The Last Days Of The Dollar

From January 2008:

I’ve never sat in an economics classroom, but some things I think ought to be self evident.

Suppose you work hard to earn money, which you invest in buying gold. Then imagine, when your money is all in gold, the price of gold begins to drop – and drop. What would you do? Stand by and watch your savings melt away? No, you’d sell that gold while it was still possible to sell it and invest it all in something else, right?

This is common sense.

For some reason, though, common sense seems lacking in the professional economists who seem to rule our world these days.

I mean, it’s not as if the US dollar hasn’t been sliding steadily for a year or more now and shows no signs of halting its slide. What this means is that the foreign exchange reserves of nations and corporations are also, in real terms, depreciating steadily – if, that is, they hold their reserves in dollars.

All these days they didn’t really have a choice. Nobody holds foreign exchange in the form of, say, Thai ringgits or Ghanaian cedis. Therefore the countries of the world had no choice but to buy up US dollars, keep the value of the currency high, and indirectly subsidise the enormously, indeed criminally, wasteful American lifestyle. But that’s about to change.   

In the first place, there is now an alternative – the Euro. In the analogy I mentioned, one would have to hold on to gold if everything is also depreciating or if everything is uncertain in value. But if, say platinum, is stable in value, it would make sense to dump gold and buy platinum, right? And it would make sense to do this before everybody got the same idea and the tipping point came when everyone began dumping gold on the market and prices crashed through the floor.

Sooner or later, this is going to happen. Nations or corporations, no one enjoys seeing their savings devalued. They will begin decreasing dollar holdings in favour of Euros or maybe even Chinese yuan. More dollars in the market means lowered prices for the dollar. This happens when anything, be it biscuits or tomatoes, floods the market. Prices crash. Sooner or later, panic selling begins and the prices fall so low it is no longer attractive to keep the material on the market. I can see this coming for the dollar. Why it hasn’t yet is something I intend to discuss in a moment.

It’s not as if the US doesn’t see the danger of this tipping point. Among Saddam Hussein’s many sins was that he shifted Iraq’s foreign exchange reserves from the dollar to the Euro. Unforgivable. But the US’ military power can’t exactly overawe anyone any more. It’s stuck in Iraq and Afghanistan, and unable to muster the resources to invade Iran. Economically it’s being challenged by Russia, China, andEurope. It’s got its back to the ropes.

The problem is that if you wish to be a global hegemon you have to be able to pay for the privilege or force others to pay for it. The US can’t pay for it and increasingly the other nations don’t want to. The invasion of Iraq hasn’t yielded the promised oil bonanza; it’s turned instead into an economic sinkhole. Afghanistan is dangerous and unstable; the pipelines from Central Asia haven’t materialised to turn the economic screws on Russia and subsidise more imperial adventures abroad. It’s all very well to cut taxes for the rich. But even a child can tell you that when you spend more than the pocket money you get you end up in an untenable position unless you can get an assured source of funds, if only by nicking from your mom’s purse. Running a deficit economy is like fooling all of the people all of the time. If you can’t extort money from abroad, you can’t do it.

Maybe the slide hasn’t yet come because they’re waiting for the next presidential elections in the US to throw up an administration with a bit of sense, which will reverse the policies of the Bush regime, but even if that happens (most unlikely I think, the corporations own the candidates) it’s not going to bring the dollar back up.

There are people hoping the US is going to go back to being the boom economy of the nineties, but that’s not going to happen. It’s not going to happen for several reasons. The first is the fact that resources are running out. You can’t keep raping the earth for ever so as to live in uxorious comfort. Not only are you going to run short of the resources necessary, your helots – the people who hew your wood and draw your water, in other words the producers of what you consume, are going to get rich enough to demand a similar quality of life – which is going to reduce your available resources even further.

Then, the environment. Even the US will have to admit that something has to be done very urgently about the environment if the world is to continue to be able to support human life. Environmental policies cost money, a lot of money, which is why nations like India and Chinarefuse to let them come in the way of “economic growth”. With environmental concerns as well, the US is never going to be the huge consumer of yore again. It can’t. Which means that countries like Indiaand China had better look to find some way of surviving without serving the US market.

Since the tipping point of the dollar is coming, and will probably arrive within the next few months, you’d think the Indian government, run by an economist, would see the writing on the wall and shift to Euros. Nothing doing. I don’t know why, unless it is to please the Bush regime. Hara kiri to oblige someone who is on the way out anyway has never seemed to me common sense.

But when did politicians have any sort of sense, common or otherwise?