interest rates.

That said, neither the euro nor Japanese yen have had anything to 
celebrate. The biggest beneficiaries of the move out of dollars since 
March have been currencies of countries that heavily export raw 
materials, such as the Australian dollar (up 33% against the greenback) 
and the Canadian loonie (up 21%).

U.S. officials historically repeat mantra-like that they favor a "strong 
dollar." That really should be interpreted as a fancy way of saying "no 
comment."

So far, the dollar has only retreated back to the level it was at before 
the Lehman Bros 
<http://content.usatoday.com/topics/topic/Organizations/Companies/Banking,+Financial,+Insurance,+Law/Lehman+Brothers>. 
bankruptcy filing in September 2008 turned an economic downturn into a 
global financial panic. A weak dollar would be a problem if it 
contributed to inflation by increasing the cost of imports, or if it got 
so low so fast that the Fed felt compelled to raise interest rates to 
attract foreign investors. Neither is the case today.

The shrinking dollar also carries important economic benefits for the 
U.S. economy as it tries to climb out of recession. By making U.S. goods 
less expensive overseas, a weaker dollar provides a welcome boost for 
exports. The Obama administration has said it wants to rebuild the U.S. 
economy to rely more on making goods here to sell to people in other 
countries instead of depending on buying more and more stuff made elsewhere.

"The U.S., in the new normal, is going to have to export more because 
U.S. households will be saving," said Eichengreen.

For that to happen, the dollar likely has further to fall.


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