Russia » Economics
Author`s name Michael Simpson

Dollar to Step Down Ahead of Saddam - 14 March, 2003

Numerous leaks of information and analysis of activities of the US authority are a sufficient basis to forecast further development of the US economic policy. This estimate is extremely important as it will further determine future situation in the world in many respects.

After “cleansing” in George W. Bush’s economy team caused, as the American press reports, by the reluctance of Paul O’Neil and Larry Lindsey “to pay attention to demands of the US economic elite”, it became evident that top-priority principle of American economy authority is to preserve the Wall Street investment banks. From the point of view of these banks, step-by-step, which means slow, dollar devaluation is the key danger. If it happens, it is highly likely that holders of futures contracts may prefer other currencies to dollar, which in its turn will seriously imperil position of the investment banks as monopoly operators on the market and the whole of US system for control over the world economy based on these markets.

High oil price that exceeds the traditional “war premium” is an indirect indication of initiation of this process. To all appearances, the problem is that sellers have already implicitly placed the dollar devaluation into the oil price; it means that sellers rely not upon dollar but upon some more stable values in their calculations. Is it possible to avoid further dollar devaluation? The latest statistics on the rate of the foreign trade balance (13% in November and 10% in December 2002, at the time when dollar was on the decline) and Federal Reserve Chairman Alen Greenspan’s report on a catastrophic condition of the budget delivered in the US Congress (he said that the process must be carried out as soon as possible) demonstrate it is impossible to avoid the scenario. This is the only way to prevent financial markets from giving up the dollar. At that, on results of this devaluation the US authorities plan to demonstrate the whole of the world that dollar won’t drop any further!

Alen Greenspan partially gave an answer to the question what can be done with the economic situation in his report in December. Arguments on “the gold standard” show that dollar may be once again made dependent upon gold, like in the time of Bretton-Woods. However, a serious problem arises in this connection. The gold supply in the world, especially in the USA is not enough to make dollar dependent upon gold effectively. Even grave devaluation carried out simultaneously with increase in gold price won’t solve the problem. In this situation, the USA has two mechanisms that would guarantee a necessary result.

The first mechanism is a confiscation reform, similar to that one carried out by Franklin Roosevelt in the 1930s. Fixation of dollar to gold will allow the US Government to make private individuals exchange gold they own for dollars at a fixed rate determined especially for this purpose.

Another mechanism is a currency reform. Cash dollars held by US residents will be accepted on territories controlled by America without any limits, but non-residents may have problems in this situation. It is highly likely that bank transfers to US resident banks and exchange of dollar notes may be restricted for non-residents. This may be explained by the necessity to hold a special check-up in the network of the “anti-terrorist campaign.” This operation (and new, so-called “pink dollars” are already printed) will not only cut off a considerable part of cash dollars but will also give the USA a powerful instrument of influence upon all countries of the world.

However, this is not enough. It is also important to prevent processes that objectively may bring dollar down after it is made dependent on gold. US’s monetary authorities think that there is only one thing menacing this scenario; it is collapse of the market of mortgages on real property. And this market is tense enough now. And with an interval of just few days, Alen Greenspan says realty prices will reduce, and then chairman of the Federal Reserve System department in St.Louis William Poole delivers a panic speech saying that the market may collapse within the nearest days. Such conduct of the top officials can be explained one way only: they think that the market must be brought down before the described scenario starts, which by the way will give a formal reason for dollar devaluation.

There is hardly an alternative to the sad scenario: inevitable dollar collapse will seriously compromise it in the world, and the only way to rehabilitate it is to make dollar dependent upon gold.

But the USA is experiencing one more problem – decline of the economy which may bring the above mentioned scenario to nothing. It’s interesting to mention in this situation that opinion and positions of the US authority don’t completely mirror the actual economic processes.

From the point of view of the US leadership, the USA is at the stage of a protracted recession. Monetary methods of economic stimulation (reduction of the rate) brought no results, and something more must be done. The policy carried out by Ronald Reagan in the mid-1980s was picked out as an example. In fact, Greenspan’s criticism of Bush’s budgetary policy is connected with Reagan’s experience. The matter is that at that period economy was stimulated from budgetary finance, which further resulted in a sudden rise of the public debt, extremely high profitability of government bonds (it reached 17% per year), as a result, the Federal Reserve System rate was very high. In the end, dollar seriously reduced by 40%.

But in the middle of the 1980s there was no alternative to dollar, and the fact of the Soviet Union’s existence made other western countries support American economy actively. New advisors to George W. Bush (unlike his previous ones) evidently think that dollar devaluation will provide a considerable supply for further increase of the US public debt; they think that America’s victory in the Iraqi war will make old and prospective allies behave in a decent manner. This is the basic difference from the situation the country experience in the 1980s.

As we’ve mentioned, usage of Reagan’s economic model will inevitably entail dollar devaluation. According to the above mentioned reasons, it is impossible to delay dollar devaluation any longer, and it would be quite natural to unite macroeconomic dollar collapse resulting in normalization of the balance of payment and the foreign trade balance and devaluation connected with a sudden deficit of the budget. So, the events may  develop in accordance with the following scenario: first, a war begins in Iraq with an aggressive PR backing; then, budgetary spending will be increased not less aggressively, and finally, early in autumn (and probably even earlier) dollar devaluation may be carried out and the US currency will be made dependent upon gold. The scheme wonderfully correlates with the already announced terms of the “pink dollars” introduction.

Why is the plan criticized at all? First of all, it is obvious that gold reserve will be quite enough. Second, realization of the plan is possible if everything goes OK in Iraq, which is open to question by the way. Third, it is not ruled out that many countries, most of all those influential with considerable dollar reserves, will strongly object to the plan. These are China, Japan, France and Germany. It is not for sure that these countries will object at all, it is just an assumption; however, Bush’s team stakes on assurance and aggressiveness.

And here finally comes the last argument which is probably not quite understood (and probably not understood at all) in Washington. All particular variants of the above mentioned economic policy have been certainly verified on the US economic models employed by different expert and scientific institutions of America. To all appearances, obtained results are contradictory which may cause conflicts in the ruling elite. But the models have one thing in common: they are all macroeconomic and based upon the invariance of the sectoral structure of the US economy. It is a natural condition, as the past years in the USA were marked with total dictate of liberal monetary principles in the economy.

But models based on the input-output balance are highly likely to bring quite a different result. Russian economists have already mentioned several times that structural disproportions in the US economy will entail immediate consequences as soon as rates on the US financial markets go up, and this is to happen for sure if the policy declared by George W. Bush is realized. At present, under conditions of a negative rate (and consequently, very low bank interest) branches of new economy may prolong and refinance their debts. When the rates increase, the process of structural defects improving will go on a large scale. As it was mentioned, the share of such nonviable enterprises and companies makes up about 20% GDP, and they will disappear right at the period when dollar dependent upon gold will, as the Bush administration plans, become stabilized.

After this large-scale collapse dollar devaluation will be not the only problem to be solved; it will also cause breakup of the international futures markets and entail more problems. And there are no guarantees that the Bush administration is ready for these very consequences of its policy.

The above mentioned situation looks very pessimistic, but this is almost a sure result of the actions already committed by the US administration, this is obvious from leaks of information and reports delivered by representatives of the Bush administration.

Mikhail Khazin

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