Most people of a certain age who have
spent time in Europe and the United States will
remember the legendary Monty Python Dead Parrot
sketch, which involves an irate customer bringing
back a parrot that the pet shop owner has sold
him, only the bird is actually dead and was nailed
to the perch.
The few readers not familiar
with the sketch will simply have to take my word
that this is one of the greatest moments in
television history, although it is fairly trivial
to search the Internet and watch all the various
versions that will pop up. Readers in some
countries where the Internet is proscribed may
find it tough, but hey, if you made it to Asia
Times Online, the next few steps cannot be that
difficult.
It is impossible to improve on
the original, but perhaps there is
a
version
of it somewhere that goes with the customer taking
the dead parrot to another person, who only claims
to have passed it on in situ from another
customer, and so on till the parcel finally
arrives at the original seller, namely the US
government.
Watching Fed chairman Ben
Bernanke and his comrade-in-arms, Treasury
Secretary Hank Paulson, over the course of the
past two weeks, I cannot help but imagine quite
what kind of scenes would be playing in Washington
when irate central bankers holding the US dollar
call in to complain.
A tragedy of
inflation and global recession as this may all
well end up to be, there is the funny side. The
world's chosen reserve currency, the one constant
in a changing financial landscape for the past 30
years, is now officially relegated to second-class
status thanks not so much to its champions in the
US government, but because of buyer behavior -
that is the buyers that are constantly passing the
parcel of damaged goods that the US dollar has now
become.
Nailed to its
perch My general disregard for central
bankers has been summarized in a previous article
How central bankers could save the
world (Asia Times
Online, December 8, 2007), which captures the
vicious cycle of Asian countries along with other
emerging nations holding too much of their
citizens' hard-earned savings in the form of US
dollar assets, thereby both damaging their
citizens through the artifact of higher inflation
at home, but also increasingly causing asset
bubbles around the world - of which the current US
subprime problem is but the most recent version.
All this happens because Asian central
banks have artificially nailed their currencies to
the US dollar through currency management regimes
- also known as pegs. China is by far the biggest
offender on this front now, but is only following
the lead of others such as Japan and South Korea
before it in following the idiotic International
Monetary Fund orthodoxy of turning one's country
into a factory for US consumption goods.
China's government has a preoccupation
with employment; due to a political structure that
ill affords economic volatility. Mao Zedong's
"iron rice bowl" for China is however subjected
first to the inflationary heating of global growth
and excessive Chinese investment in some sectors
such as real estate, and must now face a new cold
spell from a global recession as first the US and
then Europe with Japan all slide into negative
economic growth.
Increasingly, it appears
likely that while GDP growth will remain
relatively strong in China at 6-8% in the next
five years, it will still slow down enough to
expose structural weaknesses. The iron rice bowl
for all intent and purposes is going to crack as
Chinese exporters first lose their major market
and have to start firing people, while a belated
widening of the currency trading band will keep
local asset prices as well as food relatively
unaffordable for millions of people.
In
turn, this means more government mismanagement in
the form of price controls (see article "Pork-barrel politics", Asia Times Online, June 16, 2007)
and political upheavals as people inevitably rise
up against a government using pretexts such as
endemic corruption. Help though may come from an
unexpected corner for China.
Other Asian
countries across both the Pacific Rim and the
sub-continent have followed similar policies, with
India serving as a notable exception last year as
it allowed its currency to rise mainly to subvert
inflation at home. This year, the complaints of
local businessmen and panicked selling in the
local stock market by foreign investors have
pushed the Indian rupee back towards marginal
depreciation, although in my view the trend is
unlikely to survive for too long.
Another
thing that is unlikely to survive into the next
year will be the Indian government, as the usual
compromise budget statement of last week shows
accelerated revenue deficits even as capital
spending remains woefully inadequate. Growth in
India is likely to slow down to the 5-7% range for
the next five years and while that is still strong
enough for most countries, it is just not good
enough against the country's potential growth of
over 8%.
India being a raucous democracy,
I expect this unnecessary slowdown in growth will
help push the current government out of power
within 12 months when national elections are due.
Pining
for the fjords Meanwhile, back with
the dead dollar, its patrons are concocting new
brews to keep the charade of life going, much like
the shop owner in the Monty Python sketch hits the
cage to demonstrate that the parrot is indeed
moving. One such action is aimed at holders of my
favorite reserve, namely gold (see In gold we trust, Asia Times Online, September 8,
2007).
The US government is now forcing
the IMF to sell its gold holdings, as it attempts
to puncture the value of the precious metal and
hopefully jolt some current holders to buy US
dollar-denominated assets instead. Presumably, the
idea for the IMF is to sell its gold and buy some
US financial assets, in what constitutes an eerie
turn to fact from satire at least from this
columnist's perspective (see A good use for the IMF - Bail out
America, Asia Times
Online, March 17, 2007). As all the central banks
that bought into the myth of US financial
companies have realized of late, this course of
action will simply lead to more losses for the IMF
and leave the institution at a new nadir of
relevance as far as the emerging financial order
is concerned.
The question then becomes
what can replace the US dollar and an obvious
contender is the euro. The more sensible policies
of the European Central Bank have in contrast to
the Fed allowed the euro to gain much ground and
it is now worth 50% more against the US dollar
than the bottom that was reached not over five
years ago, in the days before the "war on terror".
Unfortunately though, Europe doesn't have
the demographic potential to sustain itself in the
top spot, while its politicians are short-sighted
beyond belief by pursuing idiotic socialist
policies at a time when a comprehensive embrace of
capitalism is called for. Between politics and
demographics, it is difficult to see Europe
emerging as anything other than purveyor of
dangerously expensive goods to an overtaxed
population. In time, as today's computer
manufacturers in that continent found out, the
rest of their industrial space will not be so much
taken over as overtaken by Asia.
Thus, the
euro in the Monty Python sketch would be the slug
that is offered by the shop owner to mollify the
customer - yes, but does it sing? Not really -
well that's no substitute, is it?
Searching for other substitutes would mean
skipping all of the Middle East - not just for the
volatility but also because of the absence of
meaningful economic value addition. As sellers of
commodities, Middle Eastern nations could never
get their currencies as reserve holdings for
processing nations such as Asian countries. For
much the same reason, countries in Africa and
South America are rendered irrelevant for this
purpose.
So what replaces the US dollar in
global reserves? Like a kingdom where the regent
is dead and lies rotting on the throne, the world
searches around for a new prince who will take the
mantle and all that goes with it. To be continued
...
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