Monday, May 21, 2007
Yet Another Sign of Decline
BYE, BYE DOLLAR
The following story by Wanfeng Zhou illustrates the erosion of the importance of the United States dollar in the world economy discussed in my previous post – a symptom and harbinger of U.S. decline generally. To me events of this kind are the advance rumblings of the real avalanche – the refusal of nations to lend America more and more money through purchase of U.S. Treasury bonds, etc., which are nothing more than IOUs repayable in dollars. In view of Bush’s inflationary policies, buying Treasury IOUs from the U.S. is like accepting an IOU from someone promising to repay $1000 in five years when you know that $1000 will be worth $500 in buying power by the time it’s repaid. I’m not an economist by any means, but I understand that when a debtor nation like the U.S. loses its sources for borrowing, it tends simply to print more and more money in order to preserve its previous status and avoid a depression, with the result that inflation impoverishes its citizens. . . in particular those who have retired.
‘NEW YORK (MarketWatch) -- The Central Bank of Kuwait's decision over the weekend to untie its currency from the U.S. dollar might signal a growing trend among global central banks, especially those with large foreign-exchange reserves, to more actively manage their currencies.
‘And such a shift is likely to put the U.S. dollar under increasing pressure, analysts said.
‘The significant drop in the exchange rate of the American dollar against most other major currencies had a negative impact on the Kuwaiti economy over the past two years," Sheikh Salem Abdel Aziz Al Sabah, governor of the central bank, told the official Kuwait news agency.
‘"In the Middle East, it's a story of dollar-concentration risk," said Stephen Roach, chief economist of Morgan Stanley. Kuwait's just-announced decision "may well be the first step in a regional diversification strategy that attempts to temper such risks," he said.
‘Global central banks' ongoing reserve diversification has been a main factor weighing on the U.S. currency and Treasury market in recent years. Many people argue because foreign central banks have played a vital role in financing U.S. borrowing by buying U.S. debt, a diminished appetite for dollar-denominated reserves could have a significantly negative impact on the dollar and the U.S. economy.’