Tuesday, October 6, 2009

The End of the Dollar ?

Ambrose Evans-Pritchard recently wrote:

"Clearly this is more than a dollar problem. It is a mismatch between the old guard – US, Europe, Japan – and the new powers that require stronger currencies to reflect their dynamism and growing wealth. The longer this goes on, the more havoc it will cause to the global economy.

The new order may look like the 1920s, with four or five global currencies as regional anchors – the yuan, rupee, euro, real – and the dollar first among equals but not hegemon."

Without an international reserve currency or a dominant global power to 'enforce' peace, the competing forces of nation-state capitalism would ruthlessly work to undermine and destabilize their competitors - in the worst case scenario, leading to another global war.

But despite furtive meetings between the Gulf States, France, China and Brazil - the chances of these countries agreeing on anything substantial is practically nil. Ultimately, the only possible competitor to the dollar is an economic region that can match the United States both militarily and economically. No one is on the horizon now, and so the Fed is able to devalue the dollar without eroding the power of Wall Street. This type of devaluation is bound to end up causing damage to economic rivals. An inordinately strong Euro damages German exports, as a strong Yen damages Japanese (ask Toyota). In China, dollar devaluation to a pegged yuan means a ballooning bubble in real estate that dwarfs California circa 2005.

Of all the post-World War 2 institutions, dollar dominance seems the strongest at this point.

1 "China calls time on dollar hegemony" - UK Telegraph

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