Dollar’s Fade Won’t Support Wall Street’s Party
Commentary by Paul Kennedy
April 14 (Bloomberg) -- A number of interesting things have happened in the past few weeks which, if you put them together in the manner that Sherlock Holmes would have done, make for serious thought.
First came the deliberate comments of various Chinese leaders, expressing concern that their country’s holdings of $1 trillion U.S. dollars might be at risk from a loss in currency value, due to bad fiscal management in Washington and New York. Readers might note that they were talking about China’s American assets, not President Barack Obama’s.
The very idea that China might possess such a vast amount of U.S. financial instruments would be simply baffling to someone like Harry Truman, and quite absurd to Ronald Reagan. But there it is.
The second (I’m not sure if these events occurred in chronological order, but that matters less than their coincidence) was a recommendation from a United Nations study group on improving global currency stability that there be a careful move away from the current rather anarchic reliance upon the U.S. dollar as the bank of last resort, to the adoption of a basket of currencies for the holding of the world’s reserves of cash and other assets.
Fewer dollars then, and more euros, yen, yuan, pounds, Swiss francs, etc., with their shares in the basket roughly reflecting their economic strength.
In the midst of the public and congressional fury over the American International Group Inc. bonuses, this received little U.S. media attention, apart from brief chauvinistic headlines like “UN Body Says Dump the Dollar.” So much for the level to which our political discourse has sunk.
It should be noted that in both the Russian and Chinese media -- neither exactly free from a governmental hint or two -- a move away from a dollar-dominated system is highly recommended. Not a few oil-earning Arab states would like that. And the French wouldn’t be unhappy.
The third dog barking in the night was the dramatic news last month that the Federal Reserve Bank of New York (that is, on Fed chief Ben Bernanke’s instructions) would purchase as much as $300 billion of U.S. government debt and furthermore double its purchases of Fannie Mae and Freddie Mac housing securities to an enormous $1.45 trillion. No wonder the Financial Times headline on the next morning read “Fed Purchase Plan Stuns Investors.”
Rise and Fall
Now I am not a professionally trained economist or banker, merely a historian of the reasons why Great Powers seem to have risen over time, and then steadily collapsed some generations later. Yet it appears to my non-scientific mind that if a particular national government decides on the one hand to issue more and more Treasury debt, and on the other hand to have its national bank purchase large amounts of the same, it runs a serious risk of scaring investors about its long-term credit- worthiness.
It looks somewhat like a shark feeding upon itself. Or like those swindling characters in a 17th-century Ben Johnson play (“Volpone” or “The Alchemist”) who were pouring out promises at the front of the store while cheating at the rear end of the same. Or like Buonaparte purchasing Napoleonic currency.
Heavens, it looks almost Madoffian! Just think about it. If you and I could issue a loan to our neighbor, then proceed to buy it before he even reaches for his wallet, what would the eventual value be down the street? What, the neighbor might ask, were we doing?
Now comes the fourth bit of evidence. In March the scrupulously independent Congressional Budget Office published, as it is regularly bound by law to do, its own estimates of U.S. federal deficits in the years to come.
All such forecasts are just that, mere estimates. But this group of economists and statisticians believes that America’s indebtedness will be far higher than that presented recently by the White House. It also believes that the deficits will go on, longer and longer, and larger and larger, than any of the estimates coming from the new administration itself.
So, let us try and put the four pieces together. The CBO warns that the nation’s federal deficits will be far larger than the White House projects, and thus drag down the possibility of economic recovery. The U.S. Treasury, however, plans to reassure markets by buying as much as $300 billion of government debt, and to double its purchases of Fannie Mae and Freddie Mac securities.
While Wall Street traders were photographed hopping up and down for joy at that news, the dollar resumed its long-term wobble against the euro and other currencies. The UN group of experts, not driven by the current emergency but simply reporting on their charge, recommends a shift from a dollar- heavy financial system to one that rests upon a basket of currencies; in essence, it points to a gradual end to the post- 1944 dollar-dominated world. Would that we might be so lucky to slip to a new, more multipolar currency system without awful convulsion.
Meanwhile, the symbolic but disappointing meeting of the G- 20 in London has come and gone, proclaiming solidarity, giving to the International Monetary Fund the closely conditioned tranches the richer governments had already promised, and pledging to resist domestic protectionism -- right, Mr. Sarkozy?
Ground is Shifting
Those of us looking at these grandiose summits must be grateful that the final statements were so harmonious, so full of promise. And, the Lord knows, those 20 and more world leaders were doing their best. Yet somehow it all feels staged. The front stage, the panoply, rests on ever-less-solid foundations.
Can readers not feel it? There is something going on here, in the world at large and especially in the tilt toward Asia, that is much bigger than a one-week surge or fall in the markets, bigger than a temporary Standard & Poor’s 500 Index recovery. Beneath the thin crust of the current Wall Street- happy system, the primal forces are moving. Let us hope they move steadily, and with care.
(The opinions expressed are those of the author.)
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