"The Dollar Crisis" -- Anyone Reading It?

[DrPepper]

It's a new book by Richard Duncan. Its thesis is that the defacto dollar standard, created after the fall of Bretton Woods, is causing worldwide economic dis-equillibrium which threatens to propel the world into serious recession or worse.

Under the Bretton Woods standard and previous gold standards, there were automatic mechanisms to deal with trade imbalances. These controls no longer exist and the USA is running a very large current account deficit.

The book argues the incredible growth of the world's dollar supply following Bretton Woods' collapse has caused myriad credit bubbles (South America in the 1970s, Japan in the 1980s, etc). It also argues the stock market bubble of the late 1990s in the USA and current property market bubble are an indirect result of this current account deficit and the balooning dollar supply.

In order to keep their currencies' values depressed, Asian countries must funnel dollars received from export sales back into dollar-denominated investments. If they don't do this, their currencies will appreciate and ability to export reduced. So, they have invested in American equities, corporate debt, govermment debt, and other instruments. This helped fuel the bubbles in the USA.

The author believes a crash or serious depreciation of the dollar is inevitable. To help make the system more stable for the future, he recommends a world-wide minimum wage and more monetary oversight by a global body, such as the IMF.

I tend to agree with his analysis of the problem and likely continued depreciation of the dollar. But, I'm no fan of the IMF and most of his solutions seem politically impossible at least until there is an absolute crisis.

[DrPepper]

1. Predictions

Some of the predictions of the book seem to have already come true. The book was recently released but seems to have been written mostly in 2002.

"It is quite likely that by 2004, if not sooner, the budget deficit will exceed the record of $290 billion set in 1992." (pg. 86)

We're already near $500 billion.

"In an environment of generally deteriorating credit quality, foreign investors will be reluctant to provide further credit to the financial sector of the United States." (pg. 110)

European Central Bank said a few days ago that it will curtail its investments in Fannie Mae and Freddie Mac and recommended other European banks do the same.

[DrPepper]

2. USA's Budget Deficit Helps the Dollar in Short Term

"The fate of the dollar in the near term may hinge on how quickly and by how much the U.S. budget deficit widens. Very large deficits exceeding US $500 billion annually would supply the secure dollar-denominated assets needed to recycle the rest of the world's dollar surpluses." (pg. 119)

Now I wonder if Bush wants budget deficits to keep the dollar from collapsing, or at least to engineer a softer landing.

[phgnome]

4. Not Without a Fight

I haven't read the book but I've been thinking about the dollar a lot. The dollar will not depreciate significantly without a fight, history has shown. I think what the US is experiencing -- every country goes through a similar period when the country has been an economic powerblock for too long.

I can't say I'd know what I'd do if I were in Bush's shoes ... there isn't really much he can do, maybe aside from going to war. The war with Iraq is only the tip of the iceberg, the roughest part has yet to come (i.e. world war). I wonder if there are futures on the prospect of a world war. The shit has not yet begun to hit the fan with Iraq.

It appears that war is inevitable because the greater he (or any other individual that may become president, for that matter) gets the US into debt, the more difficult it becomes to get out of that debt. Yes, in the short term, he may cushion the fall but the more debt that is gained the harder the fall becomes. I understand his conventional wisdom for cutting taxes but conventional wisdom cannot be applied to a situation of unconventional over inflation of the dollar.

I still think a global space race would help tremendously. If the Bush administration wants to pursue more propaganda, it should be pushing an international space race and begin by taking the initiative to involve even poorer countries. Make everyone literate so that they may contribute (and the country has a prospect of being a consumer later on). It will make room for further economic expansion (into places outside our atmosphere that will take economic efforts to sustain). Remember, the name of the game is not just the dollar figure or the clearing of the deficit: it is to spur economic activity and get the global money flowing again doing something productive.

We need to scrap the capitalist-individualist way of doing things and we need to do it fast.

[phgnome]

5. But...

at the same time, taxes cannot be raised too much again at this time, either -- raising taxes could hurt the economy further, as well.

[Boom_cha]

3. I read it

and thought it was pretty good.