Page 1 of 2 DOLLAR CRISIS IN THE MAKING, Part 1
Before the stampede
By W Joseph Stroupe
Increasingly ominous clouds are gathering in what could soon be the perfect
storm against the United States dollar and against the present dollar-centric
global financial order.
This is not shaping up to be a storm that anyone is trying to initiate, not
even those who are actively driving for a new global financial order that is no
longer centered on the dollar. Instead, it will result from a correlation of
forces arising out of the deepening global financial and economic crises,
coupled with recurring and conspicuous miscalculation on the part of some of
the world's political, financial and economic leaders.
The storm has the potential to cause upheaval on a grand scale, opening the
door to swift, and largely uncontrolled, fundamental transformation.
As is widely recognized, the present financial order that is
inordinately reliant on the US dollar must some day give way to a new order
that is more balanced, stable, resilient and reliable, one that is based on
multiple currencies and that therefore won't be plagued by the extremely
dangerous structural drawback of an increasingly worrisome elemental single
point of failure (the dollar).
But if the current dollar-centric financial order should become more seriously
shaken than it already has been, perhaps even suffering a collapse, as a
casualty of the present deepening global crisis, then the transition to any new
global financial order is most likely to be disorderly, disruptive and
unmanageable rather than gradual and orderly.
We can hope - but cannot be at all confident - that world leaders and global
investors will act coherently, cohesively and intelligently enough in this
crisis so as to ensure that the policies and actions being undertaken will not
put at further serious risk the fundamental structure of the current
dollar-centric financial order, and that they will instead be effective in
bolstering deteriorating global confidence in the present order and in the
safety of the dollar, at least until we get through this crisis.
Unfortunately, we cannot be confident that world leaders know what they are
doing in seeking to resolve the crisis. Are their measures attacking the heart
of the problem, or only its periphery? Are they exacerbating the crisis, either
by enacting certain misdirected measures, or by failing to enact certain
required measures? Are they setting up conditions that make a dollar crisis and
radically increased financial upheaval virtually inevitable, by blindly pushing
ahead with a simplistic agenda of trying to spend their way out of the present
crisis?
If the dollar is being put at significant short- and medium-term risk by such
measures, then we're seriously risking plunging the global financial order into
a depth and breadth of transition that we cannot adequately control.
Investment, finance and economics are a complex mix of at times downright
illogical human psychology with the pure logic of mathematical science,
introducing possibilities for potent wild-card factors that must be taken into
consideration in any calculation.
History provides many unfortunate examples of how the psychological components
of uncertainty, fear and panic can, at crucial times, trump the components of
logic, reason, knowledge and discipline to give impetus to shortsighted and
risky policies and actions that create a full-blown crisis. Humans simply don't
always act in a rational and logical way that is in their best strategic
interests. And institutions, regulatory agencies and governments, being
composed of humans, don't always act rationally either.
All are subject to the potent influence of human psychology, which can at times
be quite defensive, knee-jerk, irrational and somewhat unpredictable. In a
crisis situation such as we presently find ourselves, the darker side of
psychology's influence is often and unfortunately magnified.
Added to this is the fact that global investment, financial and economic
systems have become increasingly complex and interrelated much faster than the
ability of experts and leaders to adequately comprehend them. This makes it
much easier to make mistakes of real consequence. This complexity also at times
prevents governments and other institutions from taking requisite bold,
comprehensive actions in the midst of crisis for fear that these may backfire
by producing some unforeseen and intolerable effects and repercussions.
Further complicating matters, investment, finance and economics are nearly
always deeply intertwined with politics, adding to potential uncertainty -
especially so in a time of deepening global crisis, when individual governments
invariably lean toward self-interest, nationalism, protectionism and
self-preservation.
To illustrate the disturbing truthfulness of the foregoing, remember when
experts and leaders confidently concluded that the free markets could mostly
regulate themselves with success; when they concluded that no housing bubble
existed in the US, but only some "regional froth"; when they insisted that
complex new mortgage-backed securities, including high-risk mortgage paper,
dispersed throughout the financial and investment system, would decrease
default risk.
Empty reassurances
Remember when the present crisis broke in 2007, the reassurances that it would
not spread beyond the confines of subprime; when it did spread, the forecasts
that Wall Street banks' losses would amount only to a total of about US$200
billion. Remember when "experts" insisted no widespread credit crunch would
result. Remember when they insisted that the crisis was unlikely to spread from
Wall Street to the real economy on Main Street?
Remember when they said the hundreds of billions of dollars of liquidity thrown
into the system would free up the credit seizure. Remember when they said the
October 3, 2008, $700 billion stimulus package and the many more hundreds of
billions of dollars in bank and corporate bailouts would move the system out of
crisis. Where are all these pseudo-intellectual ideas, beliefs, ideologies,
assessments and assurances now? On the trash heap, precisely where they
belonged in the first place.
The record inspires little confidence in the ongoing efforts of governments to
resolve the crisis, or even that they know how to resolve it. The damage and
outright destruction inflicted on vital components of the present global
investment, finance and economic orders just keeps piling up while governments
keep trying their various "solutions".
As for the newly passed $787 billion stimulus package, and its accompanying
sketchy bank rescue plan, economists and the markets widely doubt whether the
two measures are potent enough and targeted accurately enough to come anywhere
near accomplishing their stated aims.
The same is true of the perpetually disjointed and half-hearted efforts of the
Group of Seven (G-7) leading industrialized nations, whose most recent confab
in Rome ended with the customary whimper. In addition to its historic
impotency, the G-7 is now being almost totally emasculated by the broader Group
of 20 nations, to which has fallen the task of designing and constructing a new
global order to replace the present broken one. If you concluded based on the
hard facts that this crisis is spinning increasingly out of control in spite
of, and in some important ways due to, the efforts of governments to resolve
it, you would not be far wrong.
Investors, both private and official, around the globe have generally given in
to a crisis reflex psychology of extreme risk aversion and have been clutching
the US dollar ever more tightly, massively running into Treasuries as a refuge
in the mounting storm. This fact would seem to imply that global confidence in
the dollar is still fundamentally sound, despite the well-documented bruises it
has received over the past few years.
The truth is that the potential for a global dollar panic is becoming greatly
heightened, in spite of (and in part, actually because of) the dollar's recent
significant gains as a refuge for investors, the bulk of whom continue to be
distinctly risk-averse. Ironically, this massive piling onto the dollar opens
yawning new vulnerabilities and risks that either did not exist before, or were
at most very minimal.
For example, a number of experts warn that US Treasuries are increasingly
taking on the characteristics of a bubble, and they remind us that bubbles
inevitably deflate, and they rarely, if ever, do so in an orderly fashion. When
this one deflates there could be uncontrolled, perhaps even chaotic,
repercussions for the dollar.
Much discussion and debate is currently underway as to whether the US will find
sufficient global demand for the more than $2 trillion in new Treasuries coming
online this fiscal year alone. But the fundamental risks for the dollar aren't
only arising out of that fear over whether demand for Treasuries will be
sustained.
Serious risks for the dollar also arise if global demand for Treasuries is
sustained. Why? Because that would only thrust the present Treasuries bubble to
even more gigantic proportions, further warping the structure of the already
severely deformed present global financial order, magnifying the dangerous
distortions that already exist and increasing the likelihood of a
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