The Great Shrinking American DollarBy PETER BOONE AND SIMON JOHNSON
Peter Boone is chairman of the charity Effective Intervention, a research associate at the London School of Economics’ Center for Economic Performance, and a principal in Salute Capital Management Ltd. Simon Johnson, a senior fellow at the Peterson Institute for International Economic, is the former chief economist at the International Monetary Fund.
The American dollar is in the midst of a large fall in its value, or depreciation, as measured against other major currencies. The decline has been steady since 2002 and our currency is down about 35 percent from that peak. After strengthening slightly more than 10 percent during the global financial crisis of the past 18 months, the dollar is again falling back toward its pre-crisis lows, representing its weakest international value since 1967.
But there is a definite possibility that the dollar could soon decline further or faster.
At the level of general economic strategy, the American government has responded to a financial sector crisis with an expansionary fiscal policy, and the Federal Reserve is implementing loose monetary policy. Andrew Haldane, responsible for financial stability at the Bank of England, puts it this way:
For the authorities, [excessive risk-taking by the financial sector] poses a dilemma. Ex-ante, they may well say “never again.” But the ex-post costs of crisis mean such a statement lacks credibility. Knowing this, the rational response by market participants is to double their bets. This adds to the cost of future crises. And the larger these costs, the lower the credibility of “never again” announcements. This is a doom loop.
In addition to a financial crisis, we also have a large current-account deficit, meaning that we buy more from the world than we sell. The deficit was $100 billion in the latest available (second quarter) data, which is around 3 percent of gross domestic product, and we finance that with capital inflows from abroad. (The current-account deficit is down from around 6 percent, but two-thirds of the decline is due to the lower price of oil).
In the past, many of those inflows have been private investments of various kinds, but as investors around the world question whether United States government debt, and its dollars, are really worth the paper, it is increasingly difficult for us to finance our deficit with the outside world.
What does this mean for the dollar?
Treasury Secretary Timothy F. Geithner continues to repeat that a strong dollar is “very important” for the American economy, but United States fiscal and monetary policy pushes toward depreciation. To bail out our banks, we need cheap money, and this implies some inflation. To finance our current-account deficit, investors need to think they are buying inexpensive assets from us. Everything points to a cheaper dollar. (The same thing is happening in Britain, but the Bank of England is increasingly explicit about this point and the unsavory broader situation.)
A “hard landing” for the dollar could be painful.
The 1980s classic, Stephen Marris’s “Deficits and the Dollar: The World Economy at Risk,” stresses that a rapidly falling dollar would push up United States inflation, resulting in higher interest rates and a deep recession (pp. lx-lxi). Writing in the latest edition of Foreign Affairs, Fred Bergsten emphasizes that such outcomes are still possible today. A weakening dollar will cause inflation fears, so yields on long-term government bonds will rise to compensate investors for inflation, and we will need to pay more and more to finance our large debts.
The idea that the American dollar might follow emerging markets such as Russia in 1998 and Argentina in 2002, or Britain in the 1970s — and so depreciate by 50 percent or more in a relatively short time — is certainly implausible now. But such a “doom scenario” is not unrealistic in the future without change.
In this context, the American government needs to control its budget deficit to keep this adjustment on track, and to stop confidence in the dollar from falling further. Our government collects far too little in taxes for what it spends. There is no choice but to raise taxes soon and rein in spending.
Short-term rates (controlled by the Fed) will stay low, while long-term rates (market-determined and affected by trust in our Treasury and Fed to keep the value of dollar strong) will rise as people fear their dollar investments will be debased. There is no doubt that both the Fed and the Bank of England know what is happening. The spread between short- and long-term rates (known as the “yield curve”) will rise, and banks will benefit; would-be home buyers and people with overdrafts or outstanding credit card balances pay more, while savers get little.
This is how the public pays for the past losses of our financial system.
We don’t have to do this again and again. We could start by changing our financial system from the roots. We need to credibly remove the promise to bail out our large banks each time they fail. This means forcing them to hold more capital, dividing them up so they are smaller, and then letting them fail when they make poor gambles.
The Treasury’s past and current close connections to Goldman Sachs, Citigroup and other major investment banks illustrate how our own doom machine functions. We need to break up these “banks” so they are small enough to fail, and also ensure that no bank, regardless of its connections, is able to demand that the Fed and the Treasury support its solvency in the future to prevent financial collapse.
In this context, a weakening dollar helps the administration to put an unstable financial system back on its feet — and to crank up our “doom machine.”———————FROM “THE FALL OF AMERICA”;”
The Fall of America
Decline of the Dollar
1 The strong-hold of the American government is falling to pieces. She has lost her prestige among the nations of the earth. One of the greatest powers of America was her dollar. The loss of such power will bring any nation to weakness, for this is the media of exchange between nations. The English pound and the American dollar have been the power and beckoning light of these two great powers. But when the world went off the gold and silver standard, the financial doom of England and America was sealed.
2 The pound has lost 50 percent of its value. America’s dollar has lost everything now as power backing for her currency, which was backed by gold for every $5 note and up. All of her currency was backed by silver, from a $1 note up.
3 But today, the currency of America is not backed by any sound value – silver or gold. The note today is something that the government declares they will give you the value in return, but does not name what the value is. But they definitely are not backing their currency with silver or gold.
4 This is the number – one fall, and it is very clear that the loss of the power of the American dollar means the loss of the financial power of America. What will happen since there is no sound backing for her notes we do not know.
5 What should we expect even in the next twelve months under the fall of the power of America’s dollar? This means that we have 100 percent inflation. What could happen under 100 percent inflation? Your guess is as good as mine. The power of gold and silver was once abundant in America. But the touch of the finger of God against the power of so mighty a nation has now caused the crumbling and fall of America.
6 We can easily and truthfully liken the fall of America to the prophetic symbolical picture given in the (Bible) Revelation of John 18:2. The name Babylon used there does not really say whether it is ancient Babylon or a picture of some future Babylon.
7 The description it gives is as follows:
“And he (angel) cried mightily with a strong voice (with authority) saying, Babylon the great is fallen, is fallen and is become the habitation of devils, (Allah has declared the people to be a race of devils) and the hole of every foul spirit and a cage of every unclean and hateful bird.” The description here give to the Babylon by the prophets compares with the present history and people of America and their fall.
8 The picture shows the cause of her fall. Number one, she had become the habitation of devils, and being the habitation of devils makes her a haven for every people that love the works and doings of the devil. Here the prophet refers to them, symbolically, as being a hole of every foul spirit, and a cage of every unclean and hateful bird.
9 People are referred to as birds, snakes, beasts, fish and other animals to tell or represent the characteristics of that person. It is universally known that the very beginning of the American people was from the lower class of European people. And their first ruler (President Washington) was a fugitive from England. And the common, dissatisfied and lower grade of European people followed and boosted his authority. This filled and inhabited America with a very low class and low-based people.
10 And then this type of people went into Africa and purchased slaves from among our people who were also uneducated, most of them; but there were a few who were highly educated. All of these began to mix with the low-based, evil-minded, real citizens of the Western Hemisphere (whites). And when America began to get strong in power, she opened her doors to the underprivileged (laborers) in overpopulated countries such as China, Japan, and in Europe to seek citizenship in America.
11 This brought into America one of the most mixed people, who were granted the freedom to live any kind of life they chose. They were not forced to serve the God of the universe who made heaven and earth nor any religion. They had freedom of worship. This made America a haven for any people who wished to be free of the compellers of religion and just rule and authority. This people for the past five hundred years have put into practice every evil that is imaginable.
12 The freedom of uncleanliness is granted and is worshiped. The percentage of sexual worship of the same sex is greater than any government on the face of the earth. Little children are bing taught sex almost from the cradle, making the whole nation, as one man put it, “nearly 90 percent freaks of nature.”
13 It is common to see on the streets of any metropolitan city of America men sweethearting with men and women sweethearting with women. Little boys with boys and little girls with girls.
14 It is common that a decent family is puzzled as to where to send their children for schooling. There are no all girl schools as there once were. They are all girls schools of sweethearts; the same sex falling upon their own. Boys’ colleges are breeding such filthy practice; the jail houses, prisons, and the federal penitentiaries are all breeding dens of homosexuals.
15 As the Prophet says in the 18th chapter; “She is a cage of every unclean and hateful bird.” There are types of hateful birds. This is why a symbolical name is given. It means human beings. There are birds of prey and birds that are unclean such as crows, owls, buzzards and ravens who live and thrive off the carcass of others. And there are unclean people living and thriving off the unclean.
16 It is time that God intervenes to bring about an end of such people as the wicked of America. She offers the same filth to all of the civilized of the earth, and she hates you if you are against her way of life and will threaten you with death as the Sodomites did Lot and his followers. But I say to you as the 4th verse of Revelations, Chapter 18 says: You that want to be a better people than this, “come out of her.”
17 The so-called American Negroes are referred to here in the 4th verse as being God’s people (“My people”) Come out of her…that ye be not partakers of her sins and that ye receive not of her plagues.”
18 This is a call to the American so-called Negroes to give up a doomed, wicked people that has destroyed them from being a people worthy of recognition, and who have now become lovers of their enemies and destroyers.
19 The 5th verse tells us that “Her sins have reached into heaven and God has remembered her iniquities and is ready to destroy her.” Her destruction cometh quickly, according to the 8th verse, that plagues of death, mourning and famines which cometh in one day (one year) then after that she shall be destroyed by fire, utterly burned.”
20 This is backed up by the words: “Strong is the Lord God who judge her.” Here it gives us a knowledge that He who judges is well able with power, with wisdom, and with deliberate and careful maneuvering to make judgement against her. “
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