The fundamental financial and economic problem of the global economy is the huge U.S. current account deficit. If the required amount of foreign capital is NOT flowing in, the currency of that nation crashes. The nation in question here is the U.S. and the currency is the Dollar.
The Europeans know this. Greenspan know this too. But President Bush, clearly doesn't! He made it clear that he doesn't in his budget speech.
With Japan and all the other Asian economies going fast into the tank, the Europeans already know that the Asians cannot come to the aid of the U.S.A. by buying their debt as they have been doing for years now. That must be concerning them, because they know that the U.S. debt must be bought by someone.
Why hold on to dollars? Sure, GDP in the 4th quarter of 2000 was .9% in France, .4% in Germany and 1.0% in the USA. Just wait till the official stats show that growth has gone negative in the US.
More than 50% of all Americans earning over $US45,000 a year are exposed to the share market. This is more than half of America's middle class and more than half of all those Americans who have a cumulative savings rate of -0.8%. The US consumer is all tapped out. U.S. markets WILL collapse when enough individual investors can no longer ignore the incompetence and ignorance of those in charge of U.S. policy. Foreigners will sell their dollars big time when it finally hits home that their economies are nothing more than vastly over-geared export industries and the US cannot save them this time! Time to restructure from within and stop playing vassal to the US. That time is coming soon and the US won't be able to do a damn thing about it.
Moreover, the gap between official U.S. interest rates and EU rates is now just 0.25%. That greatly increases the dangers of a sudden massive fall in the value of the U.S. Dollar should the U.S. stock markets REALLY fall off a cliff. But U.S. interest rates are one thing, Federal Reserve "re-liquefication" is something entirely different. The facts are that Greenspan is literally hammering fresh cash into the U.S. monetary and financial system at hair-raising rates. The U.S. MZM money measure is being inflated at an annual rate which now exceeds 20%!
Only the Europeans (at this point) stand with a genuine alternative . All that the Europeans have to do is to increase the official Gold reserve behind the Euro from the present 15% to perhaps 25%. Presto, the Europeans have restabilised the ECB's reserves as well as having restabilised the reserves of all the other participating European Central Banks. But, should the U.S. Dollar in its fall in international value also fall in value against GOLD, then the ECB and the Europeans would not have to do anything. The increase in the value of their Gold would compensate for the decrease in the value of their Dollars.
If as little as 10% of foreign holders of U.S. shares were to sell and then exit the U.S. Dollar, not only would the U.S. stock markets fall further, the U.S. Dollar would also fall as foreign holders exited. Were some other foreigners to decide to sell U.S. commercial bonds or Treasury paper and then exit the Dollar, it would fall and U.S. commercial interest rates would climb, pressuring the stock market more.
The breaking strain will come when foreign selling in the U.S. financial system - stock markets, banks, bond markets, and especially the U.S. Dollar - becomes so great that something gives way. Here, it truly does not matter where the first real break happens. If the break is large and real enough, it will be shown by a fall in the U.S. Dollar. The U.S. Dollar is THE Biggest Bubble that ever was! There is no reason for foreigners to hold their dollars as this economy sinks into deep recession and defaults and derviative blow ups come into play. |
