Reply #66: The avalanche is coming [View All]

[54anickel]

http://www.timesonline.co.uk/article/0,,1052-1369393,00.html
It happened before; it might happen again. The dollar could pitch the world into financial catastrophe

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In Washington, the Administration does not seem to be much concerned. The President’s response was to raise the US Government’s debt limit to $8,180 billion. In his first term he has raised expenditure and cut taxes to an extreme degree. Real expenditure during his presidency has risen by an annual average of 5.1 per cent, compared with 1.5 per cent under President Clinton.



The Federal Reserve is becoming extremely anxious. Alan Greenspan, the chairman, is an outstanding central banker, whom we ought to take very seriously. He gives a warning that the US current account deficit is unsustainable. The deficit has now risen to the point where the US has to borrow almost £2 billion a day. Mr Greenspan thinks that foreign investors may go on strike because they have too many dollars already. He would like to see a reduction in the US budget deficit in order to reduce the external deficit. That, however, would mean deflationary policies, and President Bush does not like deflation.

The problem is not a new one. It is based on the structural weakness of the world’s leading currency, whichever that might be. In the 1920s the key currency was sterling, but the pound had been weakened by Britain’s financial losses in the First World War. London was still the centre of the world exchange system, and Britain still had great, though declining, power to borrow. Eventually, Britain could not take the strain and had to abandon the gold standard in 1931. The slump of the 1930s followed.

As early as the 1960s the French were complaining that the dollar was following the same track. In 1965 Jacques Rueff, President de Gaulle’s economic adviser, gave an interview to the American financial writer Fred Hirsch. Rueff pointed out that “when a country with a key currency has a deficit in its balance of payment — that is to say, the United States, for example — it pays the creditor country dollars, which end up with its central bank. But the dollars are of no use in Bonn, or in Tokyo, or in Paris. The very same day, they are all re-lent to the New York money market, so that they return to their place of origin . . . if I had an agreement with my tailor that whatever money I pay him he returns to me the very same day as a loan, I would have no objection at all to ordering more suits from him.”

Of course, the main centre that now sells and lends back is Beijing. Six years after the Rueff interview, the Bretton Woods system of dollar-gold convertibility did break down. President Nixon ended the US commitment to exchange dollars for gold.

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Meanwhile there are more and more articles discussing the need for another Plaza Accord. :eyes:

Here's one, but google the news, I was trying to find one that goes with this title listed at Prudent Bear:
The world needs another Plaza Accord - Bernstein, FT ($) (11/23/2004 10:09 AM)


http://www.atimes.com/atimes/Global_Economy/FK19Dj01.html

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Yesterday, Peter Bernstein, writing in the Financial Times called for a new dollar Plaza Accord--bringing together the worlds’ major central banks in order to manage the dollar lower. He sited that the original Plaza Accord succeeded in reducing the dollars value by 30% from 1985 through 1987. And it the process, it helped bring the current account back into balance.

Two things: 1) the current account deficit then was about 3.5% of US GDP and now it is approaching 6+% of GDP. The dollar as the key policy tool to balance said current account would have to fall much more than 30% to achieve this task—I think. And 2) what Mr. Bernstein failed to mention in his article was this….

…the stock market crashed in 1987, after central banks “successfully” engineered a decline in the dollar. Sure, there were other mitigating factors. But the macro environment then seems similar to now. I’m not predicting anything here. I’m just giving you something to think about. Another Plaza Accord? Buy stocks and sell the dollar…but know your limits.