Meditations on the dollar

David Seaton's News Links
As a long term expatriate I am well placed to comment on the falling value of the dollar. If you live in the states the rise and fall of our currency affects you, but only indirectly and with a delayed effect. For Americans abroad the effect of the falling dollar can be huge. It is catastrophic for army families in Germany and for executives of American companies abroad... And even tragic in the case of American retirees.

I have been living off the local economy for many years now, but one of the reasons my family came abroad to live in the first place was the extremely favorable exchange rate. For people with fixed incomes, living abroad meant access to a much higher standard of living for the same amount of money. That simple.

People who don't travel much or have never had to "play the part" of the American, may not understand how much prestige is/was involved in the value of the dollar, they are easily unaware of what a symbol of power and even glamor it is/was.... (has been?) The last time the dollar was like this was in the 80s, but at that time the Euro didn't exist and the USSR and its army was still sitting in Eastern Europe... Nobody wanted to rock the boat.

By all means keep your eye on the "fundamentals" and, yes, there are some advantages for trade in a falling dollar, but never lose sight of the psychological effect of the dollar turning into what America's old friend Fidel Castro calls "perfumed paper".

Since Bush invaded Iraq we have watched the USA perform a striptease: habeas corpus, human rights, sub-prime, etc, etc and now the USA is down to its g-string and pasties... in this situation having the dollar crash is the "full Monty".

Things may come in a chain reaction now. It is really too difficult to forecast: too complex, too many variables. But nothing good for sure. DS

Michael Hirsh: In the Realm of the Dying Dollar - Newsweek
Abstract: Great powers die slowly. It took years before the world realized that Great Britain was an imperial corpse, sapped of its strength by two world wars. The funeral finally occurred on Feb. 21, 1947, a freezing winter day in bomb-torn, bedraggled London, when the British wrote their own epitaph. That was the day that London cabled Washington: "His Majesty's Government, in view of their own situation, find it impossible to grant further financial assistance to Greece," amounting to a half billion dollars a year and a garrison of 40,000 troops. The British also announced the same day that they were withdrawing from Turkey. "The British are finished," remarked a stunned Dean Acheson, who was soon to be Harry Truman's secretary of State. And so they were.(...) If the passing of American hegemony happens, it will occur very slowly--death by a thousand cuts of credit. One reason why it's so hard for Americans to contemplate their loss of prestige, symbolized by the fall of the once-almighty dollar, is that politicians and pundits tend to cast the issue as all-or-nothing. What would happen, they say, if China suddenly decided to dump the trillion dollars of U.S. debt it holds in reserves? This, however, will almost certainly never occur. While China and other big dollar-holding countries such as Singapore, Russia and the Persian Gulf states are very worried about the erosion in value of their dollar-denominated holdings and inflationary pressure, they also know that an abrupt move to cut their pegs to the dollar or to sell off in large amounts would force a run on the currency. That would leave them even poorer. Instead these countries are pursuing careful reallocations of their investment holdings, shifting slowly to the euro or a "basket" of currencies that will allow them to hedge against the dollar's decline. Credit will become more expensive, the U.S. economy will find itself increasingly crimped, and America's ability and willingness to act as the defense umbrella to the world will gradually peter out. The effect will be more like a slow-acting poison: drip, drip, drip.(...) the country is in such a fiscal hole right now that, as David Walker, the comptroller general of the United States, told my colleague Jeff Bartholet last week, "You could decide not to renew the Bush tax cuts, you could eliminate all foreign aid, eliminate all earmarks, eliminate NASA, eliminate the National Endowment for Humanities and eliminate the entire Defense Department tomorrow, and you still wouldn't solve the problem." READ IT ALL