GoldMoney Alert - 2 April 2004

What Future for the U.S. Dollar?

I have had the good fortune to live in six different countries and travel to more than forty others. Notwithstanding the global perspective gathered from these experiences, I tend to shy away from geopolitics.

First, politics of any sort is of little interest to me. Second, geopolitics like any field of study requires specialized knowledge, and I don't have that. And third, geo-economics is more important to money and markets, so I focus on that instead. But I am mindful of geopolitics, as most people should be because events in the political arena occasionally spill over into the monetary arena, an observation that seems particularly pertinent these days.

I provide below an article by W. Joseph Stroupe, editor of www.geostrategymap.com, an online geopolitical magazine, which looks at the future of the dollar from a geopolitical perspective. It's worth reading and thinking about, as is an editorial that Mr. Stroupe has written for Asia Times Online.
http://www.atimes.com/atimes/Global_Economy/FC31Dj02.html

What Future for the U.S. Dollar?
What You Should Know About the Imminent
Prospects for a Disorderly Decline in the Dollar
by W. Joseph Stroupe

Copyright © 2004 by W. Joseph Stroupe. All rights reserved.
Reprinted by GoldMoney with permission.

It is a well known fact that political / economic disarray, whether it arrives in the form of acute turmoil or in a somewhat lower grade but chronic pattern of recklessness and imprudence (or perhaps in a combination of both) can easily create the kind of uncertainty that leads to a weakening, and even a destabilization, of a nation's currency. Fear and uncertainty are the real enemies of a healthy currency. Once a fundamental weakening in a currency takes hold, quick but prudent and wise measures are required to reverse the trend. Failing that, or even in the event that unwise and short-sighted political and/or economic measures are taken which further undermine confidence in that currency, then at some point one may see steady decline turn to a rapid and disorderly fall as confidence begins to fail and those holding significant reserve amounts in that currency rush to minimize their losses. This is the nightmare scenario for any currency.

When that currency happens to be the international standard currency belonging to the U.S. superpower, then the risks are magnified many times over. By almost any measure, a fundamental weakening in the dollar has already taken hold. Additionally, short-sighted, imprudent and very unwise political and economic measures have already been enacted which threaten to turn the dollar's steady decline into a disorderly plunge. How so?

Enormous and still-skyrocketing U.S. debt continues to give the international community in general, and the Asian economies in particular, a serious case of "nerves" about the stability of the U.S. economy and its currency. The Asian central banks have been buying enormous amounts of U.S. debt and thus holding their reserves in dollars. Private investors have already abandoned the practice of buying U.S. debt (out of a very real fear of getting stuck holding severely weakened dollars), and that has placed the entire burden upon the central banks. By all appearances, they are stuck in a cycle of buying dollars, holding reserves in dollars, to keep their own currencies from rising against the dollar and hurting their export position. However, the policy simply cannot continue much longer because the strains caused by such enormous imbalances are becoming terrific. At some point, the Asian central banks will be forced by an array of considerations and pressures to alter their monetary policy and begin to cut back on their purchases of U.S. debt. As the dollar continues its decline, and this trend pleases the Bush administration in an election year (due to very short-term surface-deep benefits to the economy), the value of the reserves held by the Asian central banks continues to take a very substantial hit. Domestic political pressure within the Asian nations to sell a significant amount of dollars before their value declines much further and invest in domestic assets is becoming very great. The central banks are also becoming very nervous about the identical fear which caused the private investors to stop buying U.S. debt - what if they get stuck with a huge mountain of very weak dollars?

Against this background, this month both Japan and India sent credible indications they are seriously considering such changes in their monetary policies, according to reports in Bloomberg, The Business Times and others. They are acting very carefully, taking small steps, as one can reasonably understand they must. But acting they are, demonstrating they at least must begin to develop some kind of viable exit strategy from the dollar. An exit strategy might even be further along, at least in the planning stages, than most persons might imagine. Political, diplomatic and even geopolitical considerations, in addition to economic ones, are also adding their tremendous pressures to move the Asian and other economies toward an exit strategy from the dollar. Around the world there is a growing sense that a course of increased independence from the U.S. is the wise course. We see matters moving in that direction, rather than toward the U.S., on economic and diplomatic levels. The Iraq situation has helped to give significant impetus to such trends. And the actions and policies of the Bush Administration have tended to erase whatever loyalty and sympathy might have previously existed on the part of the Asians and others. Now, these players will tend to act purely in their own interests, without consideration for the American administration or American interests, unless their interests happen to coincide.

For example, with respect to India, the administration recently displayed yet again that it evidently possesses little or no sensitivity to legitimate Indian interests. On March 23 the U.S. completely blind-sided its so-called strategic partner India by granting Pakistan MNNA status, removing sanctions and paving the way for the sale of weapons to Pakistan. The Indians were deeply offended and angered, understandably so. The surprise announcement, which did not even consider legitimate Indian interests, came in the thick of the Indian political campaign and threatened to humiliate candidates seen to have a pro-U.S. stance. India is one nation that has been massively financing U.S. debt by buying dollars. On March 27, in an editorial by Sultan Shahin in The Asia Times Online, the almost immediate repercussions of such insensitive U.S. policy were outlined - and they are very serious and could be immensely damaging to the already shaky stability of the U.S. dollar. India is easing up on the buying of dollars - just days after the U.S. snubbed India and granted MNNA status to Pakistan, as noted above. Is there a connection between the two events? Very possibly.

The Bush Administration has made an undeniable track record for itself of such insensitivity around the world. As such, it risks losing the extremely valuable economic, diplomatic and geopolitical cooperation of key players which it desperately needs. It seems almost oblivious to those repercussions, however, evidently assuming the stability of the dollar is never really in doubt. But as more global players increasingly pursue their own interests, in a growing independence from Washington, the resulting repercussions against the dollar will begin to multiply. There simply isn't any way to reverse the negative trends and forces moving against the dollar, short of a profound philosophical change on economic and diplomatic levels in Washington - and that seems very unlikely. Even a new administration this fall would be saddled with the enormous weight of America's crushing debt and international isolation and the unprecedented level of ill-will directed at the last superpower - so what could it really do to turn things around for the dollar?

As detailed in numerous insightful editorials at GoldMoney.com (see The Dollar versus the Euro by Alex Wallenwein, for example), the U.S. is on the wrong side of gold. The euro is on the right side of gold, however. Increasingly, private and state investors are moving toward real money (like gold) and currencies firmly anchored to real money. The U.S. dollar has very little, if anything, to recommend it in view of the complete picture of geopolitical and geo economic trends and developments. So do not be surprised to see the EU, Russia, India, OPEC and Asia increase and deepen their mutual cooperation in finding a viable exit strategy from the dollar, perhaps much sooner than most people would expect. They will likely find that there is strength, stability and comfort in numbers, as the global economic order undergoes unprecedented tectonic plate shifts, progressively reordering itself away from a unipolar order and toward a multipolar one. In the midst of such massive reordering, it is the stability of real money and currencies firmly anchored to real money that will carry the day.

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W. Joseph Stroupe is the editor of www.geostrategymap.com, an online geopolitical magazine. He can be can be contacted at: editor_in_chief@geostrategymap.com

Published by GoldMoney
Edited by James Turk

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