The dollar melts as Iraq burns
Pastor Dale Morgan
The dollar melts as Iraq burns*
The demise of the dollar has clear links to the Iraq war and the world's
loss of confidence in America's elites.
James K Galbraith
December 4, 2006 02:10 PM
The melting away of the dollar is like global warming: you can't say
that any one heat wave proves the trend, and there might be a cold snap
next week. Still, over time, evidence builds up. And so, as the
greenback approaches two to the pound, old-timers will remember the fall
of sterling, under similar conditions of deficits and imperial retreat,
a generation back. We have to ask: is the American financial empire on
the brink? Let's take stock.
It's clear that Ben Bernanke got buffaloed, early on, by the tripe about
his need to "establish credibility with the markets." There never was an
inflation threat, apart from an oil-price bubble that popped last
summer. Long-term interest rates would have reflected the threat if it
existed, but they never did. So the Fed overshot, and raised rates too
much. Now long rates are falling; Bernanke faces an inverting yield
curve and even bank economists are starting to call his next move. That
will be to start cutting rates, after a decent interval, sometime next year.
Once again, all you monetary policy buffs, in unison please:
The grand old Duke of York, he had ten thousand men.
He marched them up to the top of the hill. And marched them down
again.
This is not good news for the dollar.
The US economy is going soft faster than the inflation hawks and
growth optimists thought. Housing has been in free-fall for months. With
the new Congress anxious to display "fiscal responsibility" - cue Robert
Rubin who has moved in very fast on Nancy Pelosi - there won't be any
help next year from them. If business investment falls off, recession
could hit in 2007 or 2008. With that fear in mind, gloomy profit
expectations are setting in, and that's not good for the dollar.
The US trade deficit is near all-time records. By itself, this
proves nothing: the US supplies reserves to the world system, and it can
run any deficit that the world is prepared to finance. But, sooner or
later the world may start to get other ideas.
So here's the big question: is the age of the dollar economy
lurching toward an end? Are China, Japan, Saudi Arabia and other big
holders of T-bonds about to start a rush, or even a stately promenade,
toward the exits? Let's hope not, because the world is unprepared to
replace the dollar with anything else. The euro is not suited for the
job, and a joint dollar-euro system would need better central bankers
than either America or Europe has got. An end to the dollar system would
therefore be chaotic, inflationary, and very tough on world trade. The
best argument for the dollar has always been: it's not in anyone's
interest to bring it down.
Could it happen, though? Yes, it could. And it could be connected to
that other unfolding disaster. As the "Pax Americana" goes to hell in
Iraq - producing a nervous breakdown among the pro-war elites - let's
remember that security and finance are linked. Typically, the country
that provides global economic security enjoys the use of its financial
assets in world trade. And when the security situation changes, that
privilege can be revoked. The consequences are unpleasant. Ask the
British: after the sterling area folded, it took a generation for the UK
to come all the way back.
That is partly why Economists for Peace and Security - a group I
chair - opposed the Iraq war from the beginning. As far back as 2002, we
understood - as the economically illiterate neo-imperialists did not -
that a world system very favourable to America was on the line. And it
was not, as they seemed to think, just a matter of military might. We
knew that if the war undermined confidence in the power, good faith and
common sense of the United States, that could lead toward disastrous
changes on the financial front.
Four years in and with no end in sight, that risk may finally be
catching up to the almighty dollar.