The Last Great Dollar Crisis

The more financially overvalued U.S. - the more they are influenced by minor financial events.

President Barack Obama being in China last month announced the need to address the deficits in order to avoid a "second wave of recession." The statement sparked speculation that the chief creditor U.S. president reminded about the importance of bringing financial affairs in order.

While most analysts all of last year claimed that China was in "dollar trap, place and time of Obama's statement indicates that China has made some key findings from the last great crisis of the dollar. Most importantly, they seem to understand that the "dollar diplomacy" is a useful tool of influence on U.S. policy for the protection of China's $ 2 trillion. reserves.

To better understand this situation, it is worth recalling the problem of confronting the major creditors of the United States in the late 1970's. In 1978, concerns about the dollar reached the top of the international economic agenda. Were especially concerned about U.S. trading partners such as West Germany and the Organization of Petroleum Exporting Countries (OPEC), as USD weakness has undermined their competitiveness and jeopardize the value of their dollar reserves. OPEC particularly acute faced with this problem, because the dollar served as the currency of payment for oil, which means that oil-exporting countries had no alternative other than the accumulation of dollars. In June 1978, for example, reserves of Saudi Arabia's foreign assets were estimated at $ 65 billion, 80%, allegedly consisted of dollars.

While China's reserves in dollar terms by several orders of magnitude greater than those that were in Saudi Arabia in late 1970, Saudi Arabia is still in the notorious "dollarrovoy trap": any attempt to transfer reserves from dollars to another currency would accelerate the decline the dollar and weaken the value of remaining reserves.

OPEC countries have taken an active stance against the accumulation of decline in value of dollars, diplomatically, by putting pressure on the United States, which eventually triggered a more stringent policy to control inflation. First, OPEC publicly discussed pricing oil in a non-dollar currencies, such as the special drawing rights (SDRs) of IMF. The cartel said it's necessary to investigate the use of alternative currencies in payment for oil, in turn, the Committee proposed the use of the OPEC basket of currencies for valuation. One member of the cartel - Kuwait declares that prefer sterling dollar.

And the second: some OPEC members raised the issue of rising oil prices to compensate for the decline of the dollar through unrestrained inflation. This proposal has caused concern among American politicians in connection with the recent oil embargo.

And yet, at least one oil exporter, has decided to transfer emergency funds into other currencies. In 1978, Saudi Arabia has invested some of the surplus funds in Swiss francs and German marks, instead of keeping them in dollars. Appears to have been involved relatively small amounts, but it attracted the attention of officials in Washington.

This occurred in conjunction with constant pressure and zakulisnyi intrigues of officials of Saudi Arabia in connection with the need for the United States to suppress inflation. One memorable episode came when Finance Minister Michael Blumenthal and his aides were so concerned about the impact on creditors OPEC that they broke leave the Saudi finance minister at Disneyland, to discuss the administration's plans to stabilize the dollar.

Undoubtedly, the influence of "dollar diplomacy" to change OPEC's inflationary policies of the Carter Administration was very much so, that he has taken steps to protect the dollar in August 1978 and appointed a supporter of "expensive" of the dollar, Paul Volcker to the chairmanship of the Fed in 1979.

Regulation of nations within the "dollar-trap" is not as hopeless as it might seem at first glance. China appears to be reverting to the experience of OPEC, calling for approval of a new world reserve currency, and to discuss possible avenues for trade with Brazil and Russia without the use of the dollar.

While the U.S. remains the largest creditor of China, thus providing a huge impact on the economic policy of the United States, China, in turn, is in great zavismosti from other U.S. creditors. Nine countries (or groups of countries, such as oil-exporting countries) belongs to the $ 100 billion or more in U.S. Treasury securities. One can imagine a scenario in which one or two of the creditors lose confidence in the dollar and sell a significant portion of their dollar assets. Such a move could spark a panic, because the lenders try to sell Treasury bonds to fall in the dollar.

Circumstances that may lead to such a scenario does not necessarily have an impact on the fundamentals of the U.S. economy. Some small auctions to sell treasury bills, higher-than-expected consumer price index or an inter-sessional review of the budget indicating a larger-than-expected deficit, which may affect creditors' expectations about inflation prospects.

Proponents point of view "dollar trap" claim that a reasonable lender would not undermine the value of its assets, starting to get rid of dollars. However, if the lender is convinced that the U.S. will have no serious intentions to curb inflation and the expectation of the dollar's decline continues, it is quite reasonable step lender will sell dollar assets at the best possible price.

The idea is that the stability of US-China economic relationship is highly dependent on the expectations of other major creditors of the United States: it is not only the relations between the two superpowers. In addition, the greater the financial dependence of the U.S., the less the stability of the country before the minor at first glance, financial events.

While China may take a "dollar diplomacy" to find a way out of difficult situations, the U.S. has only a few viable alternatives for reducing the deficit and, ultimately, the accumulation of money. While the U.S. government can not summon the will to rein in money supply and meet the public debt itself, it is additionally faced with a rival power, which suppresses the development of American economic policies that led to the collapse of faith in the dollar. Both scenarios are a good opportunity for Congress and the administration to think seriously about the fate of the dollar.

Harris recently finished work on a diploma in Oxford. Previously, he served as Director for Policy U.S. Secretary of Commerce under the administration of George W. Bush.



The Wall Street Journal
December 1