Counterpunch, October 6, 2009
Is the Sky Really Falling?
Dollar Hysteria
By MIKE WHITNEY
Robert Fisk lit the fuse with his hyperventilating narrative which
appears in Tuesday's UK Independent which went viral overnight
spreading to every musty corner of the Internet and sending gold
skyrocketing to $1,026 per oz. Now every doomsday website in
cyber-world has headlined Fisk's "shocker" and the blogs are clogged
with the frenzied commentary of bunker-dwelling survivalists and
goldbugs who're certain that the world as we know it is about to end.
From Fisk's article:
"In the most profound financial change in recent Middle East
history, Gulf Arabs are planning – along with China, Russia, Japan and
France – to end dollar dealings for oil, moving instead to a basket of
currencies including the Japanese yen and Chinese yuan, the euro, gold
and a new, unified currency planned for nations in the Gulf Co-operation
Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar.
“Secret meetings have already been held by finance ministers and
central bank governors in Russia, China, Japan and Brazil to work on the
scheme, which will mean that oil will no longer be priced in dollars.
“The Americans, who are aware the meetings have taken place –
although they have not discovered the details – are sure to fight this
international cabal which will include hitherto loyal allies Japan and
the Gulf Arabs. Against the background to these currency meetings, Sun
Bigan, China's former special envoy to the Middle East, has warned there
is a risk of deepening divisions between China and the US over influence
and oil in the Middle East. ‘Bilateral quarrels and clashes are
unavoidable,’ he told the Asia and Africa Review. ‘We cannot lower
vigilance against hostility in the Middle East over energy interests and
security.’”
"International cabal"? C'mon, Fisk, you're better than that.
Reports of the dollar's demise are greatly exaggerated. The dollar may
fall, but it won't crash. And, in the short-term, it's bound to
strengthen as the equities market reenters the earth's gravitational
field after a 6 month-long ride through outer-space. The relationship
between falling stocks and a stronger buck is well established and, when
the market corrects, the dollar will bounce back once again. Bet on it.
So why all this bilge about Middle Eastern men huddled in "secret
meetings" stroking their beards while plotting against the empire?
Isn't that the gist of Fisk's article?
Yes, the dollar will fall, (eventually) but not for the reasons that
most people think. It's true that the surge in deficit spending has
foreign dollar-holders worried. But they're more concerned about the
Fed's quantitative easing (QE) program which adds to the money supply by
purchasing mortgage-backed securities and US Treasuries. Bernanke is
simply printing money and pouring it into the financial system to keep
rigor mortis from setting in. Naturally, the Fed has had to quantify
exactly how much money it intends to "create from thin air" to placate
its creditors. And, it has. (The program is scheduled to end by the
beginning of 2010) That said, China and Japan are still buying US
Treasuries, which indicates they have not yet "jumped ship".
The real reason the dollar will lose its role as the world's reserve
currency is because US markets, which until recently provided up to 25
percent of global demand, are in sharp decline. Export-dependent
nations--like Japan, China, Germany, South Korea--already see the
handwriting on the wall. US consumers are buried under a mountain of
debt, which means that their spending-spree won't resume anytime soon.
On top of that, unemployment is soaring, personal wealth is falling,
savings are rising, and Washington's anti-labor bias assures that wages
will continue to stagnate for the foreseeable future. Thus, the American
middle class will no longer be the driving force behind global
consumption/demand that it was before the crisis. Once consumers are
less able to buy new Toyota Prius's or load up on the latest China-made
widgets at Walmart, there will be less incentive for foreign governments
and central banks to stockpile greenbacks or trade exclusively in dollars.
Here's a clip from the Globe and Mail cited on Washington's Blog:
"A UBS Investment Research report says that while it would be wrong
to write off the U.S. dollar as the global reserve currency, its roughly
90-year iron grip on that position is loosening. ‘The use of the U.S.
dollar as an international reserve currency is in decline,’ said UBS
economist Paul Donovan.
“’The market share of the dollar in international transactions is
likely to decline over the coming months and years, but only persistent
policy error – or considerable fiscal strain – is likely to cause the
dollar to lose reserve currency status entirely.’
"The UBS report maintains that the gradual slide of the U.S. dollar
is being driven not by the world’s central banks, but by the private
sector, as individual companies increasingly abandon the greenback as
their international currency of choice.
“’The private sector’s use of reserves is more important than
official, central bank reserves – anything up to 20 times the
significance, depending on interpretation,’” Mr. Donovan said. “There is
evidence that the move away from the dollar as a private-sector reserve
currency has been accelerating since 2000.’”
As private industry veers away from the dollar, governments, investors
and central banks will follow. The soft tyranny of dollar dominance will
erode and parity between currencies and governments will grow. This will
be create better opportunities for consensus on issues of mutual
interest. One nation will no longer be able to dictate international policy.
So-called "dollar hegemony" has added greatly to the gross imbalance of
power in the world today. It has put global decision-making in the hands
of a handful of Washington warlords whose narrow vision never extends
beyond the material interests of themselves and their constituents. As
the dollar weakens and consumer demand declines, the United States will
be forced to curtail its wars and adjust its behavior to conform to
international standards. Either that, or be banished into the political
wilderness.
So, what exactly is the downside?
Superpower status rests on the flimsy foundation of the dollar, and the
dollar is beginning to crack. Fisk is right to this extent; big changes
are on the way. Only not just yet.
Mike Whitney lives in Washington state. He can be reached at
[email protected]
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