Tuesday, January 06, 2009

The Dollar Crisis

Recently, one of my brother-in-law's gave me The Dollar Crisis by Richard Duncan to read. Although published in 2003, he nailed the current global economic we now find ourselves in.

He spends time discussing Bretton Woods and the departure from the gold standard, the balance or rather imbalance of payments, the dependence of much of the world on US imports, the credit unworthiness of the US, and deflation at the consumer price level.

He gives great examples of Asian and South American economic disasters, Japan being a key one.

With the US going deeper and deeper into debt to the rest of the world, the US consumer cannot continue to spend with credit and borrow to buy or refinance ever-bigger houses indefinitely. The bubble will eventually burst. Other countries will have over-capacities with no buyers for their products. As nations build products with cheap labor, the international monetary system generates deflation.

With mortgage providers pushing new loan packages and Fannie and Freddie buying them, property prices will continue to rise, and the house of cards will come down. A Ponzi scheme on a bigger scale than Bernie Madoff, second only to the Social Security Ponzi scheme being carried out by the federal government.

"The dollar standard lacks adjustment mechanisms to prevent persistent trade imbalances." It cannot tolerate "rampant credit creation." "Every bubble ends the same way."
When bubble economies deflate, there are generally tow types of costs that a government must bear in order to prevent the subsequent recession from spiraling into crisis. The first is the direct cost of bailing out the depositors of the failed banking system. The second is the cost of the annual fiscal deficits that come about as a combination of lower, post-bubble tax revenues and higher expenditures on stimulus programs and social safety nets.
He predicted the crisis -- in the insurance industry [AIG], in the government sponsored enterprises [Fannie and Freddie], in the banking sector, the investment houses [Lehman] -- and that the costs of the bailout[s] will come on top of record financial deficits.

We have had an explosion of global credit resulting in an imbalance of payments. There is a disequilibrium in the global economy that is unsustainable that will result in the collapse of the US dollar. A recession in the US will reduce our account deficit and cause a global economic slump.

He has a couple of solutions, although they are part Keynesian and part monetarist. First, he proposes a global minimum wage, targeted at exporting nations and specific industries. He is suggesting a $1 per day increase per worker over a ten year period. Second, he proposes control over the global money supply (MG) using the IMF as the global central bank.

A great read. I am sold on his analysis; I am not sold on his solutions. I really do not like putting the US in the hands of global bureaucrats. It punts on national sovereignty; always a risky proposition. But in a global economy, new thinking is required.

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