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Foreign Nations Contemplate Dollar Collapse

March 30, 2006 |

From Vigilant Investor (reprinted with permission)
Americans, because of the nation’s wealth and power, are sometimes woefully uniformed about the rest of the world’s perceptions on issues. Largely that is because, as a the global leader for nearly one hundred years in both economic power and military power, it really has not had to consider anything different. Of course, unlike Europe - with whole countries the size of U.S. states each having a unique culture and language — Americans never had to come to terms with the importance of learning other languages, cultures, etc. in order to engage in peaceful commerce — a much better alternative to competition compared to centuries of war.

But I digress. The point of this dispatch is to update our readers about comments from the Asian Development Bank (ADB) warning East Asian economies to be prepared for the possible collapse of the U.S. dollar in the face of the massive U.S. trade deficits and global interest rates rising.

“Any shock hitting the U.S. economy or the global market may change investors’ perceptions given the existing global current account imbalance,” said Masahiro Kawai, ADB’s head of regional economic integration. “Our suggestion to Asian countries is: do not take this continuous financing of the U.S. current account deficit as given. If something happens then East Asian economies have to be prepared.”

We would add, there must also exist a point where those same nations decide that buying the U.S. treasuries of a country with a runaway federal deficit, an aging population, and massive unfunded entitlement liabilities (Social Security, Medicare, etc.) being hidden off the official balance sheet (estimated at $3.5 trillion vs. the official reported $350 billion), might not be the most attractive thing to do 1) with current interest rates being at 50 year lows, and 2) given the massive amount of dollar holdings they already have (see our March 29 entry and graph) when the U.S. also seems to be in a no win position for digging itself out of debt. That situation will force it to inflate the dollar at an even faster pace than is has (M3, the broadest indicator of money supply has more than doubled since 1990 from about $4 trillion to over $10 trillion today), which will only press foreigners to hasten their search for diversifying into alternatives.

Yet most folks in the United States yawn at such discussions (and quickly turn the channel to American Idol), and could absolutely not care less what is being said about their currency in (obviously inferrior) Asian newspapers like The Hindu Times.

Yet, in the end, with the ownership of U.S debt largely becoming a foreign-held phenomenon, such indifference — and even self-righteousness, with its very expensive “world’s policeman” and “guardian of ‘acceptable’ democracy” policies — may well be downright reckless given the dependency the U.S. has on borrowing at interest rates that are well below the historic averages at a time when Americans and their governments are as cash-strapped as they have ever been since the country’s founding.

Yet it isn’t just the U.S. citizens who appear to be woefully unaware of the precarious nature of the situation. On the opposite side of the same troubled coin is the visage of a formal economic policy that holds consumption as the Holy Grail of economic growth, engaging in policies designed to disgorge and consume savings at home and abroad. (See our recent post on Fed Governor Ben Bernanke’s comments blaming a “global savings glut” for the U.S. deficit.)

Stay Vigilant!


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