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SPEAKING
FREELY
Crisis towers
over the dollar
By W Joseph Stroupe
Speaking Freely is an Asia Times Online
feature that allows guest writers to have their say.
Please click here if you are
interested in contributing.
When
analyzing such matters as the vulnerability of the US
economy and the chances of its collapse, it is vital to
avoid the two extremes of "calamity howling" on one hand
and investing blind faith in the status quo on the
other. Unforeseen and unexpected attack-induced
collapses of grand proportions can and do occur. The
sudden collapse of both towers of New York's World Trade
Center, for example, took everyone by surprise - who
could have foreseen that the two towers, which survived
the massive lateral impact of two huge planes, would,
only minutes later, collapse vertically upon themselves,
their own massive weight ensuring their demise?
Structurally, the two towers were impressive
indeed. They had actually been designed to take a
lateral and direct impact of a Boeing 747 jumbo jet and
survive without collapsing. Nonetheless, certain
fundamental structural vulnerabilities did exist in the
towers. These were not entirely evident before September
11, 2001, but were hidden beneath their massive and
stable outward appearance. When those vulnerabilities
were carefully targeted and exploited, down the massive
towers came within mere minutes of the attack.
Do similar deep structural vulnerabilities exist
within the US economy? Are these currently being
exploited by the al-Qaeda and others to cause a US
economic collapse? Are the apparent strength, stability
and imposing size of the US economy deceptively masking
an imminent collapse, as the Twin Towers did? Have the
initial stages of an attack on the towering US economy,
which might bring about a vertical collapse, already
begun?
Faulty Towers
The collapse of
the Twin Towers was a harsh lesson in the realities of
the vulnerability of US infrastructure. In the case of
the attack on the towers, the planes struck near the top
of the structures. Had they struck nearer to the street
level, there might have been a chance to extinguish the
resulting fires before the primary steel structural
beams weakened. Had they struck the top, the vertical
collapses that ensued would have been highly unlikely as
the primary steel structural beams wouldn't have been
possible.
Fundamental vulnerabilities exist in
the US economy too. But there also exists a widespread
consensus that there is little real chance of a
collapse, no matter what the attack might be. Even most
contrarian experts dismiss the possibility of an actual
collapse. They generally speak only of a prolonged
"bear" period for the economy, not a collapse. The
towers also enjoyed such widespread confidence before
September 11. The previous targeting of the towers in
1993 and their survival only reinforced this misplaced
confidence.
Vertical collapse
Just
before September 11, 2001, the US economy was also
extremely unlikely to be susceptible to a sideways hit.
It did show its resilience in the immediate aftermath of
the attacks on its economic infrastructure. But the key
to the success of the attacks, from al-Qaeda's
perspective, was the igniting of the jet fuel and its
impact on the primary steel support girders. Hence it
was not the immediate result of the impact itself, but
rather the delayed result of the fire that counted. The
steel girders were the actual framework of the towers,
around which the structures were constructed. When the
flames softened the framework, the whole structure caved
in.
The US economy is also constructed around a
fundamental framework - its currency, the almighty
dollar, and the apparently firm and virtually
unbreakable international support it enjoys. Similar to
the framework of the Twin Towers that supported their
massive weight, the dollar supports a massive load of
debt, now totaling well over US$7 trillion in the public
sector alone. Much of this debt load is, in effect,
tenuously suspended at the upper portions of the US
economic structure, where it places an undue load upon
the lower, traditionally more stable part of the
economic framework. This is true for a number of
reasons.
Federal Reserve Board and government
policies over the past 20 years or so have been
extremely shortsighted, leveraging the economy's future
stability and strength by means of large and perpetual
deficit spending. The US government, and its citizens as
well, have acted as if there would never come a day of
accounting for the immense debt being amassed, that
somehow the amassing of such debt didn't matter. Nothing
could be further from the truth. And since the economic
slowdown of 2000, Fed and administrative policies have
caused a pointed and massive ballooning of very risky
forms of public and private debt, all built upon the
structural framework we call the dollar. One such form
of debt is the massive selling of treasury notes to
foreign central banks - most notably to the big Asian
economies. Another is the Fed policy of "prolonged
monetary accommodation", meaning keeping interest rates
at artificially low levels, printing new money at the
rate of nearly $1.5 trillion per year and the massive
creation of easy credit.
In the past three to
four years, debt encouraged by such policies has
mushroomed almost beyond imagination. So, in effect,
there now exists a mountainous load of debt concentrated
within the upper sections of the US economy, where it
cannot easily be neutralized to the ground level in an
orderly fashion. How much of such massive weight can the
framework, the dollar, carry and support before the
structure caves in?
Is there already a fire in
the immediate vicinity of that framework and are the
steel girders already beginning to soften? The
traditional international support for the dollar and the
US government's foreign and economic policies is
beginning to waver. Why? Because al-Qaeda has lighted a
fire of sorts in the vicinity of the dollar framework.
It has succeeded in instigating the US to take economic
and foreign policy measures that have resulted in a
loosening of the firm "girders" of international support
for dollar and US policies. Al-Qaeda has indirectly lit
the fires of controversy over the rightfulness and
permanence, and even the desirability, of continued US
global dominance in the diplomatic, economic and
military spheres.
Now that fire is raging, and
ferociously eating into the girders. Controversial and
ill-advised unilateral US economic and foreign policies
since September 11 are only fueling that fire. In the
immediate aftermath of the re-election of President
George W Bush, international support for the dollar and
for related US economic and foreign policies is
noticeably weakening, at a time when it is most needed
to support an unprecedented and mushrooming mountain
load of debt. Recently, voices from within the
government of Norway have called for a switch from the
dollar toward the euro for international
petro-transactions. The governor of the Bank of Japan
has recently stated that having the dollar as the sole
global currency is a marked disadvantage and danger, and
recommended moving toward adopting the euro as a global
currency alongside the dollar. The appetite of the big
Asian economies to continue buying dollar assets is
waning - last month the US barely achieved the $60
billion of foreign cash inflow required each month to
keep it afloat. Hence the possibility of a Twin
Towers-like vertical collapse of the US economy is
becoming greater, not lesser.
The following
highlight the extent of the mounting debt and the risk
involved:
The total US public national debt now exceeds $7
trillion.
When Social Security, Medicare, Medicaid, military
and government pensions are added in, the total national
debt exceeds $51 trillion, according to Fortune magazine
- that's nearly five times the gross domestic product
(GDP) .
The current year's deficit alone approaches $1
trillion when you add the off-budget items.
Derivatives (highly leveraged and enormously risky
instruments such as interest-rate futures, options and
swaps) now total $180 trillion, 17 times the GDP. Warren
Buffet calls derivatives "instruments of mass
destruction". Many financial institutions have become
highly invested in derivatives. Government-sponsored
enterprises such as Fannie Mae (the Federal National
Mortgage Association) and Freddie Mac (the Federal Home
Loan Mortgage Corp) use derivatives heavily. Because of
the inherent nature of derivatives, these instruments
and those using them are extremely sensitive even to
small and moderate interest-rate increases.
The total US consumer debt is more than $8 trillion.
The Japan Times recently stated, "Stephen Roach,
Morgan Stanley's perceptive economist, drew attention to
the fact that some of the numbers are nothing short of
frightening. The US currently has $38 trillion in debts,
and there is a $54 trillion federal funding gap - the
difference between what the government is committed to
pay out and what it will receive in tax revenues."
The Fed has kept interest rates artificially low
for long, thereby creating enormous amounts of cheap and
easy money and has also pursued a policy of "monetary
inflation" (declining the value of the dollar) by
printing nearly $1.5 trillion a year. These prolonged
policies have artificially created huge and growing (1)
credit, (2) real-estate and other asset and (3)
stock-market bubbles. However, with interest rates
rising, the bubbles are about to burst.
The
price:earnings ratio is at historic highs - a sure sign
of a general stock market bubble. "Smart Money" Warren
Buffet has mostly pulled out of the US stock market
because stocks are so greatly overpriced. What goes up
must come down, and the US stock market is way up, far
higher than can be justified by reason and facts.
The troubled dollar
Is international
support for the dollar and for US policies eroding? Yes,
it most certainly is. A powerful case can be made that
it has been US policies and actions since September 11
that have resulted in a powerful upswing in terrorism
worldwide along with an equally powerful elevation in
Middle East instability resulting in sustained crude oil
price hike and a resulting dollar decline, both of which
are threatening to render serious damage to the big
Asian economies. Firm international support for the
dollar is certainly flagging. The largest Asian central
banks have gone on record that they are curbing their
purchases of US debt. And they are also diversifying
their huge reserves, steadily moving away from the
dollar. The risks have simply become too many and too
serious.
International fears of a disorderly, or
possibly even a catastrophic, decline in the dollar have
been pointedly heightened. Asian central banks are being
forced by the varied and serious risks to hedge their
bets, not wanting to be ill-prepared in the event of a
disorderly decline in the dollar. Russia is also
steadily decreasing the percentage of its reserves
denominated in dollars, moving toward a level of 50:50
split between dollars and euros. Russia is the key
player here, the one the entire world is intently
watching. It alone can play the key role in either
restoring the flagging international support for the
dollar, or completely undermine its remaining support,
precipitating a vertical collapse.
President
Vladimir Putin has stated both publicly and privately
that invoicing Russia's crude-oil and gas exports to the
European Union in euros instead of in dollars makes very
good sense for both Russia and the EU. Putin is known to
have very close relations with "old Europe", primarily
Germany and France. His statements and those of German
and French leaders have even on occasion drawn attention
to the fact that US global dominance fundamentally rests
on the fact that the dollar is the international
currency, and that if an exit from the dollar were to
occur in the sphere of global petro-transactions, the
effect would be seriously to undermine that global
dominance. Furthermore, a number of oil-exporting
countries have already gone on public record as to their
preference to make an exit from petro-dollars in favor
of petro-euros. They have indicated that if Russia
begins such a move to petro-euros, they will rapidly
follow Russia's lead. The net effect would be a rapid
international abandonment of the dollar as the
international currency, which would in turn "bring down
the towers" of the heavily debt-ridden US economy.
Al-Qaeda has recently mounted a second attack on
the fundamental framework of the US economy. Its clear
strategy of attacking oil-exporting infrastructure
around the globe to tighten global supply and drive up
crude-oil prices is a further act of instigating a
raging fire in the immediate vicinity of the US economic
girders. Al-Qaeda knows crude oil is the economic
lifeblood of industrialized economies. And it also knows
the fundamental fragility and deep imbalances that exist
in the US economy in particular. It fully understands
that international support for the dollar is weakening
and that a sustained elevated crude-oil price is the key
to producing a set of circumstances in which persistent
inflation returns, requiring a set of interest-rate
hikes, which in turn will act like a needle to burst the
credit, real-estate and stock-market bubbles. The
resulting decline of the dollar will be steep and
persistent, undermining what is left of international
support for dollar.
However, one huge problem
that has been noted on the subject of executing an exit
from the dollar is the current enormous reserves held by
the big Asian economies - those reserves are largely
denominated in the US dollar. How can any of these Asian
central banks or Russia, which still holds a percentage
of its $112 billion in total reserves in
dollar-denominated assets, execute an exit from the
dollar without simultaneously wiping out the immense
value of their own dollar reserves? On the surface, that
problem seems virtually insurmountable. But is it
really?
If we look at Russia as an example, we
learn that its central bank has been moving rapidly over
the past 15 months from a 75% holding of dollars in its
reserves to a 50% holding, significantly decreasing the
proportion of its reserves denominated in dollar.
Significantly, it is also well along in an effort to
de-dollarize itself domestically in favor of the euro,
buying up its domestic dollars with windfalls coming as
a result of the elevated price of crude oil, and by that
means it is progressing steadily toward its stated goal
of "diversification" of its reserves away from the
dollar. The rest of the world is forced to watch what
Russia does in that regard.
If Russia is perhaps
positioning itself to make even a partial exit from the
dollar in the pricing of its petro-transactions, then
the Asian and other economies don't want to risk being
left out in the cold, unprepared, seeing the value of
their own huge dollar reserves undermined by a steep or
chaotic decline in the value of the dollar. They cannot
afford to ignore Russia's moves. Hence as Russia moves
to decrease the percentage of its own holdings of
dollars, so are the big Asian economies, as well as many
other economies around the globe. No one wants to get
burned in the event Russia moves to the euro.
Additionally, as the dollar continues to weaken and
crude oil continues to rise in price, having the dollar
as the preferred international currency for
petro-transactions will become more of a liability,
especially for the big Asian economies, which are heavy
importers of crude oil. This fact will tend to further
undermine Asian, as well as the rest of international
support for the dollar.
W Joseph Stroupe
is editor in chief of Global Events Magazine, an online
geopolitical magazine specializing in strategic analysis
and forecasting.
(Copyright 2004 W Joseph
Stroupe.)
Speaking Freely is an Asia Times
Online feature that allows guest writers to have their
say. Please click here if you are
interested in contributing.
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