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Politics : Dutch Central Bank Sale Announcement Imminent? -- Ignore unavailable to you. Want to Upgrade?

To: philv who wrote (19381)	10/20/2003 3:14:31 PM
From: sea_urchin	Read Replies (1) \| Respond to of 81904

Phil > One can dismiss the past as irrelevant or one be instructed by it. ... Your choice I suppose Not only mine, also yours. The article is perfectly explicit but both you, and Mueller, who wrote it, prefer to interpret the situation as you choose. >>>Given the current account deficit in the United States of more than five per cent and a negative net foreign investment position of over twenty per cent of its gross domestic product, it is the relative stability of the US dollar that needs explanation and not the fact that the effective exchange rate of the dollar has declined by twenty per cent since late 2002. It is even more remarkable that U.S. interest rates did not have to rise as might have been expected in order to attract foreign investment as a compensation for the deficit in the current account. Balance of payments numbers such as those the United States currently has would have broken many other currencies and would have triggered severe financial crises in other countries much earlier. But the United States is different. It holds a privileged position within the international monetary system and its path to ruin may be longer and smoother than that for other nations. Nevertheless, even for the U.S. there is a limit and the country seems to be getting closer to it every day.<<< And, the difference between us is that I don't believe it. But read on ..... >>>The relative strength of the US dollar despite the deteriorating external position results from the role of the dollar as the world's global reserve currency and because the pillars on which the dollar's supremacy rests do still seem intact. Furthermore, there is not yet a ready substitute for the dollar in sight which could replace it as a functioning global currency. Compared to its potential rivals such as the euro or the yen, the US dollar has a historical and a quantitative advantage. For more than half a century, the world-wide use of the US dollar has been common practice. The dollar is the unrivalled global currency, a currency whose position as an international means of exchange rests on a prolonged experience. The dollar's origin as to its source of production is the visible power of the United States in terms of its national unity and its global military presence. Additionally, the dollar's predominance rests on the strength of the U.S. economy as there is no other economy of size which could match it in terms of productivity and innovation. All these pillars have strengthened since the early 1990s. The use of the dollar has become more widespread on a global scale with the integration of the former Communist countries into the world economy; the position of the United States as the principal global political and military player has strengthened with the fall of the Soviet Union; and, particularly since the mid 1990s, the American economy has experienced a period of outstanding dynamism and resiliency.<<< So what's the problem? He mentions foreign capital inflows >>>In the past couple of years there has been a massive fall of foreign direct investment flowing into the United States and in 2002 the flow became negative (see table 1). In 2001 the basic balance turned negative and reached 218 billion US dollar in 2002. This signifies that there is less capital inflow to compensate for the expanding current account deficit.<<< But then he adds this >>>It has been mainly due to the buying of bonds by foreign central banks that a dollar crash has been averted so far. The massive buying of U.S. bonds by central banks in 2001 and 2002 has led to an increase in global US dollar reserves which surged by 219.8 billion in 2002 reaching a total of 1,751.4 by the end of that year <<< Then he speculates as follows >>>The major buyers of U.S. debt among the central banks are now located in Asia, and here particularly in China, Hong Kong and Taiwan (see table 3). This trend—that central banks substitute private investors and thus stabilize the dollar—will hardly be sustainable <<< Why will that be? The reason these nations buy US debt is because the US buys their goods, not because they are a charity. If it didn't suit them, they wouldn't do it. >>>A situation like this which has emerged over the past few years implies an increasing financial vulnerability of the United States. If the buying spree by foreign central banks should stop or even reverse, the impact would affect the dollar exchange rate, the treasury market and the domestic price level with the consequences of a sinking dollar, a sharp rise of domestic interest rates and an increased inflation rate. It is highly unlikely that the American economy would prove resilient enough to withstand such a triple blow.<<< That has to be bullshit. What's a bit of debt to the US, anyway? And how will China, Hong-Kong and Taiwan be after they have played hard-ball with the US? >>>More than twenty years of persistently high trade deficits have led to an industrial structure which has made the United States highly dependent on foreign imports with a lack of domestic suppliers that could readily substitute dearer imports.<<< That's what no-one understands but it's called "globalism" and it's been a deliberate policy of the US --- it didn't just happen. So, clearly, it must have been thought through and there must be an advantage to the US somewhere, although clearly not to those US industries which have had to make way for foreign imports. >>>What would happen if the dollar should surpass the threshold and a crisis of confidence emerges? The consequences would not be confined to the United States itself. The dollar crisis would affect the rest of the world and it would put the current international monetary system at stake with the potential of bringing it down. While the pillars on which the dollar stands may still seem to be intact today—the statue itself may come down. But when the dollar should fall, the pillars on which it has stood, will crumble too.<<< That's the way everyone sees it but, at the moment, it's all speculation. There is absolutely no evidence for the collapse of either the US or the international economic system. The speculation continues but Mueller has no answer to the demise of the dollar. He certainly offers no solution, no remedy and no alternative and, thank God for small mercies, he does not tell us to buy gold. >>>Given the trend that the U.S. foreign debt position will continue to deteriorate, a severe dollar crisis seems almost inevitable. But this is only half of the story. The dramatic part of the enfolding scenario is that there is no ready substitute for the dollar as a global currency and that the dollar crisis will put the overall economic and political position of the United States at risk. With the loss of the privileged position of the dollar the economy would weaken and this in turn would undermine the political role that the Unted States plays presently as the world's hegemon.<<< Now he concludes with a sermon and an appeal to morality >>>International finance is closely intertwined with international politics. While a predominant role in international finance does not come without the basis provided by politics, it is sound finance on which the continuation of the dominant global role will depend later on. Both of these, however, have a more profound basis: it is basically the ethical attitude to the matters of money and finance, the deeply rooted sense for prudence and rectitude, which is required to be maintained in order to keep the privileged position.<<< Maybe someone should tell him that when it comes to international politics power comes from the barrel of a gun --- and, whether we like it or not, the US can still kick anyone's arse whom it pleases.