Friday, February 13, 2009

Nobody knows you when you are down and out

David Seaton's News Links
If you wanted to express the full meaning of the present situation in tight lipped, grim fashion, this might be it. The new director of America's national intelligence, Dennis C. Blair,
expressed concern about long-term harm to America’s reputation. The crisis that began in American markets has already “increased questioning of U.S. stewardship of the global economy”

Since the end of the Second World War the United States has been the guarantor of the world's market economy, which since the fall of the Soviet Union is the only "world economy".
Almost all, if not all, of the world's raw materials are priced in dollars which only the United States can print. This has meant, roughly, that the United States could go into the world's "supermarket" and pay with IOUs, redeemable with... more IOUs.

It is impossible to exaggerate the benefits that most Americans have derived from the US being able to write the rules of the game in its own behalf. At his moment, the "too big to fail" and "the only game in town" factors are literally the only things that are keeping a hollowed out American economy still on its feet.

Here is how it works: Luo Ping, a director-general at the China Banking Regulatory Commission, said that China would continue to buy Treasuries in spite of its misgivings about US finances: “We hate you guys. Once you start issuing $1 trillion-$2 trillion . . .we know the dollar is going to depreciate, so we hate you guys but there is nothing much we can do. Except for US Treasuries, what can you hold?” he asked. “Gold? You don’t hold Japanese government bonds or UK bonds. US Treasuries are the safe haven. For everyone, including China, it is the only option.” So we see that the ultimate repository of value, "the only option", the US dollar, that is a "fiat currency", meaning that there is nothing behind it except the reputation of the issuer, is increasingly being viewed as "funny money". This is the slipperiest of all possible slippery slopes.

This has only worked till now because the world has believed (imagined?) that the USA was a "serious" country. That has all changed in only a few months. Now the United States, to use the words of a great American, has "screwed up"... big time.
The American financial system, the core of the world financial system, has proved to be an enormous, fraudulent pyramid. Bernard L. Madoff's face, not George Washington's, should be on the dollar bill.

This will be the most important, long term effect of this crisis on the lives of Americans and it will be for generations to come, to the same extent that America's financial centrality has splendidly benefited preceding generations.

The bottom line might be:
"Ye are the salt of the earth: but if the salt hath lost his savour, wherewith shall it be salted? it is thenceforth good for nothing, but to be cast out, and to be trodden under foot of men." Matthew 5:13
You can bet that at this very moment some of the finest financial minds in the world are trying to figure out how to escape from the grip of the toxic dollar without bringing the entire shebang down on their heads.

When they hit upon a solution, this will mean that Americans will have to find something else than dollars to pay their debts with, just as today the Argentinians have to change their shaky pesos into dollars to pay their debts: which is something that has impoverished what was once one of the world's most prosperous nations and made their legendary standard of living a haunting memory.

In short, what was not long ago America's most powerful instrument, its currency's universal value, is now its greatest vulnerability and a string that its rivals will use to pull and jerk it around with at will.

Americans are a very proud people. I cannot predict how they may react to this sudden loss of wealth, standard of living, self-respect and reputation, but I doubt if it will be pleasant. DS

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