Garvey's Ghost: Black Talk

The Imploding Dollar?

I remember back in the day (80's) when Jamaican DanceHall had an artist who said " In Englan' where de Poun' is 'trong." That was my intro to International currency exchange. The idea that 1 dollar was not equal to 1 Pound was odd to me at the time (9 years old). Now I understand the reason for it. With the war in Iraq came discssions of peak oil and the set up where Oil was priced in dollars which created a situation where countries that wished to purchase oil would have to do so in dollars (or dollar equivalents in their own currency). This lead to countries purchasing "greenbacks" in order to make such purchases. A nice side effect of this is that all this buying weakened the purchasers currency vis-a-vis the dollar. Well the NY Times is reporting on an interesting twist this is having on the US economy:

Quote:
The Treasury Department reported yesterday that net monthly capital flows from the rest of the world fell for the sixth time this year, declining to $59 billion from $63 billion in July.

Private investment from abroad fell by nearly half - to $37.4 billion in August from $72.9 billion the month before. Investors appear to be concerned over cooling growth and a rising American trade deficit.

The only reason that the contraction was not more pronounced was that official financing, mainly from Asian central banks, jumped to nearly $23 billion in August from just over $6 billion in July.

Washington has demanded that China end a policy of buying dollars to reduce the value of its currency, the yuan, and make its exports more competitive in American markets. But the new data accentuated how dependent the United States has become on purchases of dollar securities by the Chinese and other Asian governments with links to the dollar.

"Foreign central banks saved the dollar from disaster," said Ashraf Laidi, chief currency analyst of the MG Financial Group. "The stability of the bond market is at the mercy of Asian purchases of U.S. Treasuries."

the US crying foul at it's own game? Really now. if the dollar is a commodity on the market then anyone who wishes to make purchases and has the ability to do so can do so. That's "free markets." Is the US now against "free markets?" of course it is, is has been for a while. the "free market" mantra is only used at home to arouse the American Public who like when i was a child, has no clue as to how the international finacial markets work or what is at stake.

quote:
"If all we have funding our current account imbalance is the good graces of foreign central banks, we are on increasingly thin ice," said Stephen S. Roach, the chief economist at Morgan Stanley. Of Washington's call for China to stop interfering in currency markets, he cautioned, "That could come back and bite us."

Not all economists are that worried about the growing shortfall in the current account, the broadest measure of trade, pointing out that it is sustainable as long as Asians continue on a path of export-led growth that requires cheap currencies against the dollar.

Exactly. What are the Asians up to anyways? Well China recently purchased Noranda, Canada's largest Mining company for a cool $7 Billion (purchasing dollars indeed!!). Noranda also has a 60% stake in a minign company Falconbidge which happens to be the #3 supplier of Nickel to the US. Nickel has many military applications in the US which woudl make China the #3 supplier to the US DOD

And it get's better:
quote:

If the United States were to temper its appetite for foreign money, the Chinese and Japanese could curtail their purchases of American securities without causing financial havoc. The dollar could then drift lower against Asian currencies, benefiting American exporters and manufacturers that compete with Asian imports.

But this would require Americans to increase their rate of savings. Household savings have plummeted to only 1.5 percent of personal income, from 11 percent 20 years ago. With the federal government running a budget deficit of 3.5 percent of the nation's output, the public sector hardly contributes to savings.

A disorderly situation would occur if foreign money dried up suddenly when the United States still needed it. Then, the adjustment in American savings might happen involuntarily. Interest rates would rise sharply, and the dollar could fall abruptly. This could induce a sharp economic contraction, even stagflation.

"The longer we wait," Mr. Goldstein said, "the more likely we'll have the adjustment anyway. But the adjustment will be more chaotic and sharper."

Americans save? It was President Bush who told us "the terrorists win" if we don't go out and shop. No Mr. Bush perhaps not the people you were thinking of.

So what does this have to do with Black folks? Well it's already been shown that we as a group have a percentage of the wealth of whites. Just how bad will it get when this "adjustment" happens? Bling on brother. Bling on...

Links:
http://www.theglobeandmail.com/servlet/story/RTGAM.20041021.wchina21/BNStory/International/?query=noranda
http://www.nytimes.com/2004/10/19/business/worldbusiness/19dollar.html
http://www.orwelltoday.com/beijingsudbury.shtml