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The crisis and the dollar
By Tim Anderson
Optimistic comments by US President Obama on his country’s financial crisis are premature. In mid April he suggested there were “signs of progress”. Federal Reserve chief Ben Bernanke also claimed there were “tentative signs” the contraction was “calming”.
This is standard stuff from those accustomed to reading short term markets and ‘talking up’ the economy. However I suggest the US crisis, in particular, has not yet reached its lowest point.
The main reasons for this are that the mountains of bad debt (‘fictitious capital’) have not yet been fully accounted, private capital is still largely on strike (therefore there is little new productive investment) and mass unemployment is still growing, with a accumulating contractionary impact on the US economy.
Neoliberal policies in the US and many other countries, which promoted wide ranging privatisations and largely disqualified public investment, have ensured that state investment (as opposed to subsidies for corporations, housing and consumption) will compensate little for this deficit in private investment. This means years of stagnation.
Another reason the US economy has not yet hit ‘the bottom’ is the US dollar. Any major shift away from the US dollar in international trading would trigger a devaluation, which would further damage US purchasing and foreign investment power and, in turn, general economic capacity.
In any other country this devaluation would have happened already. Indeed in the Asian Financial Crisis of 1997, currency collapses mostly preceded the capital flight, financial collapses and broader economic crisis.
In the case of the global crisis triggered by US finance, the US dollar has so far held up, indeed has appreciated to some extent. The substantial reason for this is the use of the US dollar as the main trading currency, over the past 65 years. A secondary reason has been the more recent global switch from investment stocks to bonds, mainly denominated in US dollars. But this will not last.
US economic decline over the past two decades, combined with the New York centred meltdown of the last year, has convinced most outside the US that the dollar is not the solid store of value it once was. Great risks are seen in having all one’s ‘eggs’ in this ‘basket’.
The other major trading powers, all holders of trillions of US dollars, have not been able to offload their dollar reserves, as they will all lose in a big dollar devaluation. However when ‘diversification’ gets a ‘head of steam’, when they escalate their use of other currencies in trade, they will likely trigger a crisis of confidence in the dollar.
They know this, have cautiously spoken of ‘diversification’ for some years but have done little, until recently. That is now changing.
Yet no single currency seems likely replace the US dollar. Rather, several regional and large national currencies are swinging into operation.
The Euro is already a major regional currency, arguably the strongest in the world. The Germans have made it clear they do not want the Euro to take the place of the dollar, because of the disadvantages in discipline and over-appreciation. Nevertheless the Euro will serve as one refuge.
In Latin America in November 2008 the ALBA grouping of seven nations adopted the ‘Sucre’ as a ‘virtual currency’, to denominate the large government to government exchange between those nations. An ALBA commission has been set up to study wider use of the Sucre. President Chavez of Venezuela has also proposed use of a ‘Petro’ to the oil exporting nations.
In East Asia, a pre-existing dollar-linked Asian Currency Unit (ACU) seems likely to break its dollar linkages. The ‘ASEAN plus three’ (i.e. plus China, Japan and South Korea) have been developing the ACU project in recent years, influenced by the European process and with the idea of an Asian Monetary Fund. The recent commitment of $120 billion to back Asian currencies has strengthened these moves.
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