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

Thanks for the November Jobs Report

Why employment still lags
Report on the number of jobs issued after the summit to work in the White House, shows that Christmas for many workers arrived early. Employers cut only 11,000 jobs, and during that time, unemployment fell from 10,2% to 10,0%. Although this is data for one month, yet it gives reason to believe optimistically that the labor market will develop even earlier than anticipated.

At the same time, this reversal can proceed much more slowly than in previous recovery. Loss of jobs in this recession was the result of a sharp drop in private employment. Reduced investment in the private sector, rather than layoffs have led to high unemployment. Nevertheless, the Obama administration has made little to address this issue, focusing instead on public expenditures, rather than on encouraging entrepreneurship. A good example of the relations of the White House to the problem of employment has become yesterday's meeting, at which there were no interest groups of employers, such as: Chamber of Commerce, National Federation of Independent Business.

The November employment report
The November report in which indicators of job losses were less than expected, was a very pleasant surprise, to which many would react with gratitude. The number of jobs lost over the past two months was significantly revised downwards, which indicates that the labor market appears again ground under their feet. It is likely that it will reach its lowest point before the resumption of moderate growth.

However, in the report are not such good news. The unemployment rate fell from 10,2% to 10% partly due to the fact that 98,000 workers were out of keeping. 62,000 adolescents, approximately 70,000 men from 20 years and more is also not taken into account, however, 35,000 women the same age, entered the lists. These figures reflect the difficulties faced by people during their job search. Because teenagers are much more likely to be unemployed, it has helped reduce unemployment.

Lost their jobs this month were a staple in the list: the builders (-27.000) and industrial workers (-41.000). In the service sector was a small increase (58,000), except retail trade (-15.000), as employees were unable to fulfill the plan holiday sales.

Growth in professional services and business services amounted to 86,000, in education and health 40,000. Demand for temporary service in November amounted to 52.400. Historically, increased demand for temporary service is a harbinger of a reversal of the labor market.

Negative data in this report touched 293,000 unemployed for more than 6 months. Average duration of unemployment also increased from 26.9 weeks to 28.5. Unemployment continues to face difficulties in finding and applying for jobs.

Fewer jobs created, followed by a net loss of labor market
Despite the fact that the news relatively well, the nature of the loss of jobs during this recession suggests that the labor market will recover slowly. Press coverage of general unemployment creates the impression that the increased number of layoffs. This is partly true: the number of layoffs increased over the past year and a half, and it is a very painful process for workers. But the main reason that the decreased number of jobs. As a result, laid-off remain unemployed longer, which raises the level of unemployment.

Bureau of Labor Statistics uses the records of social insurance statistics for measuring the growth and decline of jobs in companies for all time of existence.

Since then, as the recession began, the quarterly loss of jobs has increased by 15% (1,1 million jobs), while, as job creation fell by 25% (1,9 million jobs). The number of laid-off workers of bankrupt companies has increased by 7% (91,000 persons), and the number of workers recruited to the newly established firms declined by 22% (313,000 jobs). As in the famous phrase "the dog that did not bark", unemployment grew mainly due to the fact that not create jobs in the private sector. Research over the past economic downturns suggest that the slow creation of jobs will cause the largest part of the job losses over the entire crisis.

Why the creation of jobs in the private sector snizislos so sharply? Organizations are doing everything possible in order to survive during a recession, including, fire workers and cherish liquidity. The agenda of the politicians in Washington respect the laws on health, air emissions and increase taxes to offset the cost that is not granting organizations confidence in the future. Entrepreneurs refuse to invest because they think that federal legislation may make their projects viable.

Less investment - fewer jobs
Annual private investment fell by $ 316 billion since the start of a recession (20%). This decline has continued even when launched incentives at the level of legislation, which means that the reduction of private investment leads to a reduction in job creation. No Investment Areas in the business will remain low and employers will refrain from opening new businesses, job creation will be on the same low level, and unemployment will remain high.

The data clearly talking about it. Figure 3 shows the annual decline in employment growth and investment in the business. They are very closely linked: the creation of jobs declined, when investment slowed.

Entrepreneurship: ignored response
Obama's initiative related to employment - a package of incentives, but one of the bill is not enough to encourage job creation and private investment. In the context of incentives, new government spending does not imply the promotion of entrepreneurs who start or expand business, if this is not the governments concerned. Hence, this program ignores the root cause of rising unemployment: the lack of private investment. Rather than encourage the creation of jobs in the private sector, the bills increase public spending on long-standing liberal priorities.

The approach of the Obama administration to yesterday's meeting, which was not invited to the Chamber of Commerce and National Federation of Independent Businesses, which represents the interests of employers - a principle which demonstrates a shortsighted approach to the problem.

While entrepreneurs do not want to invest, create jobs and restore the whole system will be very slow. Even if the labor market pushed away from the bottom, the Americans may face a very long recovery. Given that employers must create 125,000 jobs each month to support the growth of employment and avoid rising unemployment, this process is delayed.

Creating new jobs
What creates jobs? Entrepreneurs who have new ideas and successfully turn the plan into action. While entrepreneurial activity remains low, unemployment is high. Nevertheless, the Administration put forward by Obama's political decision to ignore this fact. Federal spending on incentives is not enough to encourage entrepreneurs to venture or business expansion.

Data report today give us hope that the labor market will soon begin to rise, but unemployment remains unacceptably high and people are hard to find a new job. Any recovery will be weak and ineffective, while entrepreneurs remain aloof.



The Wall Street Journal
Decembe