What explains the paradox of the dollar's sharp rise in value against other currencies (except the Japanese yen) despite disproportionate US exposure to the worst financial crisis since the Great Depression?
The answer does not lie in improved fundamentals for the US economy or better prospects for the dollar to retain its reserve currency role.
The rise in the dollar's exchange value is due to two factors.
One factor is the traditional flight to the reserve currency that results from panic. People are simply doing what they have always done. Pam Martens predicted correctly that panic demand for US Treasury bills would boost the US dollar.
The other factor is the unwinding of the carry trade. The carry trade originated in extremely low Japanese interest rates. Investors and speculators borrowed Japanese yen at an interest rate of one-half of one percent, converted the yen to other currencies, and purchased debt instruments from other countries that pay much higher interest rates. In effect, they were getting practically free funds from Japan to lend to others paying higher interest.
The financial crisis has reversed this process. The toxic American derivatives were marketed worldwide by Wall Street. They have endangered the balance sheets and solvency of financial institutions throughout the world, including national governments, such as Iceland and Hungary. Banks and governments that invested in the troubled American financial instruments found their own debt instruments in jeopardy.
Those who used yen loans to purchase, for example, debt instruments from European banks or Icelandic bonds, faced potentially catastrophic losses. Investors and speculators sold their higher-yielding financial instruments in a scramble for dollars and yen in order to pay off their Japanese loans. This drove up the values of the yen and the US dollar, the reserve currency that can be used to repay debts, and drove down the values of other currencies.
The dollar's rise is temporary, and its prospects are bleak. The US trade deficit will lessen due to less consumer spending during recession, but it will remain the largest in the world and one that the US cannot close by exporting more. The way the US trade deficit is financed is by foreigners acquiring more dollar assets, with which their portfolios are already heavily weighted.
The US government's budget deficit is large and growing, adding hundreds of billions of dollars more to an already large national debt. As investors flee equities into US government bills, the market for US Treasuries will temporarily depend less on foreign governments. Nevertheless, the burden on foreigners and on world savings of having to finance American consumption, the US government's wars and military budget, and the US financial bailout is increasingly resented.
This resentment, combined with the harm done to America's reputation by the financial crisis, has led to numerous calls for a new financial order in which the US plays a substantially lesser role. "Overcoming the financial crisis" are code words for the rest of the world's intent to overthrow US financial hegemony.
Brazil, Russia, India and China have formed a new group (BRIC) to coordinate their interests at the November financial summit in Washington, D.C.
On October 28, RIA Novosti reported that Russian prime minister Vladimir Putin suggested to China that the two countries use their own currencies in their bilateral trade, thus avoiding the use of the dollar. China's prime Minister Wen Jiabao replied that strengthening bilateral relations is strategic.
Europe has also served notice that it intends to exert a new leadership role. Four members of the Group of Seven industrial nations, France, Britain, Germany and Italy, used the financial crisis to call for sweeping reforms of the world financial system. Jose Manual Barroso, president of the European Commission, said that a new world financial system is possible only "if Europe has a leadership role."
Russian president Dmitry Medvedev said that the "economic egoism" of America's "unipolar vision of the world" is a "dead-end policy."
China's massive foreign exchange reserves and its strong position in manufacturing have given China the leadership role in Asia. The deputy prime minister of Thailand recently designated the Chinese yuan as "the rightful and anointed convertible currency of the world."
Normally, the Chinese are very circumspect in what they say, but on October 24 Reuters reported that the People's Daily, the official government newspaper, in a front-page commentary accused the US of plundering "global wealth by exploiting the dollar's dominance." To correct this unacceptable situation, the commentary called for Asian and European countries to "banish the US dollar from their direct trade relations, relying only on their own currencies." And this step, said the commentary, is merely a starting step in overthrowing dollar dominance.
The Chinese are expressing other thoughts that would get the attention of a less deluded and arrogant American government. Zhou Jiangong, editor of the online publication, Chinastates.com, recently asked: "Why should China help the US to issue debt without end in the belief that the national credit of the US can expand without limit?"
Zhou Jiangong's solution to American excesses is for China to take over Wall Street.
China has the money to do it, and the prudent Chinese would do a better job than the crowd of thieves who have destroyed America's financial reputation while exploiting the world in pursuit of multi-million dollar bonuses.
Paul Craig Roberts, a former Assistant Secretary of the US Treasury and former associate editor of the Wall Street Journal, has held numerous academic appointments. He has been reporting shocking cases of prosecutorial abuse for two decades. A new (more...)
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can be blamed on the past 3 Republican administrations of Reagan, Bu$h I and and Bu$h II with the bloating of government and its runaway deficit spending that your great grandchildren will still only be paying a fraction of the interest accrued.
What else should I expect from a wife and political party swappin b rated senile sap Reagan, the "Voodoo Economics" Bu$h I who was supplying weapons to Reagan's "Freedom Fighter" Saddam the GOP re-labeled a "Terrorist" 6 months before Desert Storm II, and Dybua a convicted drunk driver and won't disclose the last time he's done cocaine, falsely accusing another Reagan Freedom fighter Osma bin Laden of 9/11 based on lies and deceit, to begin the War Of Terror agenda spawned by the very felons of the Bu$h II cabal, who were a part of the Reagan regime.
While championing deregulation of the financial markets that brought the S & L scandle, Junk bonds, the Dot.Com scam, the CDO scam, along with the 700+ billion bailout, that rewards the very "Financial Wizards" with golden parachutes who should be in prison.
Spending trillions on "Star Wars" pie-in -the-sky can't hit a target without pre-trajectory knowledge worthless missile system.
Don't even think about using the lame excuse of a "Peace Dividend", Reagan had not one iota to do with the collapse of the former USSR, but everything to do with the trillions added to the US deficit. The Pentagon has always received increases in its budgets over the years, while Russia has become a leaner and meaner threat to US imperialistic interests abroad.
Try as you might attempt to resurrect your demigod hoot of a "Family Values" schmuck Reagan, the crap will always stick to his gutter-trashed image.
by
Stanimal (2 articles, 226 quicklinks, 38 diaries, 1254 comments [233 recommended, 2 rejected]) on Thursday, Oct 30, 2008 at 4:40:02 AM
For posting non-politically obfuskated and redacted Truth about reality?
If people don't begin to uncover many of the the roots of today in the greedy, extremely dishonest, thieving, blackops laden, authoritarian police-daddy, hard, cold hearted Reagan & Bush1 terms of office, the deregulation, the corporate welfare and favoritism, the beginning of a new and extreme level of propaganda as part and parcel of domestic policy, inc. intentionally designing & constructing appearances opposite to the deeds secretly done......
The mass slaughters carried out for years in Latin American by the "Contras", covered up by calling the death squads "freedom fighters", while also trading guns to them for cocaine then marketing the cocaine in the US......
<> The weapons deals with Iran, the heinous dealings with preventing release of the hostages held in Iran until after Reagan could claim this success too, personally, like so many other lawless and deadly deeds.......
There is too much to mention it, but people surely need to wake up from THAT false mythologically structured dream ALSO, or they will soon start this same whole soul-less course all over yet again........!
(-:G
by
G Achin (1 articles, 0 quicklinks, 3 diaries, 110 comments [9 recommended, 0 rejected]) on Thursday, Oct 30, 2008 at 6:30:54 PM
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