No Exit
by Charles Mackay, Friday March 11 2005
wallstreetexaminer.com
Japanese Prime Minister Junichiro Koizumi found out Thursday that there is no exit from the ad-hoc Bretton Woods II US dollar regime.
Friday's edition of the Japan Times quotes Koizumi as saying, when talking to a parliamentary committee about diversifying foreign exchange assets, "I think it's necessary to have diversity. At the same time, taking into account what is profitable and what is safe, the overall situation must be considered".
Yes, the situation that must be considered is that there is no way for Japan, China, and others like South Korea and Taiwan, to leave the dollar based currency regime. Both the Ministry of Finance and the Bank of Japan quickly discounted what Koizumi had stated, with comments like "it would be unwise for us to be selling dollars".
Like some existential play, the actors played by the foreign central banks, can't find a way to leave the dollar regime. They are left to attack each other, over and over again.
The loss of one leg of support, especially if it is from Japan or China, could bring the entire support system for the dollar crashing down. Virtually the entre world has come to realize that it is the foreign central banks of the world which hold the dollar up.
This view is not shared at the Fed. Back in the states Thursday, Alan Greenspan and Ben Bernanke both made an impressive tag team performance - battering worries about the rapidly growing current account deficit. In official, but separate speeches at different locations, the duo blamed the current account deficit on excess savings and low inflation expectations.
Bernanke's speech was entitled "The Global Saving Glut and the U.S. Current Account Deficit". The title almost says it all. Other countries are to blame here. The US is just a good place for other countries to invest.
Greenspan's comments were simply called "Globalization". The Maestro believes that Adam Smith's "invisible hand" remains at work on a global scale. Although he does perceive the current account as huge, the US will make a smooth transition to a lower current account deficit. Somehow.
Yes, these shows will end one day, thankfully. The dollar can not survive current account deficits of over $700 billion per year indefinitely. The Asian central bankers will find a way out - eventually - and Koizumi can pursue a retirement career out of the theater. Greenspan will retire, and maybe Bernanke will just move on to the Council of Economic advisors. Meanwhile, we better all start looking for the dollar exits.
posted Friday March 11, 12 27 AM ET |
