the us dollar slide: some clear explaining

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    By Bill Bonner

    Sooner or later, people in charge of money seem to say the
    wrong things. Wim Duisenberg was the fool three years ago.
    The head of the European Central Bank said something stupid,
    (we do not recall what), and suddenly, the euro hit the skids.

    Now it is John Snow's turn. Not that he said anything much
    more asinine than Duisenberg or than his own fellow Americans
    at the Federal Reserve; McTeer, Bernanke, and the rest of the
    bunch seem to have a special gift for it. Nor did he say
    anything that was untrue. A currency does depend on 'faith,'
    after all.

    But Soros was selling and the dollar was falling; the press
    needed a simple, understandable reason: The U.S. Treasury
    secretary had 'let the cat out of the bag,' they said,
    revealing to the world that the current administration no
    longer backed a strong dollar policy.

    Here at the Daily Reckoning, we are more keenly aware of the
    dollar than most other kibbitzers. Since we take our meager
    income in dollars and spend it in euros; we feel each drop in
    its value like a whiskey spill; it practically brings tears to
    our eyes.

    But we are resigned to it. Not just the 25% drop the dollar
    has suffered at the hands of Wim Duisenberg's euro this
    year...but a lot more. In 1985-'87, the dollar lost 50%
    against the German mark. That was before Alan Greenspan took
    his post...and before the greatest spree of dollar creation in

    You see, dear reader, poor John Snow is not to blame for the
    dollar's fall any more than Alan Greenspan deserved the credit
    for its rise. Today, we let the cat out of the bag ourselves
    -- the dollar is going down, no matter what U.S. monetary
    officials say.

    Decent men and women are not normally interested in the
    working of the international monetary mechanism anymore than
    they are interested in the workings of the digestive tract.
    We wouldn't blame them for setting aside today's column in
    disgust or boredom. But there is a time and place for
    everything. Suddenly, the world's money system is in the
    news...and at risk. Readers are urged to send the young and
    weak out of the room...fortify themselves with a shot of
    whiskey ...and continue reading. It isn't pretty, but it is
    necessary, sometimes, to understand how these things work.

    There was a time when America had honest money. Both the Gold
    Standard and the Bretton Woods agreement required nations to
    settle their debts in real money --- number 79 (pls check) on
    the periodic table -- which none of them could create at will.
    Even in its late, corrupted version, under the Bretton Woods
    agreement, international accounts could still be settled in
    gold. If a country bought more from abroad than it sold, it
    could be forced to make good the difference in metal. America
    might have the dollar. Germany might have the mark. But the
    world's money was gold.

    Then began a remarkable chapter in the history of monetary
    chicanery. The Nixon Administration 'closed the gold window,'
    at the Fed, meaning that foreign nations could no longer turn
    in their excess paper dollars in exchange for gold. The
    Dollar Standard was begun. With no access to gold, nations
    settled their international trade and currency imbalances in
    dollars...and built up dollar reserves, in place of gold
    reserves, for that purpose.

    During the 20 years of the Bretton Woods agreement -- 1949 to
    1969 -- total international reserves -- money held in central
    banks to settle accounts and protect the currency -- went up
    only 55%. Since then, the increase has exceeded 2000%, most
    of it coming since Alan Greenspan took over the Fed in 1987.

    The Fed did not merely increase the supply of dollars in the
    U.S. -- it increased the entire world's money supply, which
    set the wheels of international commerce turning. So fast did
    they turn that a pile-up on the highway of the globalized
    economy was almost inevitable.

    Richard Duncan explains:

    "This explosion of reserve assets has been one of the most
    significant economic events of the last 50 years. Today, Asian
    central banks hold approximately $1.5 trillion in US dollar-
    denominated reserve assets. Most of the world's international
    reserves come into existence as a result of the United States
    current account deficit. That deficit is now $1 million a
    minute. Last year, it amounted to $503 billion or roughly 2%
    of global GDP. The combined international reserves of the
    countries with a current account surplus increase by more or
    less the same amount as the US current account deficit
    each year. So central bankers must worry not only about their
    existing stockpile of dollar reserves, but also about the flow
    of new US dollar reserves they will continue to accumulate
    each year so long as their countries continue to achieve a
    surplus on their overall balance of payments."

    Since the breakdown of Bretton Woods, the U.S. has been able
    to do something that other nations could only dream of; it
    could settle its debts in 'money' that it could create, as Fed
    governor Ben Bernanke recently explained, at near zero cost.
    The rest of the world could sell as much as they wanted to the
    U.S. -- on credit, which Americans could by creating more

    What a marvelous system this was! And not just for Americans.
    In fact, while they appeared to be its greatest beneficiaries
    -- for weren't they getting something for nothing? -- they
    were actually its biggest victims.

    For a very long while, the whole world was snowed. People
    believed that a dollar was as good as gold. Foreigners were
    willing to take as many of them as were offered, the last one
    at the same value as the first. And they were willing to work
    far into the night, for minimal wages, to produce things they
    could exchange for dollars.

    The first major beneficiary of the new system was Japan. The
    Japanese wore their company uniforms and sang their company
    songs...and transformed their island into Japan, Inc., a
    nation that whose heart beat with a single purpose -- to sell
    to Americans. But what could they do with all the dollars
    they earned?

    Duncan continues...

    "This arrangement has had the benefit of allowing much more
    rapid economic growth, particularly in large parts of the
    developing world, than could have occurred otherwise.
    It also has put downward pressure on consumer prices and,
    therefore, interest rates in the United States as cheap
    manufactured goods made with very low-cost labor have been
    imported into the United States in rapidly increasing amounts.
    However, it is now becoming increasingly apparent that The
    Dollar Standard has also resulted in a number of undesirable
    and potentially disastrous consequences.

    First, it is clear that countries which built up large
    stockpiles of international reserves through current account
    or financial account surpluses have experienced severe
    economic overheating and hyper-inflation in asset prices that
    ultimately resulted in economic collapse. Japan and the
    Asia crisis countries are the most obvious examples of
    countries that suffered from that process. Those countries
    were able to avoid complete economic depression only because
    their governments went deeply into debt to bailout the
    depositors of their bankrupt banks.

    "Second, flaws in the current international monetary system
    have also resulted in economic overheating and hyper-inflation
    in asset prices in the United States as that country's trading
    partners have reinvested their dollar surpluses (i.e. their
    reserve assets) in dollar-denominated assets. Their
    acquisitions of stocks, corporate bonds, and US agency debt
    have helped fuel the stock market bubble, facilitated the
    extraordinary misallocation of corporate capital, and helped
    drive US property prices to unsustainable levels.

    "Third, the credit creation The Dollar Standard made possible
    has resulted in overinvestment on a grand scale across almost
    every industry worldwide. Overinvestment has produced excess
    capacity and deflationary pressures that are undermining
    corporate profitability around the world."

    Will it surprise you, dear reader, to find that getting
    something for nothing hurts the gettor more than the gettee?
    There is something so elegantly correct about it. Three
    decades of the Dollar Standard have produced jobs, factories,
    savings, profits -- mostly overseas.

    More to come...

    Bill Bonner
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