The fall of the dollar system born

Just a few weeks after an outstanding victory of American and British troops in Iraq, the U.S. dollar and the pound sterling became one of the weakest currencies in the world. Do not it ironic?

A new Great Depression?
Since August 2002, the dollar is falling continuously on the world's leading currencies. In May 2003, the pace has accelerated the fall, and in the middle of the month the dollar has overcome the level of $ 1.17 per Euro - which began four years ago, life for European currencies. With regard to the pound sterling, it reached its lowest level in six years. Pound has never been so weak since the Labor Party promoted Tony Blair came to power. Since the early years, sterling has fallen on the euro by 10%. Pressure on the pound particularly intensified after the February 2003, when, to everyone's surprise, the Bank of England lowered the discount rate to 3.75% - the lowest value over the past 48 years. The English press is already matches the current situation with «sterling crisis» in September 1992 when the pound was expelled from the European exchange rate mechanism.

As in the U.S., the UK current account deficit out of control, the industrial sector shrink, and the consumption of individual households depends on the financial bubble of mortgage loans, which may soon burst.

The weakening dollar could cause a great international impact. The world financial system is substantially denominated in dollars. Most international trade contracts are also in dollars. World Trade Organization (WTO) said that the growth of world trade in 2002 was below 3% - the worst figure in 20 years. But what is 3%, if during that time the dollar on the euro has fallen by 20% (Fig. 1)?

And if converted GDP of the United States over the last year in the euro, yen and gold, then eventually we get the greatest decline in GDP since the Great Depression!

It is disturbing
Devaluation of the dollar is of great concern in other countries. European industrial corporations suffer from falling exports of their products. The Central Bank of Japan made a stealth intervention in the foreign exchange market of 2.39 trillion. yen ($ 20.5 billion), ie bought up dollars to keep yen jump. Although there was no official communication, but many analysts believe that the Bank of Japan resumed its daily intervention in the foreign exchange market, starting from 8 May 2003, which, however, did not give significant effect.

IMF chief economist Kenneth Rogoff (Kenneth Rogoff), which had three years ago warned of a possible decline in the dollar by 50%, said recently in an interview with Washington Post, that the sharp drop in the dollar «could make the financial system vulnerable», causing serious losses in the main market players working with the portfolios of derivatives and hedge funds, build on the strong dollar. More clearly than a comparison with other currencies, the dollar decline may be shown by the example of its purchasing power relative to gold (Fig. 2).

In the second decade of May 2003 the price troy ounces of gold reached $ 351. In March 2001, for every $ 100 you can buy a 12.0 g zolota. We have the same hundred, you can buy only 8.8 grams.

Actors on stage
A natural question is: who or what causes the rapid fall of the dollar? At first glance, his intention to initiate the majority of players played in the financial performance in the world: from the heads of central banks and Finance Ministers to currency traders and private investors. Most of them have good reason to get rid of dollars. What are they?

Asian central banks hold at about 80% of the world's reserves of foreign currency, with most of this money is invested in government bonds and other assets of the United States. No one was surprised already by the fact that Asian central banks are rapidly losing confidence in the ability of States to support the huge current account deficit of $ 500 billion to this amount is now added a further U.S. government budget deficit of at least $ 300-400 billion, therefore, Asian central banks are looking for various alternatives to the dollar, as that could be the euro, the local currency or gold.

The most openly express their attitude to the U.S., Indonesia and Malaysia. For example, a representative of the Ministry of Finance of Indonesia said that the country intends to introduce the euro as base currency for trade transactions, and the central bank has gradually replaced in the Euro 15% of its dollar-denominated reserves, which are generally accounted for $ 33 billion Guide Indonesian state oil company Pertamina has proposed to sell oil for euros instead of dollars. The Prime Minister of Malaysia Mahathir Bin Mohamad said that the state oil company Petronas to explore a program of action that intends to hold the Indonesian Pertamina. Replying to a question, not whether the United States will be unhappy with such action, the Prime Minister said: «The question is not whether the United States will be unhappy, but whether we get real value for our products».

After the robbery of American geopolitical Arab investors are now asking themselves the question whether it would be investing the proceeds from the sale of oil assets in the United States continues to be profitable. Any State may suddenly find themselves in the list of «axis of evil», and one fine morning to find that his assets were frozen in the States. In recent months there have been several reports that the U.S. markets is derived from $ 200 billion of Saudi money. Regardless of the truth it or not, the reluctance to invest in U.S. assets are growing every day. In the political and financial circles of Europe strengthens the view that the introduction of the euro as foreign exchange reserves and U.S. competitor in world trade can be a useful tool to counter U.S. hegemony in international affairs. However, the economy of the European countries are also at risk, and the relative strength of the euro - this is only a reflection of the weakness of the dollar. Finally, there is the administration of President Bush, which is increasingly desperate policy against the already unhealthy economy.

The debt pyramid will soon fall
For the third consecutive year, the Americans listened to the promises of rapid economic recovery «somewhere in the second half». Even according to official figures, more than 2.5 million jobs eliminated in the United States after George W. Bush, Jr.. to power. Past 12 consecutive U.S. Fed cuts discount rate to increase investment in the corporate sector ended a complete failure. Some members of the Bush administration would welcome a smooth depreciation of the dollar, because a government package of laws to reduce the tax met opposition in the U.S. Senate (help whether these laws economy - is another question.) Even if you devaluation, and will not contribute to the growth of American exports, it is expected that a cheaper dollar will increase the price of imported goods, thus reducing the trade deficit and helping their own producers.

All these theoretical predictions suggest the preservation of government control over the movement of foreign currency, which, however, the Bush administration no longer has. All dollar-denominated financial system dilapidate.

Since 1995, the so-called The Group of Seven central banks regularly opens its floodgates to money-saving system. Disasters follow one after the other: «almost have defaulted» in Mexico and the Japanese banking crisis in 1995, a series of scandals related to derivative instruments, including the bankruptcy of Barings Bank in the same year, the economic and financial turmoil in East Asia in 1997-1998.; the Russian crisis in August 1998, followed one month after the collapse of LTCM; the Brazilian crisis of 1999, Argentina defaulted in 2001 and much more. The cumulative result of pumping liquidity led to the creation of new financial bubbles that later burst, causing the largest in the last 70 years a decline in the stock market.

Having started its journey from the periphery of the global financial disintegration now come to the center of the system - the U.S. financial markets and the dollar. While the industrial sector in the United States is declining, corporations, households and state governments are still added to $ 2 trillion. debt each year - both in terms of their, and foreign creditors. The debt pyramid will soon fall, regardless of how many more liquidity the U.S. Federal Reserve to upload into the system. And rapidly deteriorating ability of the federal government to finance the current account deficit - it is only one aspect of global financial dezintegratsionnogo process.

Potemkin village «new economy»
Last year, the current account deficit of the U.S. broke the record, reaching $ 503.4 billion, far ahead of 2001 figure of $ 393.4 billion jump was clearly linked to the huge foreign trade deficit, which in 2002 once again deteriorated (Fig. 3).

Exports of goods fell from $ 718.8 billion to $ 682.6 billion, imports rose even more - from $ 1145.9 billion to $ 1166.9 billion difference between merchandise exports and imports has led to $ 484.4 billion deficit (for comparison: $ 427.2 billion in 2001). The extremely high and ever-widening trade deficit must be offset by further growth in capital flows to the United States. In reality, however, comes a significant decrease in the net (net) purchases of American assets by foreigners - from $ 1024.2 billion in 2000 to $ 752.8 billion in 2001 and $ 630.4 billion in 2002 (Fig. 4).

At a time when the Potemkin village of U.S. «new economy» to fool investors around the world, net foreign purchases of American shares doubled each year, reaching an absolute maximum of $ 192.4 billion in 2000. Since then, stock markets around the world collapsed, and net purchases of shares by foreigners fell to a modest sum of $ 55.8 billion in 2002. With the growth azhiotazhnym «new economy» was also linked to race sverhvygodnymi acquisitions, mainly in the form of buying up American companies. The net flow of foreign direct investment in the United States reached a peak of $ 307.7 billion in 2000, and after two years of almost dried up, accounting for one tenth of what it was before. If that support the flow of foreign capital in the United States in the past two years, so this bond market. Bonds promise a fixed income and due to the collapse of the stock market perceived as a reliable type of investment. Therefore, the net purchase of U.S. corporate bonds could reach a record level of $ 288.2 billion.

But since the corporate sector in the United States an unprecedented number of mega-defaults. Of the ten largest in the history of corporate defaults, seven occurred in 2001-2002. Bonds largest company entirely. Meanwhile, companies that still offer corporate bonds, have to promise much more revenue. As a result, net foreign purchases of American corporate bonds in the United States fell last year by more than 20%, to $ 228.8 billion. The only type of asset, which increased demand by foreigners last year were government bonds. If in 1999-2000. occurs primarily sell Treasury bonds and other government securities United States, the year 2002 was marked by a significant net inflow of capital into this type of securities - up to $ 127.3 billion but due to the U.S. Federal Reserve chairman Alan Greenspan, who repeatedly reduced the discount rate, return on government bonds also dropped to its lowest level in 40 years. A U.S. Treasury, there is only one way to foreigners interested in buying its debt - sharply raise interest rates, which would further aggravate the state of public finances. The financial bubble could burst, causing many corporate bankruptcies and destruction of households.

«Out of control»
So, the myth «new economy» dispelled, the net purchase of U.S. assets dropped sharply over the past two years. But the current account deficit the U.S. is still growing, therefore, the United States are in need of further capital inflows than two years ago. How can this be achieved? In 2002, the only apparent way to increase net capital inflows was to reduce purchases of foreign assets by Americans - a much faster pace than the decline in purchases of American assets by foreigners (Fig. 5).

Buy American foreign assets declined from $ 581 billion in 2000 to $ 371 billion in 2001 and $ 156 billion in 2002. In particular, the German stock market has been significantly weakened by a large outflow of American capital. Since at present there are no more attractive for investment assets, which the United States could offer to foreign investors, and sale of foreign assets is not effective in the long term solution to the problem of withdrawal from the state deficit has become an impasse. As noted recently, one economist from the European Bank, studying the U.S. economy, falling dollar «out of control, and nothing could stop him».

Lothar Comp (EIR)