The Dollar Melts as Iraq Burns....

[marmar]

Published on Monday, December 4, 2006 by the Guardian / UK
The Dollar Melts as Iraq Burns
by James K. Galbraith

The melting away of the dollar is like global warming: you can't say that any one heat wave proves the trend, and there might be a cold snap next week. Still, over time, evidence builds up. And so, as the greenback approaches two to the pound, old-timers will remember the fall of sterling, under similar conditions of deficits and imperial retreat, a generation back. We have to ask: is the American financial empire on the brink? Let's take stock.

It's clear that Ben Bernanke got buffaloed, early on, by the tripe about his need to "establish credibility with the markets." There never was an inflation threat, apart from an oil-price bubble that popped last summer. Long-term interest rates would have reflected the threat if it existed, but they never did. So the Fed overshot, and raised rates too much. Now long rates are falling; Bernanke faces an inverting yield curve and even bank economists are starting to call his next move. That will be to start cutting rates, after a decent interval, sometime next year.

Once again, all you monetary policy buffs, in unison please:

The grand old Duke of York, he had ten thousand men.
He marched them up to the top of the hill. And marched them down again.

This is not good news for the dollar.

The US economy is going soft faster than the inflation hawks and growth optimists thought. Housing has been in free-fall for months. With the new Congress anxious to display "fiscal responsibility" - cue Robert Rubin who has moved in very fast on Nancy Pelosi - there won't be any help next year from them. If business investment falls off, recession could hit in 2007 or 2008. With that fear in mind, gloomy profit expectations are setting in, and that's not good for the dollar.

The US trade deficit is near all-time records. By itself, this proves nothing: the US supplies reserves to the world system, and it can run any deficit that the world is prepared to finance. But, sooner or later the world may start to get other ideas.

So here's the big question: is the age of the dollar economy lurching toward an end? Are China, Japan, Saudi Arabia and other big holders of T-bonds about to start a rush, or even a stately promenade, toward the exits? Let's hope not, because the world is unprepared to replace the dollar with anything else. The euro is not suited for the job, and a joint dollar-euro system would need better central bankers than either America or Europe has got. An end to the dollar system would therefore be chaotic, inflationary, and very tough on world trade. The best argument for the dollar has always been: it's not in anyone's interest to bring it down.

Could it happen, though? Yes, it could. And it could be connected to that other unfolding disaster. As the "Pax Americana" goes to hell in Iraq - producing a nervous breakdown among the pro-war elites - let's remember that security and finance are linked. Typically, the country that provides global economic security enjoys the use of its financial assets in world trade. And when the security situation changes, that privilege can be revoked. The consequences are unpleasant. Ask the British: after the sterling area folded, it took a generation for the UK to come all the way back.

That is partly why Economists for Peace and Security - a group I chair - opposed the Iraq war from the beginning. As far back as 2002, we understood - as the economically illiterate neo-imperialists did not - that a world system very favourable to America was on the line. And it was not, as they seemed to think, just a matter of military might. We knew that if the war undermined confidence in the power, good faith and common sense of the United States, that could lead toward disastrous changes on the financial front.

Four years in and with no end in sight, that risk may finally be catching up to the almighty dollar.

http://www.commondreams.org/views06/1204-33.htm

[freefall]

1. Sometimes you don't want to recommend because you hate to be the

bearer of bad news, but I guess in the long run it is better to be informed.

I have a question. Is there a difference between just recommending and kicking and recommending? If so would someone please explain it to me.

Thanks and

Peace,

freefall

[marmar]

2. Yes....when you actually give a response, you kick the thread to the top of the forum.

A recommendation just helps get it closer to the 5 needed for the greatest page. In your case, you did both for this thread. Thanks. :pals:

[phantom power]

3. Easy to argue that rates are too *low*

America's "credit rating" with our debtors is also melting. The only "easy" fix for that is to raise interest rates, making the dollar a more attractive investment. Other fixes amount to "making our economy healthy again." After all the damage done, it's hard to see that happening in less than a generation.

[xchrom]

4. we couldn't afford the war in iraq.

al zwahiri knew that -- our allies knew that -- others knew that.

but those coporate advisers to bushco wanted new territory -- the taxpayer gold mine.
it's ever renewing -- and wars offer long term profitability.

the deficit and debt weren't new on the horizon -- but there was ''wisdom'' out there that the clinton years had dealt with it.

that was -- as we see now a fictio -- and making it disappear was embaraced by both political parties.

but if dems DON'T clean up the mess -- reeling in corporate power and dealing with the debt and deficit -- then that will turn into a knife used to cut the democratic party's throat.

[marmar]

7. "we couldn't afford the war in iraq"

Very true. It's a disastrous misadventure that never should have started....And now we're fucked.

[maggiegault]

9. I disagree.

Two years to clean up six years of madness and ineptitude? The demise of the dollar and the choking deficit are AWOL's fault, and they will be remembered as such, especially if we miss absolutely no opportunity to remind people of that fact.

[xchrom]

14. with an increasing number of people every day who cannot see

the difference between the two parties -- and with both parties signing on the dotted lines for crucial legislation that makes an easy trail to follow for our current predicament -- i not only think you are wrong -- i think you are wrong by a magnitude.

it isn't just this war -- it's nafta and cafta -- it's the bankruptcy legislation - - it's the betrayal by the baby bells and others to bring us the fiber optic super fast broadband internet{they promised in exchange for being able to consolidate} -- it's teh support by both parties for whatever piece of the medical/health/pharma industries they depend on to get re-elected.

it just doesn't stop -- and the people while perhaps momentarily confused by the need for the iraq war -- are not confused about there future, their jobs and their wallets.

[Alcibiades]

25. Of course, we are, at the very least, the lesser of two evils

At least we are not actively pursuing the ruination of the nation with a zeal that can only be described as maniacal. There's a big difference between the middle-of-the-road, fiscally responsible centrism of the party's leadership and the utterly mad policies of the Republicans, and I think the difference is becoming plain enough that reality is beginning to intrude into the lifeworlds of the most extensively brainwashed Freepers and Fox News aficionados.

The problem is whether the problems have become so intractable they are beyond repair.

[xchrom]

31. to me centrism is the economic/political evil of our times.

whether it's pursued by a democratic party person or a republick party person.

bushco neocons simply over played their hand.

and there are dems i could never vote for, any more than i would vote for a republick party person.

[NewJeffCT]

33. good point & welcome to DU

For the last 6 years, Republics have blamed everything bad that has happened in the world since the Huns sacked Rome on Bill Clinton. Even though they were all debunked as lies, they Right wing kept repeating them... we still hear the one about Sudan offering Osama to Clinton several times, only to be turned down - even though Bush's hand-picked 9/11 commission debunked it.

We need to remind people that when things go bad over the next 4-6 years that it is just the chickens coming home to roost from our reckless foreign policy and "borrow & spend" economics.

[Old and In the Way]

5. The bill is coming due.

No one should be surprised when the world decides to stop underwriting our insane policies that facilitate crimes against humanity. We really need to impeach this administration and create a whole new domestic agenda that signals to the world that our foreign policy, dictated by Big Oil, has come to an end.

[Freeusfromthechurch]

19. Damn that was put well. Stay old and wise and in their way.

[Old and In the Way]

20. Thanks Freeusfromthechurch!

Welcome aboard!

[girl gone mad]

6. The fed raised rates "too much"?

I don't think so. There was real inflation apart from oil prices. Anyone who tried to buy a house or go to the grocery store saw that. The housing bubble was caused in part by rates being kept artificially low for so long. They waited to long and have raised rates too little.

[MGKrebs]

10. I agree.

We may be headed for trouble, but this argument is not very convincing.
I'm no economist, but I am a small business owner, and prices have gone up more in the past 18 months than they have in the past 8 years. Anything with steel or petreoleum base, and everything needs transport, and medical costs are way up.

Galbraith says things like :"the Euro is not up to the job", but why not?
And "(We) would need better central bankers than we've got". Maybe.

I think our problems will stem from lost jobs and huge deficits. But I'm no expert.

[Alcibiades]

26. I think he says so because

of what may US economists regard as the underlying weaknesses of the European economy(ies). He is wrong on this score--European companies have shown that investing in capital infrastructure and producing actual products is a better scheme than what ours do, which is to chase ever-higher short-term returns. Anyway, there's no doubt that, despite the (at this point, systemic) higher rates of unemployment in Europe, their economy is more sound than ours.

[MGKrebs]

28. I've been amazed at the productivity of Euro economies.

Most (western) European countries have higher taxes, stricter pollution laws, universal healthcare, excellent public services, and they are STILL competitive with out relatively low-tax- free market economy.
And Germany absorbed the East German economy pretty damn well, and France and other countries are dealing with refugees and other immigrants from Africa and points east.

[Alcibiades]

27. And why is it that a seller's market

is always considered a good thing, and a buyer's market bad, in housing? There's a systemic bias toward growth built into the system. Building new stuff is always counted more than preserving or making do with old stuff.

It's an indication of how insane our policy became on the money supply, debt and lending that the Fed can raise rates 17 straight times, and yet you can still get a mortgage for under 6.00%.

[civildisoBDence]

8. DUHbya had such illusions when he took office...

An economy so strong it couldn't be damaged, a military so powerful it could exert our will anywhere in the world.

What a dumbass. This is what we get when a shallow, spoiled, ignorant frat boy is anointed to the presidency.

Newsprism

[tanyev]

13. He still has those illusions.

Facts be damned.

[enid602]

11. Jr's one accomplishment

C'mon, guys, quit yer bitchin'; W's finally got the chance to outdo his Dad, to do what his father never could; namely, destabilize the USD.

[madrchsod]

12. 350 billion dollars has been sucked out of our economy

since the war on terror has started. if i remember my econ101 each dollar invested in non military items results in a 5 to 1 return. so if it was`t for the war we could have around 1750 trillion dollars which to invest in this country.....

[DuaneBidoux]

15. The problem is WE'LL (Dems) will inherit this pile of shit.

Even more so if we grab the WH in 08.

And if you study history, once an empire gets to this point that damage is usually so great that a major fall cannot be avoided regardless of what is done.

[meuniermr]

16. The North American Unionites..

Are going to hyperinflate the dollar and kill it in order to bring in a US-CAN-MEX currency, the Amero.

[RedstDem]

17. What Are You Talking About ?

WTF is a "North American Unionite"

[meuniermr]

18. Oops I should have been clearer and said Neocons,

Bilderburgers, CFR members, etc.

[sarcasmo]

30. You must be anti Union.

[TwentyFive]

21. k & r

[eridani]

22. What we have to do is to end the US empire

Britain and the Soviet Union had to give up imperialism last century because they couldn't afford it. So will we, eventually. The only question is whether or not we will destroy ourselves as a functioning technological society first.

[woodsgirl]

23. Does

anybody remember when the cost of plywood doubled and then tripled because of the war in Iraq. Wonder what they did with all the plywood. Home Depot...big repub. donor. Canada gave 45 million to Bush without congressional oversite , like a bribe, for softwood deals. Mills all over the country are going out of business and offering lower prices to woodsmen. When a business goes or a family farm, the whole community suffers. The cost of transporting goods ,from other countries and states, is to the states to keep up the roads and to our mother earth.WE are a service industry country...we fell from a strong manufacturing country in one generation. Thank you Bill Clinton and contract with a new american century.Never forget. Never elect another Clinton or Bush to public office.

[eridani]

32. Being the the Pacific Northwest myself--

--I know exactly what you mean. Once we forget how to actually make things, it's really hard to get the human capital back.

[roamer65]

24. Bernanke can't cut rates. In fact he will probably have to RAISE them.

That's what countries like Brazil and Argentina have had to do in the past when faced with currency crises. The dollar's value is very much dependent on capital inflow. Look back to the "superdollar" of the early 80's under Volcker. It was created by 21% interest rates. Increasing interest rates will stimulate the capital inflow necessary for the dollar to maintain its value. They'll tank the economy when "push comes to shove", just to stop a currency collapse.

[sarcasmo]

29. Kick to the top.

Has any Republican blamed Clinton for the fall of the Dollar?