The End of King Dollar?
![[The Economist, U.K.]](http://www.economist.com/images/20071201/4807LD1.jpg)
Has the domination of the greenback been brought permanently to an end? According to this op-ed article from France’s Le Monde, the dollar has truly been dethroned, and now it’s time to confront the consequences of a brave new monetary world.
“The dollar has been dethroned; the monetary multi-polar world has been born. How will it turn out? … the post-dollar monetary world promises to be neither more stable, nor more just.”
By Eric Le Boucher
Translated By Julian Jacob
November 8, 2007
France – Le Monde – Original Article (French)
Will the decline in the dollar accelerate out of control? Will the euro, inflated like a balloon, rise without limits to $1.55, $1.60, $1.70 or more? As the headline in the British weekly The Economist said last week, this black scenario brings “panic” to financial circles . The crash of the dollar isn’t the most likely scenario, but it’s no longer regarded as impossible.
Since abandoning its convertibility into gold on the 15th of August, 1971, the dollar has lost more than a third of its value against all other currencies. The fall of the greenback, therefore, didn’t begin yesterday. It has already been shadowed by crises, particularly in the late 1980s when the Japanese sumo seemed to disrupt the American empire. But neither run-of-the-mill devaluations nor other types of crisis have managed to challenge the supremacy of the dollar as the linchpin of the global monetary system.
On the contrary. Emerging economies in Asia and the wealthy Persian Gulf countries have, for the sake of convenience, attached (‘pegged’ in financial jargon) their currencies to the dollar. We could say that the system born of the 1944 Bretton Woods Agreement , which died precisely on the 15th of August, 1971, has been de-facto restored. Outside continental Europe, the planet has resumed a virtual worldwide monopoly – creating a “quasi-dollar zone.” It’s a system that economists have called Bretton Woods II .
And it is this Bretton Woods II that now threatens to come completely apart. The dollar is now subject to an immediate and long-term lack of confidence.
[Editor's Note: Some economists have referred to the system of currency relations which evolved after 2001, in which currencies, particularly the Chinese renminbi, remained fixed to the Dollar, as Bretton Woods II. The argument is that a system of pegged currencies is both stable and desirable ].
The first factor is the weakness of the American economy. Will there be recession, or not? Martin Feldstein, a former advisor to Reagan, now estimates that there is a 50 percent chance of a dip. Clinton advisor Larry Summers believes there will be a recession, and predicts that it will be long, extending “beyond 2010.” To allow itself some breathing space the Federal Reserve is tempted to lower interest rates – but only reluctantly – because this would risk rekindling fears of inflation. There is talk in the United States of a return of stagflation – weak growth with inflation – a terrifying hydra that hasn’t been seen in twenty years. All of these perspectives badly tarnish the luster of the dollar.
The second reason is the sub-prime crisis. It is now believed to be under control, but after a fortnight it has re-emerged, casting doubt in the soundness of American banks (what will be the real limit of their losses?). And will it worsen in early of 2008? In terms of the dollar, none of this is reassuring to investors.
The third element, better known but weightier still, is the trade deficit. It shrunk a bit due to the decline in the greenback, which makes American-made products more competitive. But the trade gap remains at 5.5 percent of GDP: the dollar would have to devaluate significantly more to balance the books and eliminate the deficit.
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6 Responses to “The End of King Dollar?”
A sure signal of the begining of the decline of USA’s greatness and power in the world.
While the couple of quotes selected above are real people’s opinion, these are clearly cherry-picked from a significantly diverse pool. The CEO’s of the Business Roundtable are nowhere near as pessimistic……and one might argue that as vile and corrupt these folks are, they are a wee bit closer to what’s actually happening in terms of orders, production, etc.
And as far as the demise of the dollar, Monsieur Froggo should not forget Mark Twain’s admonition.
Yes, I’m sure there will be a few years of 1.3 to the Euro. But, are there none old enough here to remember the .67 to the Canuck, .8 to the Euro and 1.45 to GBP?
Oddly enough, while the French might love to see the demise of the US and its USD, the two outifts that could really bring it about……OPEC and China….have very consciously avoided aiding the fall.
While Casual is correct that factors like productivity are significant, they only represent what is of impediate importance to the CEO’s.
Job creation, for example, is way down compared to the past, and that will eventually impact on buying power.and the sustainability of the middle class, which is what keeps the ball rolling.
While it’s not even close to being time to panic, the American way of pooh-poohing bad news in favor of patriotic defense of conditions would be the absolutely worst reaction.
We have serious problems, and we’ve got to face up to them.
A recession occurs in both governments and individuals and families for one over ridding reason.
Debt.
A nation or an individual has a certain capacity to borrow X numbers of dollars and still maintain viable economic policy. Once this point is exceeded it no longer becomes a viable policy and a recession occurs.
A recession is simply the markets way of saying, okay you’ve spent…..now you have to pay back what you owe.
Therefore I have to agree that a recession is in the offing and will come about due to the Democrats who get in office and immediately raise taxes to try and pay off the debt. They will be met with a recession because a teetering economy will not be able to assume the extra debt that increased taxes put on its shoulders.
How serious it will be? I fully suspect that it will last 5 to 7 years and that unemployment will reach close to 10 percent in the USA and 18 percent worldwide.
Let me also add that if we had more tax cuts that would simply delay the inevitable. This nation must go thru the painful process of balancing the budget, paying down the debt and returning to fiscal responsibility. As a nation the United States is Bankrupt. The only reason she has not gone the way of extinction is that she continues to have Cash flow. Cash flow solves a lot of problems for a finite period of time. In this case the USA and the burden she took on in Iraq will prove too much for the country to overcome.
This is precisely why everyone wanted to let another 100,000,000 Immigrants into this country…….it would solve nothing but it would increase the cash flow and keep the country expanding until such time as the demise of the USA was so forceful as to force the entire world into a depression.
Poor economic policy by the Right will be the direct result of Americas demise. Ronald Reagan did not mean for the Country to go into hock perpetually. However the Right has lost their freakin mind when it comes to fiscal policy.
This nation is doomed unless we turn it around Today. If Global warming dont kill us all, Republican fiscal policies WILL.
We need to account for future as well as present liabilities. The federal government really should be required by law to provide accounting information, including a balance sheet and income statement (the Budget of the United States is insufficient) according to the same Generally Accepted Accounting Principles (GAAP) that businesses are sought to provide. State and local governments (often with large future liabilties for retiree income and health benefits) also need to be subject to GAAP.
Any new tax increases should go to debt service, and hopefully someday there will be not only a reduction in growth of, but a true reduction in, spending, with the money redirected to debt service.
The dollar may be somewhat weaker, but is no more doomed than the use of English throughout the world.